Types Of Letter Of Credit For Your Business
Currently there are different types of letter of credit used, depending on the situation or interest. Not surprising since it’s one of the most popular type of payment used in both domestic and international transaction.
Letter of credit have been existed way back in 18th century and known as travelers credit and have since paved the way for a modern, systemic approach for payment and peace of mind.
What Is Letter Of Credit
Letter of credit is an instrument provided by a third party (usually bank, insurance companies, or any credible financial institution) that guarantees the payment to the seller after receiving required documents.
The letter of credit contains three parts; the seller that gets the payment, the buyer that buys the goods, through the bank that issues the letter.
Types Of Letter Of Credit Available
Standard letter of credit, also known as documentary credit. While import/export letter of credit is a term used, depending on the party that uses it, where the seller will use as exporter letter of credit.
Transferable letter of credit means the document is transferable through a beneficiary to transfer all of part of it to another supplier, usually when the beneficiary acts on the behalf of the actual supplier, and providing the documents necessary. And this description is the opposite with untransferable letter of credit, where the beneficiary (usually the supplier itself) is the only receipient.
Revocable/ Irrevocable Letter Of Credit
Revocable letter of credit can be altered at any time by the issuing bank or buyer without notice. This type of document is not used much as it doesn’t provide the receiver any protection. And it’s opposite with irrevocable letter of credit where a supplier/beneficiary’s approval is needed before making any changes to the document.
Red clause letter of credit is used where a partial payment (agreed upon in advance) to the receiver before the goods are shipped or services are performed. In a way, this step is similar to telegraphic transfer. As for green clause letter of credit, the advance payment includes a proof of warehousing the goods.
Standby Letter Of Credit (SBLC)
Standby letter of credit (SBLC) is used to assure the receiver of payment should anything unfavorable happens. The document will become payable once the beneficiary provides the proof that the payment has not been made.
Revolving letter of credit is simply a document that can be used for several payments, usually made with several confirmed orders in one go.
Back to back letter of credit is used when an intermediary is involved, where the document issued by both seller and buyer to the intermediary, hence the total of two letter of credit.
Confirmed Letter Of Credit
Confirmed letter of credit used by the advising bank that guarantees the payment to the receiver. In this case, the seller gets double confirmation from adviser and issuing bank that payment will be made once the seller’s side of transaction is fulfilled. This is the opposite with unconfirmed letter of credit where you don’t get (or need a) guarantee from the second bank. In most transaction, this type of instrument is frequently used as it provides both security (appropriately) and efficiency from both parties.
L/C At Sight
Letter of credit at sight is used by submitting required documents (bill of lading, for example) to the bank for reviews, verified and inspected, before sending payments to the seller.
If a certain period of time is involved, then a deferred letter of credit is used where the bank will transfer the payment after certain time, agreed upon in advance. This happens if the buyer needs some time for a thorough inspection of the product.
Take Note
With all types of letter of credit mentioned above, there can be more details that needs to be fulfilled. For example,a restricted letter of credit means only a specific bank is used nominated by either or both parties, as opposed to unrestricted.
Conclusion
These types of letter of credit have their own pros and cons that are suitable depending on what your business needs. At Venturette Solutions, we have seen a pattern where letter of credit is used the most, where L/C at sight, SBLC, irrevocable LC, and confirmed LC is mostly used in transactions.
And usually, this type of payment paired with the most common Incoterms used around the world. Click here to know more.
