Kinds Of Letter Of Credit

Read and discuss the kinds of letter of credit. There is always an element of risk involved when it comes to import or export any product or goods. If you think from the exporter’s perspective, then they fear of not getting paid for the product and from the importer’s perspective they fear that if they pay the amount in advance and not get the product delivered to them. Some sort of risk is always present when long distance transactions are made. In case of any dispute, they may not properly resolve it because of the same ‘long distance’ reason.

In order to reduce such risk and promote safe trading between the two parties, letter of credit is usually used. This letter of credit is also called ‘Documentary credit’ in most places. This letter of credit gives a guarantee to the exporter that they will get paid for the goods they are exporting and to the importer that until they get the goods delivered to them; the exporter will not get paid. The financial institution (Bank) actually issues the letter of credit and ensures safe trading between the parties. The bank forms terms and conditions, in which the time of delivery, payment etc are stated, and the exporter must have to follow the stated terms strictly as the bank also ask to receive shipping documents as evidence.

Depending on situations and nature of transactions, there are many different kinds of letter of credit which are available.

Some of the normally used kinds of letter of credit are stated below:

Revocable letters of credit:
This is one of the kinds of letter of credit that the issuer (the Bank) can cancel or alter for any motive and at any instance.

Irrevocable letters of credit:
These kinds of letter of credit cannot be altered or cancelled until all the parties that are normally the bank, the exporter and the importer mutually agrees on its cancellation or alteration. These kinds of letter of credit are more secure than the revocable LC.

Unconfirmed and Confirmed letter of credits:
Importers usually arrange the letter of credit with the banks that are most convenient for them (issuing bank). And the exporters, on the other hand, usually require their own country’s bank to check that whether the letter of credit is valid or not. So for more security, the exporters usually request for the ‘confirmed letter of credit’. These kinds of letter of credit guarantee the exporter that if the issuing bank somehow fails to make the payment then he or she will get paid by the bank that has checked it. So confirmed letter of credits are more secure than the unconfirmed letter of credits.

Transferable letter of credit:
These kinds of letter of credit have this characteristic that they can be passed from one person who is receiving the payment to another. The person who is receiving the payment is known as ‘beneficiary’. These kinds of letter of credit are usually used when two or more people are involved in any transaction.

Revolving letter of credit:
These kinds of letter of credit are used when there is more than one transaction involved between the exporter and the importer. It can cover all the transactions.

We can see that all of the above stated kinds of letter of credit have different characteristics and different level of securities over other kinds. They are presently the most commonly used letter of credit and sometimes they even combine together for instance, irrevocable and confirmed letter of credit.