Basic and Special Types of Letter of Credit | Bandenia Challenger Finance

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TYPES OF

LETTER OF CREDIT www.bcf.ae


ROLE OF LETTER OF CREDIT IN BUSINESS:

In the modern era of trade, letter of credit is playing significant role in Business financing, earlier letter of credit was only used as international financing device in International trade, however now a days it is quite popular in domestic trade also. Theories said that Letter of credit is not a new term in this world.


BASIC TYPES OF LETTER OF CREDIT


SIGHT OR USANCE LETTER OF CREDIT When an issuing bank makes payment to the beneficiary immediately on receipt and verification of the documents from the beneficiary (Seller/ exporter); it is called a sight letter of credit. On the contrary where the issuing bank agrees to pay the beneficiary only on the expiry of the letter of credit, the L/C issued is called usance letters of credit. Usance letters of credit is considered risky from the point of view of an exporter/seller as he is left unpaid for a considerable period of time after the delivery of the goods or providing of service.


REVOCABLE OR IRREVOCABLE L/C Revocable letter of credit can be cancelled anytime by the Issuing bank without the consent of or without intimating the beneficiary. Irrevocable letter of credit cannot be cancelled or withdrawn by the issuing bank without informing and receiving an approval from the beneficiary. Revocable letter is very risky from the seller/beneficiary point of view.


UNCONFIRMED OR CONFIRMED L/C Confirmed L/C wherein apart from issuing bank, Seller acquire the guarantee of payment from confirming Bank. Unconfirmed L/C that is assured only by the issuing Bank and does not require the guarantee from second bank.


SPECIAL TYPES OF LETTER OF CREDIT


RED CLAUSE L/C A letter of credit that partially pays the beneficiary before the goods are shipped or the services are performed. The advance is paid against the written confirmation from the seller.


TRANSFERABLE L/C A Transferable Credit is one in which a beneficiary can transfer his rights to third parties. In trading business,this kind of L/c is used, wherein beneficiary (Trader of goods) transferred the letter of credit to next chain of supplier or manufacture. The beneficiary work as intermediary of actual supplier or manufacture.


BACK TO BACK L/C In Back to Back Letter of credit, seller of goods requested to bank to issue letter of credit in favour of their input supplier. Seller of goods acts beneficiary as well as applicant.


DEFERRED PAYMENT L/C Deferred Letter of Credit is a type of Letter of Credit in which a conditional undertaking is taken by the bank to pay the seller on behalf of the buyer on a specified future date after completion of the transaction. It is looking similar to usance letter of credit; however, in usance Letter of Credit, the bank makes the payment to the beneficiary on a pre-determined date after submission of necessary documents. In deferred letter of credit, specified future date after completion of the transaction .


OTHER TYPES OF LETTER OF CREDIT


STANDBY LETTER OF CREDIT Stand by Letter of credit, that assure that in case of buyer failure to make the payment, Bank will pay to seller.


UNIFORM CUSTOM AND PRACTICE DOCUMENTARY CREDIT (UCP) Uniform Customs and Practice (UCP) for Documentary Credits is a publication of International Chamber of Commerce (ICC) which is a voluntary code applied by the banks all over the world. As per UPC Letter of credit can only be irrevocable credit.


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www.bcf.ae


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