Types Of Letter Of Credit

                                             TYPES OF LETTER OF CREDIT

Letter Of Credit basically is contract between buyer and seller that buyer will pay to seller cost of goods supplied after receiving documents of shipment. Normally Buyer`s bank open LC after checking the documents send by seller with his bank. This concept of LC is widely use in international trade.  In this article we will discuss types of letter of credit

Types of Letter Of Credit

Irrevocable LC: – Meaning of irrevocable is “not able to be changed, reversed, or recovered or final”. Irrevocable LC can`t be change or modify or cancelled unless both parties agreed. Seller confident in receiving payment with Irrevocable LC.  In international trade Irrevocable LC use on regular basis.

Revocable LC:- Meaning of Revocable is “ to changed, modify , cancelled without consent of other parties in  this kind of LC  seller`s interest not protected in actual practice this kind of LC not use

Restricted LC: - Restricted LC is the LC where importer appointed particular or specific bank  to do all LC process All the transactions will be done by one bank only.

Confirmed LC: - In the process of foreign trade sometimes seller have doubt about issuing bank credit rating or he may think that issuing bank is small bank so seller ask issuing bank to appoint a big bank to take guarantee of issuing bank`s financial position or pay amount of letter of credit if issuing bank fails to pay it this type of LC is called Confirmed LC all Irrevocable L.C are Confirmed LC

Transferable LC: - Sometimes other or sister concern company export goods on the behave of main company where Transferable LC use because beneficiary allowed bank to transfer some part or whole part   of LC to other subsidiary company name

Back to Back LC: - In foreign trade one is importer and other exporter. Sometime exporters purchase the goods from its suppliers and export it to buyer. Exporter gets the credit of its supply through letter of LC Some part of letter of credit seller shares with its supplier which is known as Back to back LC     

Standby LC :-  In normal LC Buyer pays the LC to Seller but sometimes applicant fails to pay  LC  amount then it`s  issuing bank pays the letter of credit on the behave of buyer this LC called stand by LC  It is  also  treated a bank guarantee  and it is given  to beneficiary  if client fails to makes payment of shipment .  

Revolving LC :-  International trade is continue process of  business where buyer purchase the goods and seller sold the goods in this process a LC is issued which takes cares of payments of many transactions this LC is called Revolving LC. Revolving LC is two types cumulative and non cumulative type cumulative type carried forward and non cumulative not carried forward

Red Clause LC: – When any LC use for the purpose advance payment to seller then it is Red Clause LC. Sometimes exporter doesn’t have funds to pay for packing and transportation. So he ask to buyer give him advance payment against LC then on demand buyer transfer some credit to seller account this amount later deduct from actual amount of letter of credit .

Green clause LC: - This letter of credit is also given as advance payment for before shipment against goods at terminal it kind of secured lone given against goods lying for exports this LC amount is also deducted from the actual LC 

Deferred LC: – This is a conditional letter of credit where a bank pays the letter of credit to seller on the behave of buyer after the completion of transition and against proper documents. The date of payment usually after shipment of goods  

Sight LC:-– Payment received from this LC faster than other LC. As seller fulfills all requirement of letter of credit seller’s gets credit of this LC usually payment receives within seven to ten days.  This is faster payment method to exporter who are regular exporting the goods 

WHAT IS LETTER OF CREDIT

Letter of Credit

In ancient time barter system is medium of exchange People exchange goods and services for other goods and services. After buyer and seller began to use money as medium of exchange for trading goods and services activates.

But in International Trade  where seller and buyer unknown to each other  Seller fears of not getting the payment From buyer .Buyer is also not ready to pay advance payment to known seller 

In above case buyer make a contract with seller that his bank will open LC   to seller bank after receiving the documents for shipment in this process known as letter of credit. Where Buyer is call Import Seller is call exporter 

Importer`s  bank called “ Issuing Bank” ,  Exporter`s bank called “ Nominated Bank” , Sometimes one more bank also part of  in this process which confirm the credit of issuing Bank upon the  issuing seller’s bank’s  request. This bank called as “Confirming Bank “

 Parties of the Letter of Credit.

Applicant

Applicant also called importer or buyer who purchase goods and services from Seller Applicant open the letter of credit

Beneficiary

Beneficiary also called exporter or Seller who Sales goods and services to buyer . Beneficiary’s duty is to present necessary documents to bank for Letter of credit 

Issuing Bank

Issuing Bank is bank of applicant. Applicant open the LC   with this bank Issuing bank checks the correctness of documents given by seller and issue  letter of credit

Nominated Bank

Nominated bank is  beneficiaries bank which accepted the  require document from beneficiary . Check the authenticity of documents and forward to issuing bank based on these documents issuing bank credited the beneficiary’s bank by issuing letter of credit

Confirming Bank

Sometimes nominated bank may think issuing bank  is  small bank and credit rating of that bank is not good so it approach a big bank  which is called  Confirming bank which gives  guarantee of financial status  of issuing bank and if issuing bank  makes default in making payment of LC “Confirming Bank” will make a payment of its behave

 Letter of credit is issued by issuing bank against collateral or fixed deposit.  Correctness of letter of credit is very important since both parties not unknown to each other

Correctness of letter of credit  

Both the parties unknown to each other  In  letter credit only banks operated  that`s way information mention in letter of credit like Names of buyer and seller , Amount , description of goods , date , port of loading and discharge are mention correct .  Spellings are correct as per require   by letter of credit If bank finds any mistake in letter of credit it can refuse to issue letter of credit

Advantage of LC

Buyer get the correct documents after issuing LC

Buyer gets the delivery of goods with in time after issuing  LC

LC issue by issuing bank it shows strong financial status  of buyer

Seller gets his payment through LC quickly

LC issued against the documents summit by seller therefore he process the movement of goods very quickly as to reach early to the destination

Thus we can say letter of credit plays a very important in the movement of foreign trade