Letter Of Credit - Definition And Its Types

1. Letter Of Credit - Definition And Its Types A letter of credit is a legal document issued to a third-party from a bank guaranteeing that the buyer’s payment will be received by the seller on-time with the correct amount. In simple words, this financial document is used to facilitate uninterrupted and safer transactions between buyers and sellers in case of international and domestic trade. With the help of a letter of credit, the buyers and sellers can reduce their risk by ensuring timely payment and delivery of goods or services. When it comes to dealing in international trade, there are lots of risk factors included, for example, distance, the difference in law and government in each country, and an inability to know each party personally, etc. By using letters of credit, both the parties to the transaction can trust each other as well as spread their business in the different corners of the world without worrying about being cheated by the unknown persons. As the bank acts as a guarantor on behalf of the buyer, the seller finds it safe and assured about on-time payment for their delivered goods or services. It is a highly secured & safe, trustworthy, demanding, and effective form of assuring on-time payment and delivery of goods to buyers and sellers. Types Of Letters Of Credit

2. A letter of credit is an essential ​financial instruments in trade transactions​ both domestic and international. So it is important to be aware of the several types of Letters of credit so that you could use them as per your suitability. There are various types of letters of credit that we are going to discuss here. Keep reading: ● Commercial LC- This is a standard Letters Of Credit that is used by parties involved in international trade. It comes with a direct payment method where the issuing bank is responsible to make the payments to the beneficiary. Also known as documentary credit or an import/export letter of credit, in commercial LC, the bank acts as a neutral third party to release the funds when the Terms & Conditions of the agreement are met by both buyers and sellers. ● Standby Letter Of Credit - This is a different type of Letters Of Credit where the bank gives an assurance that the buyer can pay the seller. But if the buyer does not pay, and the seller is not compensated, then the amount will be paid to the seller only after the beneficiary ie. seller provides proof that he did not receive any amount for his delivered goods or services. In simple words, they are quite similar to Commercial LC but are payable only if the payee proves that he is not compensated by the buyer. You can contact Emerio Banque for safe and reliable Letter of Credit services. ● Revocable LC - This type of Letters Of Credit is uncommon as the name suggests, it can be revoked ie. changed or canceled by the issuing bank at any time and for any reason without giving any prior notification to the seller. These types of LCs are not used frequently as there is no protection or safety is provided to the beneficiary, rather they create leverage for the issuers. ● Irrevocable LC - Contrary to the Revocable LCs, these Irrevocable LCs are a safer option. As the name suggests, these Letters Of Credits cannot be revoked, changed, or canceled without getting prior authorization from all the involved parties to the contract. If there is any change that needs to be made, it will be done after getting the consent of all the parties. These letters provide more security to the sellers and buyers. There is no surprise if we tell you that almost all the LCs are now Irrevocable as revocable LCs do not provide any security or protection to the sellers. Recommended Read: ​What Is The Difference Between Bank Guarantee And Letter Of Credit? ● Confirmed Letter Of Credit - A Confirmed Letters Of Credit is a letter where a second bank (from the exporter’s country) gives its own undertaking that the payment will be made to the seller/exporter. In simple words, the seller acquires the guarantee of on-time payment from a confirming bank to avoid the risk of payment failure from the first bank ie. the buyer’s bank. This is used when the exporter is insecure about getting an

3. unconfirmed credit due to the issuing bank risk/ or economic risk involved with the importer’s country. Unconfirmed Letter Of Credit - On the contrary, an Unconfirmed Letters Of Credit is one where there is no guarantee given by any second or confirmed bank other than the bank that issued it. It is only assured by the issuing bank and does not require a guarantee from the second bank. To know about these LCs in detail, ​contact​ Emerio’s Letter of Credit services. Back-to-Back Letter Of Credit - These are the LCs that are used when a third-party or an intermediary is involved among the buyers and sellers such as a trading house. It is made up of two Letters Of Credits where one is issued by the buyer’s bank to the intermediary and the other one is issued by the intermediary’s bank to the seller. In simple words, the intermediary will be paid by the buyer and the seller will be paid by an intermediary. The buyer and intermediary use the Master letter of credit while the intermediary and the seller use a letter of credit based on this master letter. Red Clause Letter Of Credit - As the name suggests, the Terms and Conditions of the agreement are marked in red ink. It is a letter of credit where the seller gets the partial payment before shipping his products or performing the mentioned services. It means the seller gets access to cash upfront which he can use for buying, manufacturing, or shopping goods to the buyer. Transferable LC - You can understand by its name. In this type of letter of credit, the beneficiary can further transfer all or part of the payment to another supplier in the chain or any other beneficiary. It means these types of LCs can be transferred from one beneficiary to another. These Letters Of Credits are commonly used when there are intermediaries involved in the transaction. Un-transferable LC - As the name suggests, Un-translatable LCs are those which do not allow any beneficiary to transfer their funds or part of funds to any third party. Here, the beneficiary will be the only recipient of the funds and cannot further transfer it to anyone. If you are looking for genuine, authentic, and reliable letters of credit, trade finance, and other off-shore business banking services, you can contact ​Emerio Banque​. It is one of the most popular and recognized financial institutions offering currency exchange, Escrow, and many more banking services at the best rates. ● ● ● ● ●