What is Letter of Credit (LC)?
Letter of Credit is a guarantee from a bank to a seller in support of a buyer that guarantees a seller that; the payment will pay in exact time and exact amount. If the buyer will unable to pay then Bank will liable to pay the due amount to seller.
Letters of credit is usually used for international trade in case of transaction between a importer and exporter.
Documents require getting the payments:
To receive payment the exporter or shipper must present some documents to banks. Generally Bank accepts original Bill of Lending (BOL) as goods are shipped. Following documents keeps vital role to get the LC payment from Bank.
Bill of exchange which is Co accepted Drafts.
Invoice, Packaging list.
Transport documents, insurance certificate, commercial, official or legal documents.
License, embassy legalization, origin certificate, inspection certificate, phytosanitary certificate.
Bill of lading, Airway bill, Lorry / truck receipt, railway receipt, CMC other than mate receipt, forwarder cargo receipt, Deliver challan etc.
Insurance policy or certificate not a cover note.
Types of Letters of Credit:
Following are the types of letters of credit:
Import / export letters of credit:
Import and export LC depending on whose perspective it is been looked upon. In favor of importer it is termed as Import LC and for the exporter of goods is termed as export LC.
Revocable Letter of Credit:
In this type of credit, buyer and bank which has established the credit can manipulate the LC without concern from seller or exporter.
In this type of LC, any changes or cancellation must be made by applicant through issuing bank by amendment from seller. The changes depend on seller of goods.
Confirmed LC is a LC when another bank adds additional confirmation to honor a complying presentation at the request or authorization of the issuing bank.
This type of LC doesn’t require another bank’s confirmation.
Transferrable LC is one which the exporter has the right to transfer to one or more beneficiaries. This occurs when the original beneficiary is a middle man and does not supply the merchandise himself but knows both importer and exporter.
Untransferrable LC is one which the exporter has no right to transfer to other beneficiaries.
Deferred / Usance LC:
It is kind of credit which is not paid after the verification of validity of documents but paying agter a specific duration which is accepted by both buyer and seller.
At sight LC:
It is a kind of credit where the announcer bank pays the required money after observing the carriage documents from the seller and all other documents.
Red Clause LC:
In this type of credit the seller take the pre-paid or part of money from the bank before sending the products. The terms and conditions are written by red ink, so this LC is popular by this name.
Back to Back LC:
This type of LC consists of two different and separated types of LC. First one is in favor of seller that is not able to provide the corresponding goods for any reason. Back to Back LC issued in case of intermediary trade. Intermediate companies such as trading houses are sometimes required to open Lc’s by supplier and receive export LC’s from buyer.
The Price of Letter of Credit:
All the charges that include Letter of Credit issuance charge, negotiation of documents, reimbursement and other charges like courier are to the account of applicant or as per terms and conditions of letter of credit. If charges remain silent in letter of credit then they are to the account of applicant. The description of charges and who would be bearing the charges would be indicated in form 71B in the letter of credit.