Letter of credit is a document issued by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. Letter of credit, in a broad perspective, is one of the payment methods in international trade. Letters of credit is the only payment method, which has a balanced risk structure for both parties.

Commercial letters of credit:

Commercial letters of credit are mainly used as a primary payment tool in international trade such as exporting and importing transactions. Majority of commercial letters of credit are issued subject to the latest version of UCP (Uniform Customs and Practice for Documentary Credits). The ICC publishes UCP, which are the set of rules that governs the commercial letters of credit procedures.

Standby letters of credit:

Commercial letters of credit are a means of payment to be utilized when the principal perform its duties. A Standby Letter of Credit (SBLC) is a painless form of asset enhancement, effectively increasing your investment potential. Whether conducting business domestically or internationally, An SBLC can support your transactions in a myriad of ways, allowing your company to reach its investment project goals simply and securely.

Revocable letters credit:

Revocable letters of credit give issuer the amendment or cancellation right of the credit any time without prior notice to the beneficiary. Since revocable letters of credit do not provide any protection to the beneficiary, they are not used frequently. In addition, UCP 600 has no reference to revocable letters of credit. All credits issued subject to UCP 600 are irrevocable unless otherwise agreed between the parties.

Irrevocable letters of credit:

Irrevocable Letters of Credit cannot be amended or cancelled without the agreement of the credit parties. Unconfirmed irrevocable letters of credit cannot be modified without the written consent of both the issuing bank and the beneficiary. Confirmed irrevocable letters of credit need also confirming bank’s written consent in order any modification or cancellation to be effective.

Other letters of credit:

• TRANSFERABLE LETTER OF CREDIT
• BACK TO BACK LETTER OF CREDIT
• RED CLAUSE OR PACKING CREDIT
• GREEN CLAUSE LETTER OF CREDIT
• STAND BY CREDIT
• INLAND LETTER OF CREDIT

PARTICIPANTS IN LC PROCESS

• Buyer
• ssuing Bank
• Advising Bank
• Seller (Beneficiary)

STEPS IN THE LETTER OF CREDIT PROCESS

• Buyer and seller agree to terms including means of transport, period of credit offered (if any), and latest date of shipment acceptable.
• Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer’s credit standing, and may require cash cover and/or reduction of other lending limits.
• Issuing bank issues LC, sending it to the Advising bank by airmail or electronic means such as telex or SWIFT.
• Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary).
• Seller should now check that LC matches commercial agreement and that all its terms and conditions can be satisfied.
• Seller ships the goods, then assembles the documents called for in the LC (invoice, transport document, etc.).
• The Advising bank checks the documents against the LC. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank.
• The Issuing bank now checks the documents itself. If they are in order, it reimburses the seller’s bank immediately.
• The Issuing bank debits the buyer and releases the documents (including transport document), so the buyer can claim the goods from the carrier.ary)