Letter of Credit
A Letter of Credit is a document issued by a bank which guarantees the payment of a buyer’s drafts for a specified period of time and up to a specified amount, under specified conditions. Effectively it is a method of payment where the buyer’s bank guarantees payment to the supplier. L/C are almost always irrevocable, can (if required) be transferable, and subject to terms (e.g. on SIGHT, 30 days, 60 days, etc.). For regular shipments a Revolving L/C is often utilised. The various types can be defined as follows :
CL/C (Confirmed Letter of Credit) A letter of credit, issued by a foreign bank, with validity confirmed by a First Class (usually US or European) bank. A seller with CL/C terms is assured of payment even if the foreign buyer or the foreign bank defaults.
DL/C or DLC (Documentary Letter of Credit) A document issued by a bank which guarantees the payment of a buyer’s drafts for a specified period and up to a specified amount. The Documentary Letter of Credit provides a more secure means of carrying out transactions in import-export trade than by documentary bills collection (see Bill of Exchange). A letter of credit when transmitted through a bank, usually in the seller’s country, becomes the means by which the seller obtains payment. The necessary documents, correctly completed, are presented to a bank by an agreed date. If the terms of the credit are met, a seller can receive payment from a bank immediately.
IL/C (Irrevocable Letter of Credit) An Irrevocable Letter of Credit cannot be amended or cancelled without the consent of the issuing bank, the confirming bank (if confirmed), and the beneficiary. The payment is guaranteed by the bank if the credit terms and conditions are fully met by the beneficiary. The words Irrevocable Documentary Credit or Irrevocable Credit may be indicated in the L/C. It means that once the buyer’s conditions in the letter have been agreed to by the seller, they constitute a definite undertaking by the buyer’s bank and cannot be revoked without the seller’s agreement.
Revocable Letters of Credit are rarely used as the terms of the credit can be cancelled or amended by an overseas buyer at any time without notice to the seller.
RL/C (Revolving Letter of Credit) When a letter of credit (L/C) is specifically designated a Revolving Letter of Credit, the amount involved when utilized is automatically reinstated, that is, the amount becomes available again without issuing another L/C and usually under the same terms and conditions within a period of time (usually several months to one year). This saves administration when multiple shipments are involved.
SL/C or SBLC (Stand-by Letter of Credit) is a financial guarantee or performance bond issued by a bank on behalf of a buyer. i.e. a written obligation of the issuing bank to pay a sum to a beneficiary on behalf of their customer in the event that the customer himself does not pay the beneficiary. The SL/C is regulated by the ICC-500 rules.
RDLC Revolving Documentary Letter of Credit [1]
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