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.
TYPES OF LETTERS OF CREDIT
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:
PARTICIPANTS IN LC PROCESS
STEPS IN THE LETTER OF CREDIT PROCESS
DOCUMENTS MOST FREQUENTLY USED IN LETTERS OF CREDIT TRANSACTIONS
A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit.
What DHANANJAY & CO. Offers
We have an extensive experience in assisting and issuing Letters of Credit (LC) from financial institution. Our representatives are greatly skilled in providing Letter of Credit (LC) consultancy and can tailor this versatile financial instrument to fit your company’s current funding needs.
Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. There are basically two types: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the letter of credit is a secondary payment mechanism.