Letters of Credit

Can you tell me what Letters of Credit are exactly as I am very confused about it? Also list me the types of Letters of Credit?

[Pathak]

A letter of credit is a document; typically from a Bank (Issuing Bank), assuring that a seller (Beneficiary) receives payment up to the amount of the letter of credit, as long as certain documentary release conditions have been met.

In the event that the buyer (Applicant) is unable to make payment on the purchase, the Beneficiary may make a demand for payment on the bank. The bank examines the Beneficiary's demand and if it complies with the terms of the letter of credit honor the demand.

The letter of credit states what documents the Beneficiary must present, what information it must contain, and the place and date it expires.

Beneficiaries who sell goods and utilize a letter of credit as the method of payment have the assurance of the issuing bank that if it present the documents stated in the letter of credit, the issuing bank honor the demand for payment.

Types

• Import/export — the same credit is termed an import or export LC depending on whose perspective is considered. For the importer it is termed an Import LC and for the exporter of goods, an Export LC.

• Revocable — the buyer and the bank that established the LC are able to manipulate the LC or make corrections without informing or getting permissions from the seller.

• Irrevocable — any changes (amendment) or cancellation of the LC (except it is expired) is done by the applicant through the issuing bank. It must be authenticated and approved by the beneficiary.

• Confirmed — An LC is said to be confirmed when a second bank adds its confirmation (or guarantee) to honor a complying presentation at the request or authorization of the issuing bank.

• Unconfirmed — this type does not acquire the other bank's confirmation.

• Restricted — Only one advising bank can purchase a bill of exchange from the seller in the case of a restricted LC.

• Unrestricted — The confirmation bank is not specified, which means that the exporter can show the bill of exchange to any bank and receive a payment on an unrestricted LC.

• Transferrable — the exporter has the right to make the credit available to one or more subsequent beneficiaries. Credits are made transferable when the original beneficiary is a middleman and does not supply the merchandise, but procures goods from suppliers and arranges them to be sent to the buyer and does not want the buyer and supplier knows each other.