What is Letter of Credit ?
- A Letter of Credit is a payment method whereby the Buyer and Seller rely upon the banks to ensure that payment is received and goods are provided. This method is used when the Buyer and Seller are not sure of each other especially when the Seller is selling goods to new clients.
- Known as a Documentary Letter of Credit is an undertaking of payment given by the Buyer’s Bank to the Seller for a specified sum provided the Seller ships out the goods and present the required compliant documents by a predetermined deadline.
- Separate from the sales & purchase contract on which it is based. All parties deal in documents and not in goods.
- Governed by a set of guidelines called the Uniform Customs and Practice for Documentary Credits (UCP 600), which is issued by the International Chamber of Commerce.
How many types of Letter of Credit ?
- Commercial LC
- Export/Import LC
- Transferable Letter of Credit
- Un-transferrable Letter of Credit
- Revocable Letter of Credit
- Irrevocable Letter of Credit
- Standby Letter of Credit (SBLC)
- Confirmed Letter of Credit
- Unconfirmed Letter of Credit
- Revolving Letter of Credit
- Back to Back Letter of Credit
- Red Clause Letter of Credit
- Green Clause Letter of Credit
- Sight Letter of Credit
- Usance Letter of Credit
What is Irrevocable Letter of Credit?
This is a payment method which does not allow for modifications of the LC without the approval of the beneficiary
What is Standby LC ?
This is a payment method which occurs when the Buyer is not able to pay the Seller, the Seller will present the relevant documents to the bank for payment. The Bank is obligated to pay the Seller if the documents presented comply with the terms of the LC.
What is LC at Sight ?
This is a payment method also known as Sight LC which means payment will be made as soon as the documentation stated in the LC has been presented and verified.
What is Usance LC ?
This paument method also known as Deferred LC whereby a LC payable at a predetermined time after the presentation of conforming documents.
What is Back to Back LC?
This payment method is used in a trade involving an intermediary, such as a trading house. It is actually made up of two LC, one issued by the buyer’s bank to the intermediary and the other issued by the intermediary’s bank to the seller
What is the difference between a LC vs Bank Guarantee?
A LC is an undertaking of payment given by the Buyer’s Bank to the Seller for a specified sum provided the Seller ships out the goods and present the required compliant documents to the Buyer’s Bank by a predetermined deadline.The LC ensures the payment will be made as long as the services are performed.
A bank guarantee, guarantees a sum of money to a beneficiary. Unlike a LC, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract.
LC ensure that a transaction proceeds as planned, whereas bank guarantees reduce the loss if the transaction doesn’t go as planned.