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What is Letter of Credit? | Company Vakil

A letter of credit is a form of payment that is assured in nature. It is generally used by the businesses during transactions made at the time of trade. It is known as LC in short. Typically in a letter of credit, the bank decides to make the payment to the seller or the beneficiary on the submissions of the documents that are stipulated in that letter. In this blog post, we will focus on the general discussion related to this topic and look at the types of letter of credit.

 

The Basics of Transactions

Applicant

The buyer or the importer of goods is generally considered as the applicant of an LC transaction. The person who applied for the LC has to do the payment if the documents get delivered to the bank according to the rules and regulations.

 

Beneficiary

The party, that is, the exporter or the seller, who has been addressed by the letter of credit is called the beneficiary. Following the guidelines given by the LC regulations, the beneficiary is eligible to receive the payment once they submit the proper documents to the nominated bank.

 

Issuing Bank

The banker who lends the warranty or the credit to the proper transaction to the buyer or the importer is called the issuing bank. The issuing bank is responsible for making the payments after the proper submission of documents tested by the negotiating bank, according to the regulations of the LC.

 

Negotiating Bank

The negotiating bank is the bank of the beneficiary, that is, bank of the exporter or the seller, according to the terms used in letter of credit. Typically, what the negotiating banks do is that they claim the payment from the issuing bank, which is simply known as the opening bank as well.

 

Types of Letter of Credit

In the global transactions, various types of letter of credit are used. These are described below.

 

DP LC or DA LC (Usance)

The kind of LC where the payment has to be done on the date of maturity as per the conditions of the credit is called the DA LC. After the acceptance of the documents for the payment, the documents which carry the title of the goods are given to the buyer. After that, the buyer would have to make the payment on the given date of maturity of the letter of credit. Meanwhile, the DP letter of credits are those where the payment has been made against the documentation on the presentation.

 

Revocable or irrevocable LC

A revocable LC is the type of credit letter that can be altered or postponed any time without informing the beneficiary beforehand. On the other hand, the irrevocable LC are those letter of credit which can be altered or postponed only with the full permission of the beneficiary, the confirming bank and the applicant. Generally, letters of credit are irrevocable in nature

 

LC with or without recourse

The LC is said to be with recourse, if the beneficiary who hold itself responsible to the owner of bill and dishonors it. And if the beneficiary do not hold itself responsible for such action, then the credit is considered to be without recourse.

 

Restricted LC

A restricted LC is that letter of credit where a certain bank has been given the responsibility to pay, negotiate or accept the LC.

 

Confirmed LC

If the LC contains the addition of the confirmation of payment in them as per the request of the issuing bank, then that LC is called a confirmed LC. The addition is made by the advising bank. The liability of the confirming bank is similar to that of the issuing bank. If the payment is getting tendered by the beneficiary, then the confirming banks has to be respectful to that payment.

 

Transferable LC

A transferable LC is that type of letter of credit which can be transferred partially or wholly from one beneficiary to another. Normally the beneficiary is the seller from the supplier. But it is to be noted that the later beneficiary cannot transfer the LC to anyone else.

 

Back to back LC

A second LC gets opened by the main beneficiary in a back to back LC, where it does so to favor the other beneficiary by going against the safety and security of the main LC. This type of credit letter is normally opened for the suppliers.

 

Standby LC

A standby LC is quite similar to a guarantee or a performance bond, but the difference is that it gets issued in the form of an LC. The beneficiary who owns the standby LC can make a submission of a claim through the means of evidence in the form of documents, according to the guideline of the LC.

 

Revolving LC

In a revolving letter of credit, the one who made the application will be permitted to use the benefit again on the basis of the payments and withdrawals made against the LC.

 

 

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