This letter of credit is issued by the buyer’s bank and doesn’t include assurance for payment from a second bank. The letter cushions the seller from non-payment by the buyer’s bank thus the need for a letter from a second bank confirming payment. Confirmed LCĪ second bank writes a confirmed letter of credit to guarantee payment to the seller. Back to Back LC involves two letters one to the intermediary by the buyer’s bank and a second letter to the supplier by the intermediary’s bank. We use this letter of credit in transactions that involve an intermediary. This letter guarantees the seller of payment. Irrevocable LCĪny changes to this letter can only be made after consultations between the involved parties. Such letters are not common since the seller has no guarantee of payment with this letter. Revocable LCĪ revocable letter of credit is a credit letter the issuing bank or the buyer can cancel that without notifying the seller.

If the buyer does not pay the seller, the bank has to honor the letter by paying the seller. The letter acts as a guarantee for payment. It’s only the beneficiary who can claim payment using this letter.

The letter doesn’t allow transfer of payment to third parties. In such a case, the recipient can use their documents as they transfer the money. The beneficiary is a link between a seller and the actual supplier. Most common letters of credit include Transferable LCĪ beneficiary can write a letter to transfer payment to another beneficiary or supplier this letter is a transferable LC. Types of letter of creditīased on business transactions, various kinds of letters of credit exist. In general, exports from developing countries under different terms of payment other than a letter of credit require a special approval by the exporter's government.If faced with a challenge when writing these letters, you can use samples and templates to familiarize yourself on the details and format. Most developing countries do not allow exports even to related parties without a letter of credit to prevent capital flight. In fact, shipments other than air usually arrive at the port of importation long after the payment for the goods has been made to the exporter against the shipping documents by opening bank of letter of credit. Payments under a letter of credit are made against the shipping documents regardless of the quality and conditions of the goods at the time of arrival. With a letter of credit, the exporter gets paid for the goods he has shipped upon presentation of shipping documents. In most cases, the exporter will not start manufacturing until he receives a letter of credit because most export goods are made only for that importer according to the specifications provided by the importer. The exporter relies on the credit-worthiness of the issuing bank instead of the importer. The exporter should obtain export credit insurance to protect against an importer's non-payment.īy issuing a letter of credit, the issuing bank assumes the responsibility for payment for the imported goods. Banks do not have any responsibility to honor the accepted draft on behalf of the importer. In D/ A transactions, the banks simply act as intermediaries facilitating the transactions between the exporter and the importer. The importer is obligated to pay the draft amount on a due date to his bank, which, in turn, remits the payment to the exporter's bank. The time draft can also be made at a specified number of days from the draft date. The shipping documents are released to the importer with his acceptance which is his promise to pay at a future due date such as 30, 60, 90 or 120 days or longer from the acceptance date. Acceptance is done by the importer by marking the word 'ACCEPTED' across the face of the draft and signing his name and dating it.

He then can pick up his shipments after the customs clearance. If the exporter's draft is drawn at a tenor such as 30, 60, 90 or 120 days sight, the importer can obtain the shipping documents from the bank simply by accepting the draft.

Accountee in letter of credit