A Letter of Credit is an irrevocable commitment by the issuing bank to pay the beneficiary (the party sending the goods), upon presentation of the documents required by the letter of credit, at the specified time, and upon fulfillment of any other applicable conditions. Letters of credit are used only in international trade, which involve significant amounts between a supplier (exporter) in one country (state) and a buyer (importer) in another country (other state) for significant monetary values, as well as in cases where the business relationship is in its early stages and the parties involved seek to confirm the quality of the continuity of the relationship.
The supplier from whom you have ordered the goods must fulfill all the conditions specified in the letter of credit in order for him to accept payment.
In this letter of credit, you and your partner can specify details such as:
- The latest date when the goods can be shipped.
- The quantity of the goods.
- Quality and other details of the goods.
The types of Letters of Credit offered are:
- Unconfirmed Letter of Credit: A letter of credit is unconfirmed if the promise to pay the beneficiary comes only from the issuing bank.
- Confirmed Letter of Credit: A letter of credit is confirmed when another bank (preferably in the beneficiary's country) in which the issuing bank has an account, or a correspondent bank, a first-tier bank, adds its commitment to pay this letter of credit upon a request from the issuing bank.
According to the possibilities for use (financing):
- Transferable Letter of Credit: Is a letter of credit that can be transferred from the first beneficiary to a second beneficiary with the same elements, except for the amount, the latest date of departure of the shipment and the expiration date.
- Non-transferable Letter of Credit: In this type of letter of credit, the beneficiary specified in the Letter of Credit is the only one who can benefit from these funds. These expected proceeds can neither be transferred to another beneficiary nor sold at a discount.
- Back-to-back Letter of Credit: A letter of credit issued on the basis of a previously issued letter of credit. In these types, the main letter of credit serves as a means of guarantee and not a means of payment. The second letter of credit is issued by the exporter for the benefit of the importer.
According to the payment terms, letters of credit are grouped into:
- Immediately paid letter of credit: A letter of credit where payment is made immediately upon presentation of the documents requested by the beneficiary. In any case, the bank has the obligation to check and validate the documents before becoming responsible for payment.
- Letter of credit with later payment: A letter of credit where payment is made at a later date from the date of shipment of the goods and presentation of documents to the bank. The delayed payment terms are specified in the business contract between the parties, e.g. 30,60,90 days from the date of shipment of the goods.
