Here we will present you a list of the most frequently used irrevocable letters of credit or LC
An unconfirmed LC only supports only the guarantee that the issuing bank gave the exporter. The payment obligation fall under the lap of the exporter itself. The notifying bank only has the responsibility of informing the buyer of what is expected of the transaction and the quality of the product. The payment usually needs to be managed through foreign banks.
A LC is called Back to Back because it is composed of two letters of credit. When put together, these letters are equivalent to a transferable LC. Letters of this type give the opportunity to exporters who do not qualify for bank loans to use LC.
When a LC is issued in favor of an exporter in a foreign country, some financial institutions will also issue LC to the suppliers of that exporter so that he or she is able to buy the merchandise it needs for the products. When one LC has been approved, the second one is valid in spite of the first one being not well written. The issuing bank is expected to pay for the products according to what the LC says.
Many banks are reluctant to such agreements because back to back letters of credit involve two separate transactions. It is likely that several banks are involved and the risks of confusion and dispute are higher.
To protect itself, a bank will require the exporter to submit all relevant documents that are part of the first LC before issuing the second LC. The second transaction is made to confirm the original and the expiration date will appear before the date of the first one. This will ensure that the seller has sufficient time to provide the documents within the time limit of the first one.
A standby LC: Unlike the regular LC which is basically a payment mechanism, a standby LC is a kind of bank guarantee that is used to cover financial obligations for non-payment. The bank issues a standby LC that held by the seller provides the customer open account terms. If payment is carried out in accordance with the conditions set by the seller, the LC is not used. However, if the client cannot make payment, the seller presents a bill of exchange with copies of invoices to the bank along with other necessary documents. The standby LC generally expires after twelve months.
An unconfirmed LC only supports only the guarantee that the issuing bank gave the exporter. The payment obligation fall under the lap of the exporter itself. The notifying bank only has the responsibility of informing the buyer of what is expected of the transaction and the quality of the product. The payment usually needs to be managed through foreign banks.
A LC is called Back to Back because it is composed of two letters of credit. When put together, these letters are equivalent to a transferable LC. Letters of this type give the opportunity to exporters who do not qualify for bank loans to use LC.
When a LC is issued in favor of an exporter in a foreign country, some financial institutions will also issue LC to the suppliers of that exporter so that he or she is able to buy the merchandise it needs for the products. When one LC has been approved, the second one is valid in spite of the first one being not well written. The issuing bank is expected to pay for the products according to what the LC says.
Many banks are reluctant to such agreements because back to back letters of credit involve two separate transactions. It is likely that several banks are involved and the risks of confusion and dispute are higher.
To protect itself, a bank will require the exporter to submit all relevant documents that are part of the first LC before issuing the second LC. The second transaction is made to confirm the original and the expiration date will appear before the date of the first one. This will ensure that the seller has sufficient time to provide the documents within the time limit of the first one.
A standby LC: Unlike the regular LC which is basically a payment mechanism, a standby LC is a kind of bank guarantee that is used to cover financial obligations for non-payment. The bank issues a standby LC that held by the seller provides the customer open account terms. If payment is carried out in accordance with the conditions set by the seller, the LC is not used. However, if the client cannot make payment, the seller presents a bill of exchange with copies of invoices to the bank along with other necessary documents. The standby LC generally expires after twelve months.
About the Author:
Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letter Contract Standby Letter of Credit Click here to get your own unique version of this article with free reprint rights.
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