financial document issued by an issuing bank at the request of a buyer (applicant) to a seller (beneficiary), which guarantees payment to the seller if the terms and conditions specified in the L/C are fulfilled. It usually contains a brief description of the goods, the documents required, shipping date and an expiry date after which payment will no longer be made. There are different types of L/C, according to the level of security they grant the beneficiary (seller/exporter).
(1) Irrevocable Letter of Credit: This can neither be modified nor cancelled without the agreement of all the parties concerned. The payment by the issuing bank is guaranteed provided that the beneficiary (seller/exporter) satisfies all the terms and conditions of the L/C.
(2) Revocable Letter of Credit: This may be modified or cancelled by the issuing bank at any time and without notice to the beneficiary. However, payments or drafts negotiated within the terms of the credit before receipt of the revocation or amendment notice from the issuing bank remain validly binding for all parties. Negotiability is restricted to the advising bank and confirmation is usually not available. The revocable letter of credit gives maximum flexibility to the buyer but involves risks for the seller.
(3) Confirmed Irrevocable Letter of Credit: A L/C in which the responsibility of another bank (the confirming bank, which is usually the same as the advising bank) has been added to that of the issuing bank, upon authorization or request of the latter. The confirmation represents a definite undertaking by the confirming bank, which obligates itself in the same manner as the issuing bank. It is used to back up the credit standing of the issuing bank and to mitigate risk by replacing a foreign bank risk with a domestic bank risk.
(4) Irrevocable Unconfirmed Letter of Credit: A L/C which has been advised through an advising bank, acting as an agent of the issuing bank, without however assuming any responsibility towards the beneficiary except for taking reasonable care to check the apparent authenticity of the documentary credit which it advises.
(5) Revolving Letter of Credit: A type of L/C issued only once and through which the money made available to the seller, after being drawn within a stated period of time, will again become available in the future, usually under the same terms and without another L/C being issued. This type of credit is used in connection with regular and ongoing purchases from a foreign supplier. Revolving L/Cs may be revocable or irrevocable, and the revolving element may be linked to time and/or value.
(6) Documentary Letter of Credit: A L/C where the issuing bank stipulates that certain documents should accompany the draft. These documents assure the applicant (buyer/importer) that the merchandise has been shipped, is in good condition and that title to the goods has been transferred to the importer.
(7) Negotiable Letter of Credit: A L/C issued in such form that it allows any bank to negotiate the documents.
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