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1. Irrevocable LC. This LC cannot be cancelled or modified without consent of the beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other party.
2. Revocable LC. This LC type can be cancelled or modified by the Bank (issuer) at the customer's instructions without prior agreement of the beneficiary (Seller). The Bank will not have any liabilities to the beneficiary after revocation of the LC.
3. Stand-by LC. This LC is closer to the bank guarantee and gives more flexible collaboration opportunity to Seller and Buyer. The Bank will honour the LC when the Buyer fails to fulfill payment liabilities to Seller.
4. Confirmed LC. In addition to the Bank guarantee of the LC issuer, this LC type is confirmed by the Seller's bank or any other bank. Irrespective to the payment by the Bank issuing the LC (issuer), the Bank confirming the LC is liable for performance of obligations.
5. Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this LC.
6. Transferable LC. This LC enables the Seller to assign part of the letter of credit to other party(ies). This LC is especially beneficial in those cases when the Seller is not a sole manufacturer of the goods and purchases some parts from other parties, as it eliminates the necessity of opening several LC's for other parties.
7. Back-to-Back LC. This LC type considers issuing the second LC on the basis of the first letter of credit. LC is opened in favor of intermediary as per the Buyer's instructions and on the basis of this LC and instructions of the intermediary a new LC is opened in favor of Seller of the goods.
8. Payment at Sight LC. According to this LC, payment is made to the seller immediately (maximum within 7 days) after the required documents have been submitted.
9. Deferred Payment LC. According to this LC the payment to the seller is not made when the documents are submitted, but instead at a later period defined in the letter of credit. In most cases the payment in favor of Seller under this LC is made upon receipt of goods by the Buyer.
10. Red Clause LC. The seller can request an advance for an agreed amount of the LC before shipment of goods and submittal of required documents. This red clause is so termed because it is usually printed in red on the document to draw attention to "advance payment" term of the credit.
1- import/export letters of credit. 2- revocable letter of credit. 3-irrevocable letter o.f credit . 4- confirmed letter of credit 5- unconfirmed letter of credit. 6-transferrable letter of credit. 7-un-transferrable letter of credit . 8-usance letter of credit. 9-usance letter of credit. 10-back-to-back letter of credit.
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Types of Letter of Credit
There are various types of letters of credit used in the trade transactions. Some of the letters of credit may be defined by their purpose. The following are the different types of letters of credit:
Commercial LC: A standard LC, also called as documentary credit.
Export/Import LC: The same letter of credit can be called export or import depending on who uses it. The exporter will term it as an exporter letter of credit whereas an importer will term it as an importer letter of credit.
Transferable LC: A letter of credit that allows a beneficiary to further transfer all or a part of the payment to another supplier in the chain. This generally happens when the beneficiary is just an intermediary for the actual supplier. Such letter of credit allows the beneficiary to provide its own documents but transfer the money further.
Un-transferable LC: A letter of credit that doesn’t allow transfer of money to any third parties. The beneficiary is the only recipient of the money and cannot further use the letter of credit to pay anyone.
Revocable LC: A letter of credit that can be altered any time by the issuing bank or the buyer without any notification to the seller/ beneficiary. Such types of letters are not used frequently as the beneficiary is not provided any protection.
Irrevocable LC: A letter of credit that does not allow the issuing bank to make any changes without the approval of the beneficiary.
Standby LC: A letter of credit that is designed to assure the payment if something wrong happens. If the beneficiary proves that the promised payment was not made, a standby LC becomes payable. It does not facilitate a transaction but ensures the payment.
Confirmed LC: A letter of credit where an advising bank also guarantees the payment to the beneficiary. Only the irrevocable letters of credit are confirmed by the advising bank. The beneficiary has two promises to pay – one from the issuing bank and the other from the advising bank.
Unconfirmed LC: A letter of credit that is assured only by the issuing bank and does not need a guarantee by the second bank. Mostly the letters of credit are an unconfirmed letter of credit.
Revolving LC: A letter of credit used for several payments instead of issuing letters for each leg of the transaction.
Back to Back LC: A letter of credit which is commonly used in a transaction including an intermediary. There are two letters of credit, the first issued by the bank of the buyer to the intermediary and the second issued by the bank of an intermediary to the seller.
Red Clause LC: A letter of credit that partially pays the beneficiary before the goods are shipped or the services are performed. The advance is paid against the written confirmation from the seller and the receipt.
Green Clause LC: A letter of credit that pays advance to the seller just not against the written undertaking and a receipt, but also a proof of warehousing the goods.
Sight LC: A letter of credit that demands payment on the submission of the required documents. The bank reviews the documents and pays the beneficiary if the documents meet the conditions of the letter.
Deferred Payment LC: A letter of credit that ensures payment after a certain period of time. The bank may review the documents early but the payment to the beneficiary is made after the agreed-to time passes.
Direct Pay LC: A letter of credit where the issuing bank directly pays the beneficiary and then asks the buyer to repay the amount. The beneficiary may not interact with the buyer.
As mentioned above, a letter of credit can be of various types depending on its purpose. It is in the interest of both the buyer and the seller, to understand all the different types thoroughly and then pick one which serves the purpose completely
