Home / Blog / Various Types of Letter of Credit that You Might Need

Various Types of Letter of Credit that You Might Need

When exporters and importers enter into a trade in the international market, there are some risks that are unavoidable, like loss of goods, failure to deliver on time, strikes and lockouts. But risks involving the failure of payment is something that can be easily avoided. To avoid such issues and maintain a strong foothold in the business, a buyer might need a guarantee that ensures the seller that they will receive the payment for goods and services that are being traded. The solution to such problems is signing a Transferable Letter of Credit (TLC). A Transferable LC is signed commitment where the buyer or the first beneficiary requests the bank to transfer his credit to another beneficiary in order to make payment to the sellers in case the first beneficiary fails to meet the dues.

Commercial LC

The most common form of LC is called the commercial letter of credit, which is used when you are entering into business with someone in the international market, that assures the seller that they will receive the payment.

Commercial LC

Trade LC

Or known as “import letter of credit” or “export letter of credit” depending upon which party is utilizing it. Such LC helps in safeguarding the interest of both parties involved in the trade from unforeseen circumstances.

Negotiable LC

If the parties enter a revocable letter of credit then the buyer or their bank is in a position to alter the terms and conditions of an LC, when required, while most common form if LC is irrevocable LCs, which protects the sellers.

Multiple-Shipments LC

Or commonly known as the revolving letter of credit allows the buyer to raise finance for multiple purchases from the same seller, these types of LC are valid for a period of one year.

Back to Back LC

When there are three parties involved in a transaction, then back to back LCs are more suitable where two LC are prepared one between the buyer and the seller and another between the seller and their supplier.

Back to Back LC

Documentary LC

As the name suggests these types of LCs require proof of shipment or certificates from the seller that ensures they will receive the payment only if they can provide the required papers.

Standby LC

This a last resort LC, where the bank makes the payment on behalf of their client by the end of the contract if their buyer is unable to make the payment in any circumstances.

Source: https://www.credicocapital.com/