Letter of Credit – Different Types
Confirmed Letter Of Credit
A letter of credit is a document issued by a bank that allows the holder of the letter to draw the funds as stated on the letter from the issuing bank. In contrast to a confirmed letter of credit, if the seller does not seek the second guarantee, the document would be called an unconfirmed letter of credit.
Transferable Letter Of Credit
The transfer of credit must be clearly outlined in the documentation of the letter. However, the letter of credit must state expressly that the credit is transferable. Otherwise, no credit can be transferred regardless of any other factors.
Transferable Letter Of Credit
The transfer of credit must be clearly outlined in the documentation of the letter. However, the letter of credit must state expressly that the credit is transferable. Otherwise, no credit can be transferred regardless of any other factors.
Usance
1. Usance applies to many items purchased on credit or a company’s accounts payable. For example, a company that purchases materials from a supplier will receive the goods today. The bill will be delivered today, but the company might have up to 30 days to pay it. The 30 days represents the usance for the sale.
2. When a person lends money, he or she will charge a usance in exchange for the service. In this case, usance relates to the profits made from the lending of principal.
3. Usance is the process of using goods to fulfill economic needs. This involves refining materials into finished goods, or the consumption of goods to satisfy needs.
At Sight Letter Of Credit
An LC at sight is a letter of credit (LC) that is payable immediately – more or less – after the seller meets the requirements of the letter of credit. This type of LC is the quickest form of payment for sellers.
To satisfy the terms of the LC, a seller needs to submit documents to the bank. Those documents typically include the letter of credit and any documents proving that the exporter has met his obligations (a bill of lading proving that the product was shipped, for example).
Back-To-Back Letters Of Credit
Two letters of credit (LCs) used together to help a seller finance the purchase of equipment or services from a subcontractor. With the original LC from the buyer’s bank in place, the seller goes to his own bank and has a second LC issued, with the subcontractor as beneficiary. The subcontractor is thus ensured of payment upon fulfilling the terms of the contract.
Red Clause Letter Of Credit
A specific type of letter of credit in which a buyer extends an unsecured loan to a seller. Red Clause Letters of Credit permit documentary credit beneficiaries to receive funds for any merchandise outlined in the letter of credit. These letters are commonly used by beneficiaries who act as purchasing agents for buyers in another country.
Standby Letter of Credit – SLOC
A guarantee of payment issued by a bank on behalf of a client that is used as “payment of last resort” should the client fail to fulfill a contractual commitment with a third party. Standby letters of credit are created as a sign of good faith in business transactions, and are proof of a buyer’s credit quality and repayment abilities. The bank issuing the SLOC will perform brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then send notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
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