LETTER OF
CREDIT (L/C):
A letter of
credit can be defined as “an undertaking by importer’s bank stating that
payment will be made to the exporter if the required documents are presented to
the bank within the variety of the L/C”. This method of payment has become the
most popular form in recent times; it is more secured as company to other
methods of payment (other than advance payment).
CONFIRMED
AND UNCONFIRMED LETTERS OF CREDIT:
When a buyer
arranges a L/c they usually do with their own bank, known as ISSUING BANK. The seller
will usually want a bank in their country to check that the letter of credit is
valid. For extra security the seller may require the letter of credit to be “CONFIRMED”
by the bank that checks it. By confirming the L/c , the second bank agrees to guarantee payment even if the issuing bank
fails to make it. So a confirmed L/c provides more security than an unconfirmed
one. The UNCONFIMED L/C means the advising bank forwards an unconfirmed L/c directly
to the exporter without adding its own undertaking to make payment or accept
responsibility for payment at a future date, but confirming it’s authenticity.
TYPES OF
LETTER OF CREDIT
(A)
REVOCABLE
L/C.
This type of
L/c can be Changed or cancelled by the bank that issued it at anytime and for
any reason.
(B)
IRREVOCABLE
L/C
This type of
L/c cannot be modified or cancelled unless everyone involved agrees. This letter of credit is more security than
revocable ones.
(C)
TRANSFERABLE
L/C.
This type of
L/c commonly used when intermediates are involved in a transaction. This L/c
can be transferred to one to others.
(D)
STAND BY
L/C.
It’s like a guarantee
that is used as support where an alternative, less secure method of payment has
been agreed. It is as assurance from a bank that a buyer is able to pay a
seller. The seller does not expect to have to draw on the L/c to get paid.
(E)
REVOLVING
L/C.
This type of
L/c is used for regular shipments of the same commodity to the same importer. It
can revolve in relation in time or value until the credit is fully drawn. These
types are very useful to avoid the need of repetitious arrangements for opening
or amending letter of credit.
(F)
BACK TO BACK
L/C.
This type of
L/c are rather than transferring the original letter of credit to the supplier,
Once the L/c is received by the exporter from the opening bank, that L/c is
used as security to establish a second L/c drawn on the exporter in favour of
his importer. These are alternative to transferable L/c.
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