An irrevocable letter of credit is an instrument that assists in the payment of a transaction. It carries the promise of a party, other than the obligor, to effect payment upon receipt of complying documents. Generally, letters of credit are subject to a standard set of rules.· These rules are issued or endorsed by the International Chamber of Commerce.
Import Letters of Credit
Import letters of credit help trading parties establish confidence by providing greater control over transactions. Through the L/C, the issuing bank, at the request of the buyer, agrees to make payment to the seller, provided the terms of the L/C have been met.
Export Letters of Credit
Like an import letter of credit, an export letter of credit is the means of ensuring payment to the seller. However in this case the buyer is overseas.
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Transferable Letters of Credit
A letter of credit that specifically states it is "transferable", allows the beneficiary to transfer their drawing rights, in whole or part, to another beneficiary. A transferable letter of credit grants the first beneficiary the benefits of providing a letter of credit to their supplier of the "second" beneficiary without the use of their bank credit line.
Standby Letters of Credit
The standby letter of credit “stands by” in case the issuing bank’s customer is unable to live up to its obligations. The standby letter of credit substitutes the issuing bank’s creditworthiness for that of their customers.
Advantages for the Buyer:
- Documentary conditions for payment are clearly defined.
- Responsibilities for shipping costs are clearly defined using standard INCOTERM.
Advantages for the Seller:
- Third party assurance of payment.
- Bank and country risk can be mitigated with a local bank confirmation.