A Letter of Credit

1. A Letter of Credit

2. A Letter of Credit A letter of credit is a type of business loan, an important document that is a form of guaranteeing the buyer’s payment to the sellers. Generally, it is issued by the bank and ensures timely and full payment to the seller. In case the buyer defaults on the payment, then the bank covers the full or whichever remaining amount on behalf of the buyer. A letter of credit is issued against a pledge of securities or cash. Banks typically collect a fee. For instance, percentage of the size or amount of the letter of credit. Parties to a Letter of Credit • Importer, which means an applicant requests the bank to issue the Letter of credit. • Thereafter, an importer bank (issuing bank which issues the LC also known as the opening banker of LC).

3. Types of a Letter of Credit There are several types of letters of credit that are categorized into the following categories: Sight Credit: Under this type of LC, documents are payable at the sight/upon presentation of the correct documentation. A businessman can present a bill of exchange to a lender along with a sight letter of credit and take the necessary funds right away. A sight letter of credit is more immediate than other forms of letters of credit. UsanceBill: The Bills of Exchange which are drawn and payable after a period, are called usance bills. Under acceptance credit, these usance bills are accepted upon presentation and eventually honoured on their respective due dates. Revocable and Irrevocable Credit: A revocable letter of credit is a credit, the terms and conditions of which can be cancelled by the importer/issuing bank. This cancellation can be done without prior notice to the beneficiaries. An irrevocable credit is a credit, the terms and conditions of which can neither be amended nor cancelled. Hence, the opening bank is bound by the commitments given in the LC.