L.C. ( THE LETTER OF CREDIT )

L.C.
THE LETTER OF CREDIT

IN EXIM BUSINESS 

WE SHOULD ALWAYS ACCEPT IRREVOCABLE L.C. 

AND NOT REVOCABLE L.C.


The Expiry Date of L.C. should one month later than the delivery date.

 What Is a Letter of Credit?

A letter of credit, or "credit letter" is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility.

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.

Types of a letter of credit

The letters of credit can be divided into the following categories:

Sight Credit

Under this LC, documents are payable at the sight/ upon presentation of the correct documentation.
For example, 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.

Acceptance Credit/ Time Credit

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. For example, a company purchases materials from a supplier and receives the goods on the same day. The bill will be delivered with the shipment of goods, but the company may have up to 30 days to pay it. This 30 day period marks the usance for the sale.

Revocable and Irrevocable Credit

A revocable LC is a credit, the terms and conditions of which can be amended/ cancelled by the 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.

Confirmed Credit

Only Irrevocable LC can be confirmed. A confirmed LC is one when a banker other than the Issuing bank, adds its own confirmation to the credit. In case of confirmed LCs, the beneficiary’s bank would submit the documents to the confirming banker.

 What Is an Irrevocable Letter of Credit (ILOC)? 

Key Takeaways

• An irrevocable letter of credit (ILOC) is a guarantee for payment issued by a bank for goods and services purchased, which cannot be cancelled during some specified time period.
• ILOCs are most commonly used to facilitate international trade.
• A confirmed ILOC offers additional risk protection for the seller by providing a guarantee of payment from both the buyer's bank and the seller's bank.

Irrevocable Letter of Credit

An irrevocable letter of credit (ILOC) is an official correspondence from a bank that guarantees payment for goods or services being purchased by the individual or entity, referred to as the applicant, that requests the letter of credit from an issuing bank.

An irrevocable letter of credit cannot be canceled, nor in any way modified, except with the explicit agreement of all parties involved: the buyer, the seller, and the issuing bank. For example, the issuing bank does not have the authority by itself to change any of the terms of an ILOC once it is issued.

Importance of letters of credit

Since the nature of international trade includes factors such as distance, different laws in each country and the lack of personal contact during international trade, letters of credit make a reliable payment mechanism. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.