Letters Of Credit — Definition, Types & Process

Letters Of Credit — Definition, Types & Process

A Letter of Credit (LC) is a document that guarantees the buyer’s payment to the sellers. It is issued by a bank and ensures timely and full payment to the seller. If the buyer is unable to make such a payment, the bank covers the full or the 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, ie, a percentage of the size/amount of the letter of credit.

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.

Parties to a Letter of Credit

• Applicant (importer) requests the bank to issue the LC.
• Issuing bank (importer’s bank which issues the LC [also known as the Opening banker of LC]).
• Beneficiary (exporter).

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.

Back-to-Back credit: In a back to back credit, the exporter (the beneficiary) requests his banker to issue an LC in favour of his supplier to procure raw materials, goods on the basis of the export LC received by him. This type of LC is known as Back-to-Back credit.

Example: An Indian exporter receives an export LC from his overseas client in the Netherlands. The Indian exporter approaches his banker with a request to issue an LC in favour of his local supplier of raw materials. The bank issues an LC backed by the export LC.

Transferable Credit: While an LC is not a negotiable instrument, the Bills of Exchange drawn under it are negotiable. A Transferable Credit is one in which a beneficiary can transfer his rights to third parties. Such LC should clearly indicate that it is a ‘Transferable’ LC.

Frequently Asked Questions

Is there a fee for a letter of credit?

The bank charges a fee for issuing a letter of credit. The fees for a letter of credit depends on several factors like the risk amount and the type of letter of credit.

How does a letter of credit help the purchasers?

Usually, a letter of credit supports a beneficiary or a seller in an exchange agreement where the bank will make sure that the seller receives the amount from the purchaser or from the issuing bank itself.

However, the letter of credit arrangement also assists a purchaser in certain circumstances such as if the purchaser makes a payment to the seller for an order and the seller does not deliver the order on time. In such a situation, the purchaser will get paid with the money that was spent by him or her with the help of a letter of credit. Hence, this way, the purchaser will get a refund.

How does a letter of credit help the sellers?

When the buyer cannot pay the full outstanding amount, the bank that issues the letter of credit will need to make the payment to the seller. Sometimes, the seller can select a banker, and that banker will have to make the payment. If a letter of credit is transferable in nature, then the seller can choose another party to make the payment.

When does a seller or a beneficiary receive the payment from the bank?

In a letter of credit facility, the seller or beneficiary will get the payment from the bank only when the seller complies with the terms laid down in the letter of credit document. When the delivery is made on time, he/she will get relevant documents to prove that the delivery was made. These documents will be sent to the bank to meet the bank requirements. The bank will then need to pay the letter of credit without fail.

What type of collateral is required to open a letter of credit?

The bank issuing the letter of credit will require collateral depending on the strength of the applicants’ finances or even a fixed deposit as collateral. The final decision of the bank to enter into a transaction is made according to a set of criteria.

Our Services

We are direct providers of LOANS (Personal Loan, Business Loan, SME Loan), Bank Guarantees (BG), Standby Letter of Credit (SBLC), Letter of Credit (Documentary Letter of Credit (L/C, DLC). We welcome clients from all countries. We DO NOT discriminate against any nationality, skin color, race or religion.

• Banking Products / Bank Instruments
• Bank Guarantee (BG) Lease/Owned
• Standby Letter of Credit (SBLC) Lease/Owned
• Medium Term Note (MTN)
• Monetization
• Offshore Bank Account Openings
• Safe Keeping Receipt (SKR)
• Commercial Bonds
• Project Finance
• Long Term Note (LTN)
• Financial Facilitators
• Consultations

Loans and Project Funding

We provide personal loans, business loans & project financing worldwide. We DO NOT discriminate against any nationality, skin color, race or religion. This means that ALL COUNTRIES are welcomed as far as the project or business is viable we will provide the needed loan or funding. Most importantly, we provide both secured loans and unsecured loans and our loan interest rate is just 3% per year which is the lowest in the industry. So if you have any viable business or project that needs funding kindly send us an email for more details.

WE PROVIDE LOAN / FUNDING FOR:

• Start-ups
• Small Businesses (SME’s)
• Medium and Large Businesses
• Public and Private Companies
• Service Companies
• Construction Companies
• Agricultural Companies
• Real Estate
• Manufacturing Companies
• Global Companies
• Companies across all Industries
• Companies wanting to go Public

Bank Guarantees (BG) / Standby Letters of Credit (SBLC)

CHUANG’S CREDIT LIMITED solely lives, breaths, focuses on and deals with the following Financial Instruments: Bank Guarantees (BGs), Standby Letters of Credit (SBLC), Mid Term Notes (MTNs), Private Placement Programs (PPP), Monetization of bank instruments, Funding, Buying and Selling of Financial Instruments. We have conquered the financial instruments industry from the inside out with some of our staff coming directly from working in the Financial Instrument Departments of World Top 25 Banks. Our business has close personal relationships, direct access and strong long term operational partnerships with Bank CEOs and Department Managers, Bank Financial Instrument Departments, Trade Platforms and countless other finance, banking, trading, monetization and funding experts. We are immersed in the World Financial Instruments industry permanently. That is our niche, our core competency, our passion, our focus and our exceptional expertise.

We are the #1 World Financial Instrument Specialists who close deals, complete transactions, protect customers and achieve results others only talk about.

All Our bank instruments are issued by prime banks such as HSBC Hong Kong or London, Barclays Bank London, Citibank New York, Standard Chartered bank or any top AAA rated bank of your choice. Through our cutting edge facilities, BG’s and SBLC’s can be issued to both local and overseas beneficiaries from any top 25 world bank at 4% interest rate per year. These financial instruments can be used to get loans, credit enhancement facilities, PPP, joint ventures, trading, signature projects etc.

Letter of Credit (Documentary Letter of Credit (L/C, DLC)

Letter of Credit (Documentary Letter of Credit (L/C, DLC) is the bank’s obligation to pay the seller of goods or services a certain amount of money in the timely submission of documents confirming shipment of goods or performance of contractual services. Documentary Letter Of Credit is one of the most important means of financing in the international trade, as the letter of credit is a tool that removes most of risks as from the buyer (importer) and from the seller (exporter).

Registered Bonds

We can arrange for underwritten by a European Brokerage through a series of registered Bonds and offering these Bonds for sale through broker dealers around the world. These Notes would be listed on DTC/Euro clear, for sale. We can accommodate clients who require a minimum of $5 MM with no maximum.

Structured Note Program

A new program backed by a major financial institution that guarantees the principal and interest for project financing. This program is for clients who requires a minimum of $20Million USD. AAA or rated higher institution will be the guarantor of not only the principle but the interest payments as well using their portfolio $30 plus Billion dollars of fortune 500 companies as collateral.