Types of Letter Of Credit (LC)
If you want to be a good and successful garment merchandiser, you have to know about different types of LC (Letter of Credit). Without Knowing LC you won’t take any kind of big orders from international buyers. LC – Letter of Credit are classified into various types according to the method of settlement employed.
All credits must clearly indicate in major categories. Apparel Merchandisers are using different types of LC in Garment Industry or Buying house.
- Sight payment LC
- Deferred payment LC
- Acceptance LC
- Negotiation LC
- Red close LC
- Revolving LC
- Stand by credit.
- Transferable LC
Basic (LC) Letter of Credit Transaction
The most commonly used credits are sight payment credits. These provide for payment to be made to the beneficiary immodestly after presentation of the stipulated documents on the condition that the terms of the credit have been complied with. The banks are allowed reasonable time to examine the documents.
Under a deferred payment credit the beneficiary does not receive payment when his presents the documents but at a later date specified in the credit. On presenting the required documents, he received the authorized banks written undertaking to make payment of maturity. In this way the importer gains possession of the documents before being debited for the amount involved.
In terms of its economic effect a deterred payment credit is equivalent to an acceptance credit, except that there is no bill of exchange and therefore no possibility of obtaining money immediately through a descant transaction. In certain circumstances, how ever, the banks payment undertaking can be used as collateral for an advance, though such as advance will normally only be available form the issuing or confirming bank. A discountable bill offers wider scope.
With an acceptance credit payment is made in the form of a tern bill of exchange drawn on the buyer, the issuing bank or the pendent bank. Once he has fulfilled the credit requirements, the beneficiary can demand that the bill of exchange be accepted and returned to him. Thus the accepted bill takes the place of a cash payment.
The beneficiary can present the we accented bill to his own bank for payment at maturity or for discounting, depending on whether or not he wants cash immediately. For simplicities sake the beneficiary usually gives on instruction that the accepted bill should be left in the safekeeping of one of the banks involved until it matures. Bill of exchange drawn under acceptances credit usually have a term of 60-180 days.
The purpose of an acceptance is to give the importer time to make payment. It he sells the goods before payments fall due, he can use the precedes to meet the bill of Exchange in this way, he does not have to borrow money to finance the transaction.
Negotiation means the purchase and sale of bill of exchange or other marketable instruments. A negotiation credit is a commercial letter of credit opened by the issuing bank in the currency of its own country and addressed directly to the beneficiary. The letter is usually delivered to the addressee by a corespondent bank. This credit is sometimes also as Hand on credit.
The letter of credit empowers the beneficiary to draw a bill of exchange on the using bank, on any other named drawer or on the applicant for the credit. The beneficiary can them present this bill to a bank for negotiation, together with the original letter of credit and the documents stipulated therein.
Payment of the bill of exchange is guaranteed by the issuing bank on the condition that the documents presented by the beneficiary are in order. The most common form of negotiation credit permits negotiation by any bank. In rare case the choice is limited to specified banks.
Red Clause Credit
In the case of a red clauses credit, the seller can obtain an advance for an agreed amount from the correspondent bank, goods that are going to be delivered under the documentary credit. On receiving the advances, the beneficiary must give a receipt and provide a written undertaking to present the required documents before the credit expires.
The advance is paid by the correspondent bank, but it is the using bank that assumes liability. If the sellers does not present the required documents in time and fails to refund the advance, the correspondent bank debits the issuing bank with the amount of the advance plus interest. The issuing bank, in turn, has reveres to the applicant, who therefore bears the risk for the advance and the interest accursed.
The clause permitting the correspondent bank to make an advance used to be written on red in home the name red clause credit.
Revolving credit can be used when goods are to be delivered in installment at specified intervals. The amount available at any one time is equivalent to the value of one partial delivery.
A revolving credit can be cumulative or non-cumulative means that amount from unused or incompletely used portions can be carried forward to subsequent period. If a credit is non-cumulative, portions not used in the prescribing period case to be available.
Stand by Credit
Stand by credit are encountered principally in the US. Under the laws of most US states, banks are prohibited from issuing regular quarantines, so credits are used instead. In Europe, too the use of this type of credit is increasing by virtue of their documentary credit, stand-by credit are governed by the UCP. However, their function is that of a grantee.
The types of payment and performance that can be guaranteed by stand-by credits include the following :
- Payment of thorium bill of exchange
- Repayment of bank advance
- Payment of goods delivered.
- Delivery of goods in accordance wets contract and
Execution of construction contracts, supply and install contracts.
In order to enforce payment by the bank, the beneficiary merely presents a declaration stating that the applicant for the credit has failed to meet his contractual obligation. This declaration may have to be accompanied by other documents.
Transferable credit are particularly well adapted to the requirements of international trade. A trader who receives payment from a buyer in the form of a transferable documentary credit can use that credit to pay his own supplier. This enables him to carry out the transaction with only a limited and lay of his own funds.
The buyer supplies for an irrecoverable credit issued in the traders favour. The issuing bank must expressly designate the credit as transferable.As soon as the trader receives the confirmation of credit he can request the bank to transfer the credit to his supplier. The bank is under no obligation to effect the transfer except in so far as it has expressly consented to do so.
The costs of the transfer are usually charged to the trader and the transferring bank is entitled to delete them in advance.