Letters of credit are a hugely important part of international trade and import export. They guarantee payment and allow the seller to receive payment which can be advantageous when capital is needed up front. Our quick guide below shows you the four most common types of letter of credit and when to use them.
The Four Most Common Type of Letters of Credit:
IRREVOCABLE: Cannot be changed or amended without the consent of both the buyer and seller.
RED CLAUSED: Useful when the seller needs an up front funds from the letter of credit, this could be to buy the raw material for the contract. The amount available was usually printed in red ink hence the name.
TRANSFERABLE: Used by the seller to purchase the goods of the contract from a third party. It enables the seller the purchase the goods with the funds from the Letter of Credit. Very useful when the seller is acting as a middle man and has not the personal funds to purchase the goods of the contract
CONFIRMED: Used when the seller is unsure of the buyers banks ability to honour the Letter of credit. This could be due to Political or financial unrest in the buyers country. The letter of credit is Confirmed by a second bank usually the sellers bank, The confirming bank becomes the prime payer and seeks reimbursement from the buyers bank.