Letters of Credit (LCs) are instruments which guarantee sellers payment if certain terms and conditions are met. They are frequently used in international transactions and have many different types. We have illustrated and defined the main different types of Letter of Credit below.
The LC can be cancelled or changed at any time by the buyer or the issuing bank without notification. It is important to note that in the latest version of the UCP 600, revocable LCs have been removed for any transaction undertaken under their jurisdiction.
The LC cannot be unilaterally reversed, unless all parties (the issuing bank, confirming bank, buyer and seller agree).
The status of a LC is ‘confirmed’ once the confirming bank (of the exporter) has added its obligation to the issuing bank. The obligation could be a guarantee or assurance of payment.
An unconfirmed LC is guaranteed only by the issuing bank (i.e., there is no confirmation by the advising bank). This type of confirmation is the most common in LCs, although where a jurisdiction has economic instability or political unrest, payment could be at risk.
If the beneficiary is an intermediary for the real suppliers of goods or services, the payment will need to be transferred to the actual suppliers.
An un-transferrable LC disallows payments from being transferred to third parties.
Here, the issuing bank has to pay the beneficiary.
The issuing bank is obligated to pay the beneficiary or any bank nominated by the beneficiary.
Only one advising bank can purchase a bill of exchange from the seller in the case of a restricted LC.
The confirmation bank is not specified, which means that the exporter can show the bill of exchange to any bank and receive a payment on an unrestricted LC.
Payment can be deferred in the case of a usuance LC which gives time for the buyer to inspect or even sell the goods.
If a LC is at sight, it is payable as soon as the documents have been verified and presented.