Letter of Credit Explained
Updated: Nov 12, 2021
What is a letter of Credit?
A Letter of Credit (LC) is a trade finance tool issued by the bank that will guarantee the payment of goods to the beneficiary or exporter/seller. When the buyer or importer fails to perform the required obligations, the confirming bank pays. In this blog, we look at the types of letter of credit, meaning and the operation.
As a trade financial instrument, Letters of Credit are designed to protect both importers and exporters. This can help the trader to get new foreign clients in export market. By using the Letter of Credit the exporter gets a guarantee of payment, and the importer gets verified documents of shipment and goods as assured by the exporter.
The Letter of Credit also provides the information on foreign buyer’s credit which is not always easy to find. If the importer is able to provide the Letter of Credit from reputed prime banks, proving that his financials and credit profile are good, because banks do the prior verifications before issuing the Letter of Credit.
Types of Letter of Credit
The various types of Letters of Credit are given below.
A revocable letter of credit
An irrevocable letter of credit
A standby letter of credit
Revolving letter of credit
Sight letter of credit
Usance letter of credit
UPAS letter of credit
Revocable Letter of Credit
This Letter of credit can be revoked by the issuing bank without the agreement of the beneficiary. Which means this type of LC can be amended or cancelled without the consent of the exporter or beneficiary.
Irrevocable Letter of Credit
This type of LC cannot be cancelled or amended without the consent of all parties including the exporter.
Standby Letter of Credit (SBLC)
SBLC is a Guarantee of Payment: Which means, upon submission of the documents to the bank, the importer should pay for the goods to the beneficiary bank, and if the beneficiary is not paid by the importer, then the bank pays the beneficiary upon submission of documents mentioned in the LC verbiage.
Revolving Letter of Credit
This is used when there are regular shipments of the same commodity between the supplier and the customer. This eliminates the need to issue a Letter of Credit for every individual transaction.
Sight Letter of Credit
The payment will immediately made by the bank by presenting the documents.
Usance Letter of Credit
The payment will be effected on the Pre-designated days (30 days, 60 days, 90 days, 120 days) from the date of acceptance of documents. However, the beneficiary can get part payment from the confirming bank upon submission of shipping documents. The confirming bank will get the payment from the issuing bank on the pre designated days as mentioned in the LC.
Usance Payable at Sight (UPAS)
This letter of credit works as a sight LC for the beneficiary/exporter and Usance LC for the importer/buyer.
Parties involved in the Letter of Credit
A typical LC process involves following parties:
Applicant – importer who initiates the LC process
Issuing bank – bank that issues the LC for the applicant
Beneficiary – exporter for whom the LC is being issued
Advising bank – bank for the beneficiary, located in the country of beneficiary
Confirming bank - bank which confirms the LC
Processes involved in the Letter of Credit
The processes in a Letter of credit transaction starting from the issuance to the release of payment is shown in the above diagram. This is for a Non Transferable LC. For the SBLC and transferable LCs we will write a follow-up blogs.
How to Buy Indian Sugar, Broken Rice, Wheat and Maize on Letter of Credit
Viya's Group is one of the genuine and verified supplier of Argo Commodities from India. We Supply Broken Rice (IR 64 - 100% Broken, 5% and 25%), 1121 Basmati Rice, Milling Wheat, Sugarcane Molasses, and Maize. We also supply Indian Refined Sugar (ICUMSA 150), Raw Sugar (ICUMSA 600-1200)from India.
The Sugar and Rice Season in India has started, we are open for Spot and Yearly Contract for the Supply/Export of Sugar, Broken Rice, Wheat and Maize (Yellow Corn). We supply in MOQ of 10 FCL (260MT) up to 12,500 MT per Shipment.
Our Payment Terms:
100% Irrevocable, Non Transferable Documentary Letter of Credit (DLC) payable at Sight from Beneficiary Cargo Owner (BCO) issued or confirmed by Prime Western Bank. If advance is paid, Advance Bank Guarantee can be provided for the Advance Paid.
For Price Quote, Send the signed and sealed LOI to email@example.com (or) contact +91-7010225247 (Watsapp).
Please check our range of products here