Types of Letters of Credit
Irrevocable credit
Irrevocable credit means the credit cannot be amended or canceled without the agreement of all parties (the beneficiary, the applicant and the issuing bank).
A credit therefore should clearly indicate whether it is revocable or irrevocable. In the absence of such indication, the credit shall be deemed to be irrevocable.
Revocable credit
This type of credit may be amended or canceled without the beneficiary's consent. It is generally used when the applicant and the beneficiary are members of the same group of companies.
Confirmed credit
The strength of a documentary credit is related to the financial standing of the bank that issues it. The economic strength of the country of the issuing bank is also a factor.
In cases where the financial strength of the issuing country and/or bank is in doubt, the exporter may require another bank, preferably in the exporter's country, to provide its undertaking that the credit will be honoured. Consequently, the exporter is assured that drawings will be paid by the confirming bank in the event the issuing bank cannot do so, provided the terms and conditions of the credit are met. Remember, only the issuing bank may request another bank to add its confirmation.
Transferable Credit
A transferable credit is a credit under which the beneficiary (first beneficiary) may request the transferring bank, or in the case of a freely negotiable credit, the bank specifically authorized in the credit as a transferring bank, to make the credit amount available in whole or in part to other beneficiary(ies).
Only credits designated as transferable by the issuing bank can be transferred. Terms such as divisible, fractionable, assignable and transmissible do not render the credit transferable. If such terms are used, they will be disregarded.
Standby Letter of Credit
These types of credits are not specifically related to the movement of goods, they act more like a guarantee. Like a performance guarantee, a standby letter of credit allows the beneficiary to draw in the event of default on a contract, provided that the complying documents (usually a sight draft) are presented. For more information, see, ...more about Guarantees.
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