Genre of Letter of Credit 1.

Clean Letter of Credit A clean letter of credit allows an applicant to issue drafts which must be paid on demand by the bank, without additional required documentation. Such documents are used frequently in international trade to provide a mechanism for importers to pay exporters for their goods. They may come up in other trade and business contexts as well. This contrasts with a documentary letter of credit, where supporting material is necessary before a bank will pay out on a letter of credit.

The process of getting a clean letter of credit starts with an application to a bank that offers this service. Applicants provide documentation to demonstrate their creditworthiness and explain how they plan to use the letter of credit. The bank can review this information to determine whether it wants to grant the request, and how much credit to offer. This is typically based on a reasonable ability to repay, and the letter of credit may be renewable every year to allow the bank to review the customer periodically to confirm the credit limit is still appropriate.

2. Documentary Letter of Credit A documentary letter of credit is a type of financial instrument that is used to guarantee delivery of payment to a specific bank or other financial institution at an agreed upon future date. The detail included in this particular type of letter of credit (LC) is usually very comprehensive in terms of identifying the responsibilities that the seller must fulfill before the payment will be tendered. Issues such as the type of documentation that must be prepared and presented to the buyer, the date that the goods will be shipped, and even what type of shipping methods will be employed are often addressed. The purpose of a documentary letter of credit is to clearly identify all the terms that must be completed before the payment will actually be issued to the exporters bank.

The use of a documentary letter of credit does not take the place of a sales contract, although the two documents will often include much of the same detail. While the contract focuses on the specifics of what items are ordered and how much the buyer will pay for those items, the documentary letter of credit will typically address additional issues such as the mode of shipment, the charges involved with the shipping, and the preparation of proper documents to allow the goods into the country where the buyer resides. Essentially, this type of letter of credit spells out everything that must be done before the actual payment is tendered.

3. Revocable Letter of Credit The L/C that may be amended or canceled any time by the buyer (the account party) without the approval of the seller (the beneficiary) is known as Revocable L/C. Since it does not provide any protection to the seller, it is rarely used. Some banks even refuse to issue such L/Cs because of the fear of getting involved in the possible litigation between the buyer and the seller.

4. Irrevocable Letter of Credit A letter of credit is a document from a financial institution such as a bank that guarantees payment for satisfying the terms of a business deal. An irrevocable letter of credit cannot be rescinded and, thus, is a way to reduce the risk of conducting business. Common in international trade, irrevocable letters are used as a secure form of payment across borders and typically involve two businesses and two banks. Both the buyer and seller are guaranteed they will receive the promised work or product from the other party, because the intermediary banks will not pay if the businesses do not perform the agreed upon actions.

An irrevocable letter of credit is only one type of letter of credit. A letter of credit can come with various levels of protection. For instance, a transferable letter of credit is when the seller can assign part or all of his right to receive funds to another party.

When using a letter of credit, two businesses a buyer and a seller will agree to payment by letter of credit via two intermediary banks an issuing bank and an accepting bank. The buyer will request the issuing bank to create a letter of credit to authorize payment if the seller fulfills specific requirements. After the seller completes the specific actions, he must provide proof, such as shipping receipts, to the accepting bank. The accepting bank will verify the documents, request and receive funds from the issuing bank, and pay the seller.

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