Basic Types of Letters of Credit



Basic Types of Letters of Credit :




There are three basic features of letters of credit, each of which has two options. These are described below.


Each letter of credit has a combination of each of the three features.


SIGHT OR TERM/USANCE

Letters of credit can permit the beneficiary to be paid immediately upon presentation of specified documents (sight letter of credit), or at a future date as established in the sales contract (term / usance letter of credit).



REVOCABLE OR IRREVOCABLE

Letters of credit can be revocable. This means that they can be cancelled or amended at any time by the issuing bank without notice to the beneficiary.


However, drawings negotiated before notice of cancellation or amendment must be honored by the issuing bank.


An irrevocable letter of credit cannot be cancelled without the consent of the beneficiary.



UNCONFIRMED OR CONFIRMED

An unconfirmed letter of credit carries the obligation of the issuing bank to honour all drawings, provided that the terms and conditions of the letter of credit have been complied with.


A confirmed letter of credit also carries the obligation of another bank which is normally located in the beneficiary’s country, thereby giving the beneficiary the comfort of dealing with a bank known to him.




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