Letter Of Credit (L/C; Also, Documentary Credit, D/C) [Last Updated by: admin on 2012-01-01]
A document issued by the importer's bank stating its commitment to honour a draft, or otherwise pay, on presentation of specific documents by the exporter within a stated period of time. The documents the importer requires in the Credit usually include, at a minimum, a commercial invoice and clean bill of lading, but may also comprise a certificate of origin, consular invoice, inspection certificate, and other documents; The most widely used type of Credit in international trade is the irrevocable Credit, which cannot be changed or cancelled without the consent of both the importer and the exporter. In a confirmed irrevocable Credit, the confirming bank adds its irrevocable commitment to pay the beneficiary (the confirmation is an additional guarantee of payment). Types of L/C: ? irrevocable - a Credit which cannot be retracted or revoked once the beneficiary has been notified; there is a presumption under the UCP 500 that a Credit is irrevocable. ? advised -a Credit the opening of which the beneficiary has been informed by a local bank. ? confirmed -a Credit which has received an additional guarantee of payment by a local or highly reputable bank. ? back-to-back -a system utilised by middlemen/intermediaries to finance a single transaction through the use of two L/C's opened in succession (e.g.,"back-to-back") in order to permit the middleman/broker to use the ' proceeds from the first Credit to pay off his supplier under the second credit. ? transferable -an L/C which allows the beneficiary to make part or all of his Credit payable to another supplier; used in middleman/brokerage contexts; distinguishable from back-to-back L/C's because the transferable Credit requires the knowledge and authorisation of the importer (applicant/principal). ? revolving -a Credit which can be drawn against repeatedly by the beneficiary; : can take a variety of different forms, depending on whether the credit is limited ' in terms of time, number of possible drafts, maximum quantity per draft, or maximum total quantity. ? cumulative revolving L/C - revolving L/C under which unused amounts . can be carried forward and become available under the next draft. ? red clause - an L/C allowing payments of advances to the beneficiary (originating in the wool trade in Australia, these clauses used to printed in red ink). ? deferred - an L/C under which payment by the importer is to take place a specified time after his receipt of the shipping documents. ? sight - an L/C under which the beneficiary is entitled to present a sight draft or sight bill of exchange, which is a call for immediate payment upon acceptance of shipping documents. ? import - an L/C used to finance importation of goods. ? standby - akin to a demand guarantee or bank guarantee, the standby L/ C is generally used to assure performance or payment by the counterparty.