Freely Negotiable LC allows any bank to become a nominated bank as long as it is willing to pay, accept, incur deferred payment undertaking, or negotiate the LC. The LC has to indicate that it is not restricted to any bank for negotiation or that it can be negotiated in any bank. Revolving LC is one where the amount mentioned gets reinstated after payment, reducing the need to create a new LC.
It is used in case of shipments with a diverse set of goods or a repeated set of the same goods, which are traded within a specific period. In a Red Clause LC the seller or beneficiary is partly paid or is paid an advance before the goods are shipped and after receipt of documents and a written confirmation from the seller to the bank. This type of LC acts as an aid to the seller for his working capital requirements for purchase of raw materials, packaging and processing of goods.
In a green clause LC the seller receives advance payment not only for purchasing raw material, packaging and processing of goods but also for the cost incurred for pre-shipment warehousing and insurance.
Trade Advice. Letter of credit is a document issued by a bank or a financial institution, it serves as a guarantee for payment from buyer to seller and is most commonly used in International Trade Transactions.
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Letters of Credit. Description of LC LC is a bank service ensuring payment of the amount indicated in the letter of credit to the Seller as per the Buyer's instructions against the shipment of goods, performance of other conditions stipulated in the letter of credit and submittal of relevant documents. Performance of LC 1. Advantages of LC Advantages of LC for the Buyer: - Elimination of risk of losing money for the Buyer - Payments are made after fulfilment of the Seller's contractual obligations - Transfer of ownership over shipped goods to the Buyer within the period indicated in the LC and according to other terms.
Thanks to Letter of Credits LCs , the buyers can easily avail goods and services from international sellers. It is beneficial for both the buyer and seller. LCs build trust between the parties. Also, it is amendable, i. Further, it reduces the chances of conflict between the trading parties.
LCs, simplify negotiations. Banks impose a specific fee for formulating an LC. LCs bind both the buyer and seller to fulfill contractual terms within a time frame. Consider the hypothetical example to better understand a letter of Credit LC. ABC Ltd. The buyer applies for an LC with the issuing bank. The issuing bank offers the LC in favor of the seller in exchange for a specific fee. The issuing bank releases the payment when the seller delivers the goods consignment or services to the buyer.
However, if the buyer fails to pay, then the issuing bank has to bear the cost. This limit can be higher or lower than this, as per the norms of the issuing bank. Here we discuss Letter of Credit types, features, how it works, examples, advantages, and disadvantages.
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A letter of credit that allows a beneficiary to further transfer all or a part of the payment to another supplier in the chain or any other beneficiary. This generally happens when the beneficiary is just an intermediary for the actual supplier.
Such LC allows the beneficiary to provide its own documents but transfer the money further. For more information click on Transferable LC. The beneficiary is the only recipient of the money and cannot further use the letter of credit to pay anyone. Such types of letters are not used frequently as the beneficiary is not provided any protection.
For more information click on Revocable LC. An LC that does not allow the issuing bank to make any changes without the approval of all the parties. A letter of credit that assures the payment if the buyer does not pay. After fulfilling all the terms under SBLC, if the seller proves that the promised payment was not made.
In this situation, the bank will pay to the seller. In a nutshell, it does not facilitate a transaction but guarantees the payment.
It is quite similar to a bank guarantee. For more information click on Standby LC. Which the seller or exporter acquires the guarantee of payment from a confirming bank also called the second bank. This is primarily to avoid the risk of non-payment from the first bank. For more information click on Confirmed LC.
A letter of credit that is assured only by the issuing bank and does not need a guarantee from the second bank. Mostly the letters of credit are an unconfirmed letter of credit. When a single LC is issued for covering multiple transactions in place of issuing separate LC for each transaction is called revolving LC. For more information click on Revolving LC. Back to back LC is an LC which commonly involves an intermediary in a transaction. There are two letters of credit, the first issued by the bank of the buyer to the intermediary and the second issued by the bank of an intermediary to the seller.
For more information click on Back to Back LC.
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