Detailed explanation of different types of letters of credit and their applications

As an important international trade payment tool, letters of credit can be divided into multiple types according to different standards. Each type of letter of credit has its specific application scenarios and advantages.

Revolving L/C

A revolving letter of credit refers to a letter of credit in which the beneficiary can restore the original amount of the letter of credit and use it again after utilizing the specified amount within a certain period of time, until the number of times specified in the letter is reached or the cumulative total amount is used up. Revolving letters of credit are generally suitable for long-term contracts with relatively large quantities of single goods that can be supplied in batches on a regular basis and paid in batches. For importers, it can save the procedures and fees for issuance of certificates one by one, reduce deposits, and facilitate capital turnover; for exporters, it can reduce the procedures for batch-by-batch reminders and verifications, and get the right to recover all the payment. Assure.

Reciprocal L/C

An open letter of credit is a settlement method commonly used in barter transactions or processing and assembly business with incoming materials and parts. Since both parties were concerned that the other party would only use its rights but not fulfill its obligations, they adopted the method of opening letters of credit to each other to connect imports and exports. Its characteristics are: the beneficiary and applicant of the first letter of credit are the issuer and beneficiary of the second retroactive letter of credit respectively. The issuing bank of the first L/C is also the advising bank of the L/C; the advising bank of the second L/C is usually also the issuing bank of the L/C. The amounts of the two certificates can be equal or unequal. The two certificates can be effective at the same time or one after another.

Advance letter of credit (anticipatory L/C)

Advance letter of credit refers to a letter of credit that allows the beneficiary to advance the payment for goods before delivery of the goods shipment documents. There are two types: full advance and partial advance. Partial advance The part that can be advanced in a letter of credit is mostly the deposit paid by the buyer to the seller included in the total amount of the letter of credit. In order to attract attention, the terms of this kind of advance payment were often printed in red letters in the past, so it was commonly known as “red clause L/C” (red clause L/C). At present, our country sometimes uses this kind of letter of credit in compensation trade.

Local L/C

Local letter of credit, or local letter of credit, refers to a letter of credit in which the issuer, issuing bank and beneficiary are all in the same country. In most cases, it is used to open a letter of credit. For example, after an exporter receives a letter of credit from abroad, he is unwilling to transfer the original letter of credit to the domestic manufacturer out of the need to keep commercial secrets and prevent manufacturers supplying goods in his country from knowing the name, address or sales price of the foreign importer. , and require local banks to issue local letters of credit to local manufacturers based on the original certificate.

Confirmed L/C and unconfirmed L/C

A confirmed letter of credit refers to a letter of credit issued by the issuing bank, in which another bank guarantees payment obligations for documents that comply with the terms of the letter of credit. The bank that confirms the letter of credit is called the confirming bank. An unconfirmed letter of credit means that the letter of credit issued by the issuing bank has not been confirmed by another bank.

Sight letter of credit (sight L/C) and usance letter of credit (usance L/C)

A sight letter of credit refers to a letter of credit in which the issuing bank or paying bank immediately fulfills its payment obligations after receiving the documentary draft or shipping documents that comply with the terms of the letter of credit. A usance letter of credit refers to a letter of credit in which the issuing bank or paying bank performs its payment obligations within the specified period when it receives the documents of the letter of credit.

Fake usance letter of credit (usance credit payable at sight)

False Usance Letter of Credit stipulates that the beneficiary issues a usance draft, the paying bank is responsible for discounting, and stipulates that all interest and fees shall be borne by the issuer. For the beneficiary, this kind of letter of credit is actually still a collection at sight, and there is a “usance L/C payable at sight” clause in the letter of credit.

Transferable L/C and non-transferable L/C

A transferable letter of credit means that the beneficiary of the letter of credit (the first beneficiary) can request the bank (collectively, the “transferring bank”) to authorize payment, assume deferred payment liability, accept or negotiate, or when the letter of credit is free During negotiation, the transfer bank specifically authorized in the letter of credit can be requested to transfer all or part of the letter of credit to one or several beneficiaries (secondary beneficiaries) for use by the letter of credit. The issuing bank must clearly indicate “transferable” in the letter of credit, and it can only be transferred once. A non-transferable letter of credit is a letter of credit in which the beneficiary cannot transfer the rights to the letter of credit to others. If the letter of credit does not indicate “transferable”, it is a non-transferable letter of credit.

Documentary credit and clean credit

Documentary letter of credit refers to a letter of credit that is paid against a documentary draft or only against documents. The documents here refer to documents that represent the ownership of the goods (such as ocean bills of lading, etc.), or documents that prove that the goods have been shipped (such as railway waybills, air waybills, and parcel receipts). A clean letter of credit refers to a letter of credit that is paid against a clean draft without accompanying shipping documents. The bank pays against a bare letter of credit, and may also require the beneficiary to submit some non-shipping documents, such as invoices, advance payment lists, etc. In the payment settlement of international trade, documentary letters of credit are mostly used.

Irrevocable L/C and revocable L/C

An irrevocable letter of credit means that once a letter of credit is issued, the issuing bank cannot unilaterally modify or cancel it without the consent of the beneficiary and relevant parties within the validity period. As long as the documents provided by the beneficiary comply with the provisions of the letter of credit, the issuing bank will The bank must fulfill its payment obligations. A revocable letter of credit refers to a letter of credit that the issuing bank has the right to revoke at any time without the consent of the beneficiary or relevant parties. However, in modern practice, according to “UCP600”, banks no longer issue revocable letters of credit.