A letter of credit is a written guarantee issued by the issuing bank to the beneficiary at the request of the applicant or in its own name, promising to pay a certain amount of money within a certain period of time against the specified documents. A letter of credit belongs to bank credit. A letter of credit involves the applicant, the issuing bank, the notifying bank, the beneficiary, the negotiating bank, the paying bank, the confirming bank, the reimbursing bank and other parties. Letters of credit can be divided into many types according to different methods.
(1) Documentary letter of credit and clean letter of credit.
Documentary letter of credit (Documentary L/C) refers to a letter of credit in which the issuing bank pays against documentary bills or only against documents.
Clean letter of credit (Clean L/C) refers to a letter of credit in which the issuing bank pays against bills of exchange (clean bills) without accompanying documents.
(2) Sight letter of credit and deferred payment letter of credit.
Sight Payment LC refers to a letter of credit where the issuing bank or the paying bank immediately fulfills its payment obligation upon receipt of documents that meet the terms of the letter of credit.
Deferred Payment LC refers to a letter of credit where the issuing bank guarantees payment within a certain number of days after the goods are shipped or after receiving the bill, without the beneficiary issuing a bill of exchange.
(3) Acceptance LC and Negotiation LC.
Acceptance LC refers to a letter of credit where the issuing bank is the payee of the deferred bill of exchange.
Negotiation LC refers to a letter of credit that is negotiated by a certain bank or can be negotiated by any bank.
(4) Irrevocable LC and Revocable LC.
Irrevocable L/C: Once a letter of credit is issued, during its validity period, the issuing bank cannot unilaterally modify or revoke it without the consent of the beneficiary and the relevant parties. As long as the documents submitted by the beneficiary meet the provisions of the letter of credit, the issuing bank must fulfill its payment obligations.
Revocable L/C: It means that the issuing bank does not need to obtain the consent of the beneficiary or the relevant parties for the letter of credit it has issued, and has the right to revoke it at any time.
Letter of credit payment is a kind of bank credit, which is a contract independent of the contract. The relevant banks only act in accordance with the provisions of the letter of credit. Letter of credit business is a pure document business. Under the letter of credit payment method, bank credit cannot completely replace commercial credit, nor can it completely avoid commercial risks. Therefore, it is necessary to pay attention to the prevention of letter of credit risks and be good at distinguishing the authenticity of documents. If any doubts are found in the documents, they must be carefully investigated.