1. Documentary credit and clean credit
A documentary credit is a credit that is paid, accepted or negotiated against a documentary bill of exchange or documents only. The “documents” here refer to shipping documents that represent the ownership of the goods or prove that the goods have been shipped, namely, transport documents and commercial invoices, insurance documents, commodity inspection certificates, certificates of origin, packing documents, etc.
A clean credit is a credit that the issuing bank only relies on the bill of exchange or simple receipt issued by the beneficiary without the need to attach the goods.
In the settlement of international trade payment, documentary credit is mainly used. Clean credit is usually only used for payment of shipping documents between head offices and branches.
Payment settlement and non-trade expense settlement, etc.
2. Confirmed and unconfirmed credit
A confirmed L/C is a credit that another bank, namely the confirming bank, guarantees the payment of the L/C it has opened at the request of the issuing bank. A letter of credit confirmed by a confirming bank guarantees that it will pay the beneficiary or its designated person with documents that comply with the terms of the letter of credit, and there is no recourse to the beneficiary or its designated person after payment or negotiation. This type of letter of credit is the responsibility of the issuing bank and the confirming bank to the beneficiary. Therefore, generally speaking, it is beneficial for the exporter to collect foreign exchange safely.
Unconfirmed L/C refers to a letter of credit that has not been confirmed by any bank other than the issuing bank.
3. Sight payment letter of credit, deferred payment letter of credit, acceptance letter of credit and negotiation letter of credit
Sight payment letter of credit (sight payment L/C) refers to a letter of credit that stipulates that the beneficiary shall issue a sight draft with documents attached, or shall present the documents to the designated bank for payment without the need for a draft. For this type of letter of credit, the issuing bank, the confirming bank (if any) or the designated paying bank shall bear the responsibility for sight payment. The paying bank of a sight payment letter of credit is sometimes concurrently served by the designated notifying bank. If a bill of exchange is required, the designated bank shall be the payee of the bill of exchange.
Deferred payment L/C, also known as non-acceptance usance L/C, refers to a L/C that only relies on the documents submitted by the beneficiary. After the documents are checked and confirmed to be consistent, the bank is determined to bear the deferred payment responsibility, and the payment is extended for a period of time until the due date of payment. There are three ways to determine the due date of payment: (1) a number of days after the date of presentation of the documents; (2) a number of days after the date of shipment shown on the transport document; (3) a fixed date in the future. The beneficiary of this type of L/C does not issue a bill of exchange, so there is no need for the issuing bank to accept the bill of exchange, and therefore it cannot be discounted. In practice, it is mostly used for transactions of large amounts of capital goods, and the payment period is long, ranging from one year to several years, so it is often combined with government export credit.
Acceptance L/C refers to a L/C in which the paying bank designated by the L/C, upon receiving the usance bill of exchange and documents that meet the requirements of the L/C, first performs the acceptance procedures on the bill of exchange and waits for the due date of the bill of exchange to make payment. Acceptance letters of credit are usually used in transactions with deferred payments.
A negotiation letter of credit (L/C) is a letter of credit in which the issuing bank invites other banks to buy bills and/or documents. That is, a letter of credit that allows the beneficiary to present documents to a designated bank or any bank for negotiation. Usually, under the condition that the documents meet the terms of the letter of credit, the negotiating bank will pay the bill to the beneficiary after deducting interest. One of the main differences between negotiation and payment is that if the negotiating bank cannot recover the money from the issuing bank after negotiation due to reasons such as the documents not meeting the terms of the letter of credit, it can still claim against the beneficiary; while the designated paying bank (as well as the issuing bank and confirming bank) has no right to claim against the payee once the payment is made.