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Sujai Adithya
Business Development and Banking & Financial Services Expert
Asked a question last year

What is the meaning of 'Letter of Credit'? What are its types?

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Sujai Adithya
Business Development and Banking & Financial Services Expert

The letter of credit is one of the negotiable instrument. It is given by the bank, that guarantee’s buyer’s payment to the seller shall be received on time along with the proposed amount to be paid. In this instinct, if the buyer is unable to make the agreed payment to the seller, then the bank will cover the full or remaining amount of purchase.

In case of international dealings, many factors such as distance, duration, various law enforcing agencies and complexities in knowing the trading party in person and therefore, In international dealings letter of credit would be of great importance and key player in assurance to the beneficiary.


TYPES OF LOC:

  • Import/export letter of credit - In this the importer will be a buyer and exporter would be a beneficiary.
  • Revocable letter of credit - It can be changed anytime by buyer or issuing bank without any prior notification to the beneficiary.
  • Irrevocable letter of credit - Here the change can be done only by the issuing bank after approval given by the beneficiary alone.
  • Transferable letter of credit - It is used when beneficiary involved are one or more suppliers in which beneficiary will be presenting the documents for part of his payment.
  • Non-Transferable letter of credit - It is non-transferrable to the third parties/others who are not part of the payments.