Letter of credit is a letter
from a bank requesting exporter to send goods to the importer and guarantees
payment. If the importer (buyer) is unable to make payment, the bank will be
required to cover the full or remaining amount of the purchase. It is used in
local and foreign trade. Letter of credit may be issue by individual, but mostly
it is issued by banker.
Types of letter of credit
1. Irrevocable Credit:
This kind of credit cannot be
altered or cancelled without the consent of beneficiary (seller). By issuing
irrevocable credit the bank gives an undertaking to accept and pay the bill
drawn on it.
2. Revocable Credit:
This kind of credit can be
altered or cancel without the consent of beneficiary (seller). By issuing
revocable credit the bank does not give an undertaking to accept and pay the
bill drawn on it.
3. Documentary Credit:
This kind of credit requires
attaching necessary documents with bill like insurance policy, commercial
invoice, bill of lading etc.
4. Non-Documentary Credit:
When the credit does not
require attaching necessary documents with the bill, it is known as open or
non-documentary credit.
5. Omnibus Credit:
Those exporters who have high
credit standing can get omnibus letter of credit. This letter of credit grants
the exporter to draw money from bank in lump sum against the pledge of a
general lien on goods.
6. Fixed Credit:
When a letter of credit is
issued for a fixed amount, it is called fixed letter of credit. It is exhausted
when the full amount is received.
7. Revolving Credit:
Revolving letter of credit is
used for several payments. This type of credit can cover multiple transactions
between same buyer and same seller.
8. Transferable Credit:
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