Letters of credit is a type of financial instruments, which were first started to use in 18th century. We will describe here various kind or "Letters of Credit" used in today's business environment.
1) Commercial Letters of Credit
Commercial letters of credit are primaryly used as a payment tool in international trade such as exporting and importing goods and services transactions. Most of the commercial letters of credit are issued subject to the latest version of UCP "Uniform Customs and Practice for Documentary Credits". The ICC publishes UCP, which are the set of rules that governs the commercial letters of credit procedures.
2) Standby Letters of Credit
Commercial letters of credit are a type of payment to be utilized when the principal perform its dues. For example, let us consider an exporter who ships the goods according to the sales contract and apply to the appointed bank for the payment. If the appointed bank decides that the presentation is conforming to the terms and conditions of the credit and the UCP rules then exporter will be paid. This situation is just contrary in standby letters of credit.
3) Revocable Letters of Credit
Revocable letters of credit give issuer the modification or cancellation right of the credit any time without prior notice to the beneficiary. Since revocable letters of credit do not provide any protection to the beneficiary, they are not used frequently. In addition, UCP 600 has no reference to revocable letters of credit. All credits issued subject to UCP 600 are irrevocable unless otherwise agreed between the parties.
4) Irrevocable Letters of Credit
Irrevocable Letters of Credit cannot be modified or cancelled without the agreement of the credit parties. Unconfirmed irrevocable letters of credit cannot be modified without the written consent of both the issuing bank and the beneficiary. Confirmed irrevocable letters of credit need also confirming bank's written consent in order any modification or cancellation to be effective.
1) Commercial Letters of Credit
Commercial letters of credit are primaryly used as a payment tool in international trade such as exporting and importing goods and services transactions. Most of the commercial letters of credit are issued subject to the latest version of UCP "Uniform Customs and Practice for Documentary Credits". The ICC publishes UCP, which are the set of rules that governs the commercial letters of credit procedures.
2) Standby Letters of Credit
Commercial letters of credit are a type of payment to be utilized when the principal perform its dues. For example, let us consider an exporter who ships the goods according to the sales contract and apply to the appointed bank for the payment. If the appointed bank decides that the presentation is conforming to the terms and conditions of the credit and the UCP rules then exporter will be paid. This situation is just contrary in standby letters of credit.
3) Revocable Letters of Credit
Revocable letters of credit give issuer the modification or cancellation right of the credit any time without prior notice to the beneficiary. Since revocable letters of credit do not provide any protection to the beneficiary, they are not used frequently. In addition, UCP 600 has no reference to revocable letters of credit. All credits issued subject to UCP 600 are irrevocable unless otherwise agreed between the parties.
4) Irrevocable Letters of Credit
Irrevocable Letters of Credit cannot be modified or cancelled without the agreement of the credit parties. Unconfirmed irrevocable letters of credit cannot be modified without the written consent of both the issuing bank and the beneficiary. Confirmed irrevocable letters of credit need also confirming bank's written consent in order any modification or cancellation to be effective.
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