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Different types of Letter of Credit
Letter of credit is an instrument or a letter of comfort issued by the Buyer’s bank on behalf of buyer for the benefit of the seller.
Revolving Letter of Credit is used when the delivery of goods is in form of partial/ multiple shipments. Revolving Letter of Credit keeps on revolving and is not restricted to a single transaction. Revolving Letter of Credit (LC) can be utilized for subsequent business transactions over a period of time on a continuous basis to the extent of limit sanctioned.
The seller/buyer does not have to go to the bank for sanction of fresh limits every time he gets a new order for executing the same.
2) Back to Back Letter of Credit:
A Letter of Credit (LC) is a mode of making payments for trade transactions. An Letter of Credit is a highly popular payment mode because it allows an importer or buyer to make secure payments to the exporter or seller.
Back to Back Letter of Credit, one Irrevocable Letter of Credit facilitates the seller to obtain another Letter of Credit. To obtain the Back to Back Letter of Credit the permission of the Buyer or the applicant of the first Letter of Credit is not required. Back to Back Letter of Credit is generally used by the middleman or agencies to hide the identity of the real suppliers or manufacturers. The seller can utilize this Back to back Letter of Credit as a security for his bank, to issue a back to back Letter of Credit in “favour of his suppliers” in order to get a very competitive rate for his purchases and increase his profit margin in the process. Thus this can very well be used by the seller to raise quick funds and complete his orders in the scheduled time.Such transactions originate when a seller receives a letter of credit covering goods which must be obtained from a third party who in turn requires a letter of credit. The “second” issuing bank looks to the first issuing bank for reimbursement after paying under the second letter of credit.
Just4uloan help you with the list of the banks and the contact details, which provides Back to Back Letter of Credit.
3) Revocable Letter of Credit:
Revocable Letter of Credit means the payment against this L/C can be revoked by the issuing bank. The buyer may either amend the Letter of Credit or cancel it without the approval of the seller. The payment against Revocable Letter of Credit is not for sure and hence this type of Letter of Credit is not commonly used.
The Seller has meager chances to get loan against Revocable Letter of Credit.
4) Irrevocable Letter of Credit:
Irrevocable Letter of Credit cannot be cancelled. This seller is assured of payment for his supply of goods/services provided all terms and conditions of L/C are conformed to. This mode of payment is generally used in international trade transactions.
As the payment against this Irrevocable Letter of Credit is guaranteed by the issuing bank and the holder of this Irrevocable Letter of Credit (seller) can borrow short term finance from any other bank or lending institution at a very low rate of interest and within a very short time.
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