This post will give you in-depth knowledge about letter of credit along with its accepted types.
At times when trading with an open account, the exporter needs a standby L/C. This means just as the name states; the L/C is not to be implemented unless the payment is not made within the determined period, usually 30–60 days. Bank handling costs for standby L/Cs are generally higher than that for a commercial (import) L/C.
-Issuing, Validating, and Advising Banks
Letters of credit are honorable either at sight or on the time draft basis. Under a sight L/C, the issuing (purchaser’s) bank pays, with or without the draft, when it is convinced that the provided documents conform to the specifications. An advising bank (most often the confirming or exporter’s bank) conveys the seller or beneficiary that an L/C has been issued. Under a time (acceptance) L/C, once the draft is provided and found to be in accordance, the draft is stamped as “accepted” and can then be communicated as a “banker’s acceptance” by the exporter, at a concession to show the cost of money advanced against the draft.
Once the purchaser and the exporter consent that they will use an L/C for payment and they have worked out on the conditions, the importer applies for the L/C to his or her foreign bank.
Types of L/Cs
There are 2 kinds of letters of credit: revocable and irrevocable.
Revocable credit means that the document can be modified or declined at any time without prior notification of the exporter. Irrevocable means that the conditions of the document can be modified or declined only with the consent of all parties. Taking the application as the guide, the bank issues a document of credit using the terms agreed to by the parties.
Keep following to learn about various uses of letter of credit in the most special ways.
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