Here we will present you a list of the most frequently used irrevocable letters of credit or LC
We say that a LC is Unconfirmed when the documents that back it up only show the bank guarantee issued by the importer’s bank. The role of the notifying bank is to let the exporter know what the LC establishes but without paying for the merchandise. It is the responsibility of the exporter to obtain payment for the merchandise from a bank usually located in the country of the importer.
Back to back: these are two letters of credit which, together, comprise an alternative transferable LC. These kinds of letters of credit allow exporters (sellers or brokers) who do not qualify for a bank loan without collateral to obtain a second LC in favor of the supplier.
When a LC is issued in favor of an exporter in a foreign country, some financial institutions will also issue LC to the suppliers of that exporter so that he or she is able to buy the merchandise it needs for the products. When one LC has been approved, the second one is valid in spite of the first one being not well written. The issuing bank is expected to pay for the products according to what the LC says.
Back to back LC are not the favorite choice of some financial institutions, because they involve more than one transaction. The more transactions, the higher the risk for complication and dispute.
To protect itself, a bank will require the exporter to submit all relevant documents that are part of the first LC before issuing the second LC. The second transaction is made to confirm the original and the expiration date will appear before the date of the first one. This will ensure that the seller has sufficient time to provide the documents within the time limit of the first one.
Finally, there are also Standby LCs. Their main objective is to provide protection to the exporter against nonpayment. An exporter will use a Standby letter of credit when the importer refuses to pay in spite of having received the merchandise as requested in the LC. These letters have a period of validity of one year after they are issued.
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