How many different kinds of bank letters of credit are there?
Answer: More than 6
A letter of credit (LC), also known as a documentary credit, bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide a payment guarantee from a creditworthy bank to an exporter of goods. Letters of credit are used extensively in the financing of international trade where the reliability of contracting parties cannot be readily and easily determined. Its effect is to introduce a bank as an underwriter, where it assumes the credit risk of the buyer paying the seller for goods.
There are several types of LC’s and within each type there can be variations, which seek to operate in different markets and solve different issues. Here are some examples:
Import / Export — The same credit can be termed an import or export letter of credit depending on whose perspective is considered. For the importer it is termed an Import LC and for the exporter of goods, an Export LC.
Revocable / Irrevocable — Whether an LC is revocable or irrevocable determines whether the buyer and the issuing bank are able to manipulate the LC or make corrections without informing or getting permissions from the seller. Changes, amendments or a cancellation of the LC (except if it is expired) are done by the applicant through the issuing bank. It must also be authenticated and approved by the beneficiary.
Confirmed / Unconfirmed — An LC is said to be confirmed when a second bank adds its confirmation (or guarantee) to honor a complying presentation at the request or authorization of the issuing bank.
Restricted / Unrestricted — Either the one advising bank can purchase a bill of exchange from the seller in the case of a restricted LC or; the confirmation bank is not specified, which means that the exporter can show the bill of exchange to any bank and receive a payment on an unrestricted LC.
Deferred / Usance — A credit that is not paid/assigned immediately after presentation, but after an indicated period that is accepted by both buyer and seller. Typically, the seller allows the buyer to pay the required money after taking the related goods and selling them.