• A Letter of Credit (LC) is a payment mechanism that is typically deployed for international trade settlements
    • There are several benefits of LCs, including the fact that they provide an economic guarantee while also facilitating the payment
    • There are several traders who demand the use of LCs from their counterparties for all transactions
  • This blog discusses the different types of letters of credit in order to help you in choosing the right one for your business

Different Types of Letters of Credit

  • There are five major types of Letters of Credit. These include Irrevocable LCs, At Sight LCs, Stand By LCs, Transferrable LCs, as well as Confirmed LCs. Each of these Letters of Credit has unique characteristics that can prove to be extremely useful for importers and exporters
  • The first type is Irrevocable LCs. The key characteristic of this type of Letter of Credit is that the conditions that have been stated in it are irrevocable
    • This implies that the buyer or the bank cannot amend these conditions without the express consent of the seller
    • This type of LC provides an extra layer of security to the seller since it is not possible to change the terms and conditions
  • The second type is At Sight LC. The key characteristic of this type of Letter of Credit is that it is designed to facilitate quick payments
    • Under this type of Letter of Credit, the seller is immediately paid by the underwriting bank
    • The only requirement, in this case, is to submit the required carriage documents to the bank
  • The third type is Stand By LC. This type of Letter of Credit is not designed to be the actual mode of payment
    • Instead, it is only used as a security. The LC only comes into the picture if and when the buyer fails to make the payment
    • This type of LC is fairly common, and it is offered by almost all trade finance institutions
  • The next type is a transferrable LC. This type of Letter of Credit is not very common because of its peculiar nature
    • A transferrable LC provides the seller with an option to transfer its credit on to a third party
    • In this case, the third party may or may not be related to the seller. In certain instances, sellers want to transfer their credit to one of their suppliers. This is where a transferrable LC proves to be useful
  • The last type is a confirmed LC. This type of LC has been designed to provide sellers with an extra layer of protection
    • In this case, there are two banks involved in the LC
    • If the first bank refuses to pay for the LC, then the second bank can step in and make the payment to the seller
    • This type of LC minimises the risk involved for the seller
  • Thus, it is evident that all five types of LCs are different from each other and present unique propositions to the traders

  • To conclude, it is clear that there are various types of letters of credits, and traders must choose the most appropriate one that suits their needs. Institutions such as Euro Exim Bank offer customised support to traders in the form of financial instruments and bespoke trade advisory services. Euro Exim Bank offers financial instruments such as Bank Guarantees and Letters of Credit (LCs). Further information about Euro Exim Bank and its key product offerings is available here.