Letter of credit (L/C)

Definition of L/C

An L/C is a written promise which is issued to the exporter by the opening or issuing bank upon the request of the importer (i.e. the applicant), promising to pay a certain sum of money within a certain period of time against the stipulated documents. The documents the importer requires in the credit may vary, but at a minimum include an invoice and a B/L. Other documents the importer may specify are certificate of origin, consular invoice, insurance certificate, inspection certificate and others.

Documentary L/C

Ls/C are the most common method of making international payments because the transaction risks are shared by the importer and exporter, and they are more formally called documentary Ls/C because the banks handling the transaction deal in documents instead of in goods.

Types of L/C

There are a number of different kinds of Ls/C, such as Revocable L/C, Irrevocable L/C, Documentary L/C, Clean L/C, Confirmed L/C, Unconfirmed L/C, Transferable L/C, Acceptance L/C, Sight L/C, Usance L/C, Deferred Payment L/C. Back-to-back L/C, Revolving L/C ,Red Clause L/C ,Standby L/C .Each type of L/C has its own advantages and disadvantages for the importer and for the exporter.

Two basic forms of L/C

Of all the types, two basic forms of Ls/C are the Revocable L/C and Irrevocable L/C. There are also two types of irrevocable L/C: the Irrevocable L/C not Confirmed, and the Irrevocable Confirmed L/C.