Different types of Letter of Credit

There is more than one type of letter of credit, in fact there are eight which are listed below:-

1. Irrevocable – the default option. These are only binding if all terms and conditions are met and once negotiated; they cannot be amended or cancelled without the agreement of everyone involved.
2. Revocable – these offer little security so are not often used. The importer can cancel at any time until the documents are taken up by the bank.
3. Confirmed – this type of letter of credit confirms that payment will be made by the advising bank (usually an international bank) if the issuing bank or the buyer fail to pay, this facility comes at higher cost and is not available under certain circumstances.
4. Unconfirmed – these letters of credit are authenticated by the advising bank and forwarded to the exporter but offer no guarantee of payment.
5. Revolving – a type of letter of credit used for repeat transactions, for example when the same company is importing the same product from the same supplier. The letters revolve over time or value and can do so automatically or subject to agreed terms and conditions.
6. Standby – a standby letter of credit is essentially a back up option for a transaction where a less secure payment option has been agreed. It is negotiated before the transaction but not used unless the importer fails to pay. Then it can come into effect, allowing the supplier to claim payment, so long as both parties have adhered to its terms and conditions.
7. Transferable – these letters of credit are used to transfer part or all of the credit value to one or more third parties, in particular where transactions are facilitated via brokers and there is a need to finance the purchase from the ultimate supplier.