Payment Methods- Types of L/C (Letter of Credit)

Updated: Jan 17

As we have learned so far that transactions in International Trade can be carried out via multiple methods. Out of these, L/C is the most widely used method. However, there are various types of L/C's which you can use in different situations. Let's understand these one-by-one:-

1)REVOCABLE LETTER OF CREDIT:-  A revocable letter of credit is one which can be cancelled or amended by the issuing bank at any time and without prior notice to or consent of the beneficiary. From the exporter’s point of view, such L/Cs are not safe.

2) IRREVOCABLE LETTER OF CREDIT:-  An irrevocable letter of credit is one that cannot be cancelled or amended without the consent of all parties concerned. This L/C is safer for you than the previous one.

3) REVOLVING LETTER OF CREDIT:-  A revolving letter of credit is one where, under terms and conditions thereof, the amount is renewed or reinstated without specific amendments to the credit needed. It can revolve in relation to time and value. This L/C is suggested if you are involved in long term contracts.

4) TRANSFERABLE LETTER OF CREDIT:-  A transferable credit is one that can be transferred by the original (first) beneficiary to one or more second beneficiaries. This L/C is advised when there is an involvement of a middleman.

5) BACK TO BACK LETTER OF CREDIT:- When the credit is not transferrable and in cases wherein a middle man enters into a contract to supply goods to be obtained from other suppliers but is unwilling to disclose the identity of the buyer and the buyer also is unwilling to open a transferable letter of credit, in such case back to back credits are opened.

6)  RED CLAUSE LETTER OF CREDIT:-Such letters of credit contain a clause that enables the beneficiary to avail an advance before effecting shipment to the extent stated in the L/C. The clause used to be printed in red, hence the L/C is called Red Clause L/C. This is beneficial for you as an exporter, as you can reduce your initial cost by taking advance from the importer.

7) GREEN CLAUSE LETTER OF CREDIT:-  This is an extension of the red clause letter of credit. It provides for an advance not only for the purchase of raw materials, processing and/or packing but also for warehousing and insurance charges at the port. This L/C is most beneficial for you as an exporter.

8) CONFIRMED LETTER OF CREDIT:-  Confirmed letter of credit is a letter of credit to which another bank (bank other than the issuing bank) has added its confirmation. This is the most secure option for you as an exporter and highly recommended for transactions involving high investment.

If you are facing challenges related to export/import, then Ximpex is the best platform for you. We help the Indian exporters in overcoming those challenges and help in minimizing the risks and gaps.

Author: Sachin Yadav Co-Author: Lisa Goel

Information source:- Union Bank of India

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