Presentation – Types of Letters of Credit

Commercial credits are used mainly in export and import transactions of tangible goods.
Majority of commercial letters of credit are issued subject to the latest version of UCP (Uniform Customs and Practice for Documentary Credits).
UCP (Uniform Customs and Practice for Documentary Credits) are the set of rules that governs the commercial letters of credit procedures.

Standby credits are used mainly in contraction projects as well as export and import transactions of tangible goods.
Majority of standby letters of credit are issued subject to the latest version of ISP (International Standby Practices).
ISP (International Standby Practices) are the set of rules that governs the Standby letters of credit procedures.

Irrevocable means not to be revoked or recalled; unalterable according to Kernerman Webster’s College Dictionary.
Irrevocable Letter of Credit is a type of letter of credit which can not be cancelled or amended without the written agreement of the credit parties.
If credit is unconfirmed unconfirmed than beneficiary beneficiary and issuing issuing bank must reach an agreement on the amendments.
If credit is confirmed than beneficiary, issuing bank and confirming bank must reach an agreement on the amendments.
All credits issued subject to UCP 600 are irrevocable unless otherwise specified.

Revocable means capable of being revoked; able to be cancelled according to Kernerman Webster’s College Dictionary.
Irrevocable Letter of Credit is a type of letter of credit which can be cancelled at any time without prior notification to the beneficiary.
Revocable credits can not be confirmed. So all revocable credits are
need to be unconfirmed.
Revocable credits can not be confirmed. So all revocable credits are
need to be unconfirmed.
Unconfirmed credits can be amended or cancelled by the issuing bank at any time without prior agreement of the beneficiary.
All credits issued subject to UCP 600 are irrevocable unless otherwise specified.
Revocable credits can still be issued subject to UCP 500.

Transferable Letters of Credit are suitable for triangle trade. Triangle trade is a trade where a middleman exist between the buyer (importer) and the seller (exporter).
Transferable letter of credit issued in favor of the middleman. Then middleman transfers part of the credit to the ultimate supplier of the goods.
Middleman’s Middleman’s commission commission is the difference difference of these two credit amounts amounts. (issued amount-transferred amount=commission of the middleman)
Transferable Letters of Credit can be issued subject to UCP 600.
Transferable credit can be transferred more than one beneficiary. (partial transfer is allowed)
Transferred credits can not be transferred to another second beneficiary once more.

Back-to-Back Letters of Credit are suitable for triangle trade. Triangle trade is a trade where a middleman located between the buyer (importer) and the seller (exporter).
There are two separate letters of credit exist in a back-to-back letter of credit transaction.
- Buyer issues 1st. letter of credit in favor of the middleman middleman.
- Middleman issues 2nd. letter of credit in favor of the ultimate supplier of the goods.
As back-to-back letters of credit contain two independent credits, issuing bank of the 2nd letter of credit has to bear substantial amount of payment risk. For this reason back-to-back letters of credit are rarely used in international trade.

If buyer and seller are trading the same commodity regularly on a certain period of time than they may choose to work with a revolving letter of credit instead of issuing a new LC every shipment.
Buyer’s bank (issuing bank) issues a letter of credit that replenishes either in value or in time.
Revolves by value : Letter of credit is reissued automatically when credit amount is utilized.
Revolves by time : an amount is available in fixed installments over a period