Letters of Credit Explained

A letter of credit is a payment mechanism that is used to ensure two things:

1. That the supplier gets paid
2. That the client receives the products form the supplier, as agreed

Letters of credit come in a few flavors:

1. Revocable letters of Credit: A revocable letter of credit allows for modifications, amendments or cancellation.

2. Irrevocable letters of credit: An irrevocable letter of credit requires the consent of all parties before any amendments,modifications or cancellations. Most beneficiaries (suppliers) prefer this as a method of payment because it ensures payment, provider a proper delivery of products/services is made.

3. transferable letters of credit: A transferable letter of credit allows the client (or exporter) to transfer all or part of his rights to a third party. This type of L/C allows clients/exports to obtain pre-export financing, by levering the credit of the issuing bank.

4. Standby letters of credit: A standby letter of credit is a payment guarantee more than a payment mechanism. It guarantees that the supplier will be paid by the issuer, should the payer default.

I will be posting a more comprehensive article soon.

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