A documentary letter of credit is issued by a bank on behalf of an importer, and provides a guarantee to an exporter that money due as payment for goods ordered by the importer will be paid. The documentary letter of credit contains terms and conditions that the exporter must meet, including the provision of documents, such as export licenses issued by the exporter's government.
Irrevocable Letter of Credit
An irrevocable letter of credit is one where the bank that issues the letter guarantees payment to the exporter if the exporter meets all the terms and conditions set out in the letter of credit. An exporter who asks for a letter of credit from an importer usually insists on an irrevocable letter of credit, because this means that the importer cannot refuse to pay, so long as the exporter meets all the conditions of the trade. An irrevocable letter of credit can only be canceled or amended if both parties to the letter of credit agree.
Confirmed Letter of Credit
Sometimes, an exporter will insist on a confirmed letter of credit to guarantee payment of the supply of goods. A confirmed letter of credit is one that is issued by a bank in the importer's country, but is further guaranteed by a bank in the exporter's country. This provides additional assurance for the exporter that the payment will occur. An exporter may request a confirmed letter of credit if the importer has reason to believe that the importer's bank that is issuing the letter of credit might fail, or if the importer is based in a country that is politically and financially unstable.
Transferable Letter of Credit
A transferable letter of credit allows the payment, as stated in the letter, to be transferred from the original beneficiary to a third party. A transferable letter of credit may be used when an exporter sells goods to an importer via a middleman or agent. Technically, the importer is dealing with the agent but by using a transferable letter of credit, the agent can make a payment directly to the exporter without needing to set up a line of credit with the bank that issues the letter of credit. A letter of credit can only be transferred to a third party if the bank that issues the letter of credit states that it is transferable.
Terms of Payment
A letter of credit that is said to be "at sight" is one issued by a bank that will make the due payment as soon as the exporter meets the conditions of the letter of credit. Meeting the conditions of the letter of credit includes producing documents required by the letter of credit, such as bills of lading, insurance certificates and export licenses. Some letters of credit specify a number of days until payment, and these are known as term letters of credit. A term letter of credit is one in which payment is made on a specific number of days after the bill of lading date, or a specific number of days after the date on the bill of lading, or after the date that the bank receives the bill.
