TYPES OF LETTER OF CREDIT

• Revocable
A revocable letter of credit can be amended or cancelled at any time without the
beneficiary’s agreement (unless documents have been taken up by the nominated
bank). Little protection is offered to the beneficiary with a revocable credit and
they are rarely seen.

• Irrevocable
An irrevocable letter of credit can neither be amended nor cancelled without the
agreement of all parties to the credit. Under UCP500 all letters of credit are
deemed to be irrevocable unless otherwise stated.

• Unconfirmed
An unconfirmed letter of credit is forwarded by the advising bank directly to the
exporter without adding its own undertaking to make payment or accept
responsibility for payment at a future date, but confirming its authenticity.

• Confirmed
A confirmed letter of credit is one in which the advising bank, on the instructions
of the issuing bank, has added a confirmation that payment will be made as long
as compliant documents are presented. This commitment holds even if the
issuing bank or the buyer fail to make payment. The added security of
confirmation needs to be considered in the context of the standing of the issuing
bank and the current political and economic state of the buyer’s country. A bank
will make an additional charge for confirming a letter of credit.

• Standby Letters of Credit
A standby letter of credit is used as support where an alternative, less secure,
method of payment has been agreed. They are also used in the United States of
America in place of bank guarantees. Should the exporter fail to receive payment
from the buyer he may claim under the standby letter of credit. Certain
documents are likely to be required to obtain payment including: the standby
letter of credit itself; a sight draft for the amount due; a copy of the unpaid
invoice; proof of dispatch and a signed declaration from the beneficiary stating
that payment has not been received by the due date and therefore reimbursement
is claimed by letter of credit. The International Chamber of Commerce publishes
rules for operating standby letters of credit – ISP98 International Standby
Practices.

• Revolving Letter of Credit
The revolving credit is used for regular shipments of the same commodity to the
same buyer. It can revolve in relation to time or value. If the credit is time
revolving once utilised it is re-instated for further regular shipments until the
credit is fully drawn. If the credit revolves in relation to value once utilised and
paid the value can be reinstated for further drawings. The credit must state that it
is a revolving letter of credit and it may revolve either automatically or subject to
certain provisions. Revolving letters of credit are useful to avoid the need for
repetitious arrangements for opening or amending letters of credit.

• Back-to-Back Letter of Credit
A back-to-back letter of credit can be used as an alternative to the transferable
letter of credit. Rather than transferring the original letter of credit to the supplier,
once the letter of credit is received by the exporter from the opening bank, that
letter of credit is used as security to establish a second letter of credit drawn on
the exporter in favour of his supplier. Many banks are reluctant to issue back-toback
letters of credit due to the level of risk to which they are exposed – a
transferable credit will not expose them to higher risk than under the original
credit.