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LC Types
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LC Costs
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LC Terms
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LC Risks
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A letter of credit (LC) is a financial instrument that guarantees payment from a buyer to a seller in international trade. It reduces the risk of non-payment, fraud, and currency fluctuations. However, there are different types of LCs that suit different situations and needs. How do you choose the best one for your import/export operations? Here are some factors to consider.
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- Alba Cristina Lesmes Senior Solution Consultant
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- Ali Sufyan Result-Driven Senior Supply Chain Specialist | Trade Finance | Supply Chain | Letter Of Credit | Islamic Banking|…
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- Anohar John Faculty Member/Philanthropist/Board Member/Subject Matter Expert//Posh Expert/Human Rights/Content Writer/Course…
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1 LC Types
There are four main types of LCs: irrevocable, revocable, confirmed, and unconfirmed. An irrevocable LC cannot be changed or canceled without the consent of all parties involved. A revocable LC can be changed or canceled by the issuing bank at any time. A confirmed LC means that a second bank, usually in the seller's country, adds its guarantee to the issuing bank's. An unconfirmed LC means that only the issuing bank is responsible for payment. Generally, irrevocable and confirmed LCs are more secure and preferable for sellers, while revocable and unconfirmed LCs are more flexible and cheaper for buyers.
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- Anohar John Faculty Member/Philanthropist/Board Member/Subject Matter Expert//Posh Expert/Human Rights/Content Writer/Course Developer
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Types are given as a listAcceptance Credit/ Time Credit.Revocable Letter of Credit.Irrevocable Letter of Credit.Confirmed Letter of Credit.Back-to-Back Letter of Credit.Transferable Letter of Credit.Restricted Letter of Credit.
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See AlsoLetter Writing: Introduction, Types of Letter, Letter Writing Tips, ExamplesTypes of letter of creditDifference Between Letter of Credit and Bank GuaranteeLetter of CreditFunny
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- Alba Cristina Lesmes Senior Solution Consultant
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Agreed, this type of L/C should not be part of any documentation anymore. Do not mention anything that does not exists nowadays.
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- Ali Sufyan Result-Driven Senior Supply Chain Specialist | Trade Finance | Supply Chain | Letter Of Credit | Islamic Banking| Import and Export
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There is no revocable LC being practiced these days This term is only in the theory these days. Further no supplier will take a risk of accepting and shipping against revocable LC
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2 LC Costs
Another factor to consider is the cost of using an LC. There are fees involved in opening, confirming, advising, amending, and negotiating an LC. These fees vary depending on the bank, the country, the currency, and the amount of the transaction. The fees are usually borne by the buyer, unless otherwise agreed by the parties. Therefore, you should compare the fees and charges of different banks and types of LCs before choosing one.
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3 LC Terms
A third factor to consider is the terms and conditions of the LC. These include the expiry date, the shipment date, the documents required, the partial shipments, the transshipments, and the discrepancies. The expiry date is the deadline for presenting the documents to the bank for payment. The shipment date is the latest date for dispatching the goods. The documents required are the proof of delivery and performance, such as invoices, bills of lading, certificates of origin, and inspection reports. The partial shipments are the allowance for sending the goods in more than one consignment. The transshipments are the allowance for changing the mode or carrier of transport during transit. The discrepancies are the errors or inconsistencies in the documents that may cause rejection or delay of payment. You should ensure that the terms and conditions of the LC are clear, realistic, and acceptable for both parties.
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4 LC Risks
A final factor to consider is the risks involved in using an LC. Although an LC reduces the risk of non-payment and fraud, it does not eliminate them completely. There are still possibilities of bank failure, political instability, legal disputes, and forgery. You should also be aware of the risks of over-reliance on an LC, such as losing competitive edge, damaging customer relationships, and missing opportunities. You should balance the benefits and drawbacks of using an LC and consider other alternatives, such as advance payment, open account, documentary collection, or trade credit insurance.
Choosing the best letter of credit type for your import/export operations depends on several factors, such as security, cost, terms, and risks. You should evaluate your situation and needs carefully and consult with your bank and your trading partner before making a decision.
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- Alba Cristina Lesmes Senior Solution Consultant
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L/C reduces the risk of the exporter of non payment, in the other hand advance payment increases the buyer's risk of non getting the goods and increases his asses, so these types of payments are not substitute of each other.
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- Anohar John Faculty Member/Philanthropist/Board Member/Subject Matter Expert//Posh Expert/Human Rights/Content Writer/Course Developer
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But the Bank who issues the Letter of Credit have their own risks which prevent most regional banks from giving an Letter of Credit. Some sea routes are now red flagged due to sanctions and Letter of Credit will not be issued in this case.
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5 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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- Ali Sufyan Result-Driven Senior Supply Chain Specialist | Trade Finance | Supply Chain | Letter Of Credit | Islamic Banking| Import and Export
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Regional practices and local laws are also another factor which needs to be considered such as in some regions Banks doesn’t make payment of a sight LC having clean documents until unless the cargo physically arrives at the port of discharge. Which totally kills the purpose of using an LC.
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- Julia Lomas Area Head of Customs for UK and Ireland - Helping clients navigate the world of Customs and simplifying their supply chains
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I’m previous roles as the importer I’ve had lots of experience working with LC’s. I see lots of benefits in the current economy to leverage borrowing for manufacturing however sometimes the administrative burden and charges incurred can make them difficult to work with. I see an opportunity with advances in technology and the banking industry to make the process so much easier, using AI would stop errors occurring and fees being levied. It has to be practical for all and cost effective.
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- Anohar John Faculty Member/Philanthropist/Board Member/Subject Matter Expert//Posh Expert/Human Rights/Content Writer/Course Developer
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There are some regional laws and procedures which prevent business houses from getting Letter of Credit. It has become worse after COVID-19 as many banks and financial institutions stopped providing Letter of Credit. But we have hope as few International banks are providing LC for Business.
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