| A document,
issued by a bank per instructions by a buyer of goods, authorizing the seller to draw a
specified sum of money under specified terms, usually the receipt by the bank of certain
documents within a given time. Some of the specific descriptions are: - Back-to-Back: A new letter of credit issued to
another beneficiary on the strength of a primary credit. The second L/C uses the first L/C
as collateral for the bank. Used in a three-party transaction.
- Clean: A letter of credit that requires
the beneficiary to present only a draft or a receipt for specified funds before receiving
payment.
- Confirmed: An L/C guaranteed by both the
issuing and advising banks of payment so long as seller's documents are in order, and the
L/C terms are met. Only applied to irrevocable L/C's. The confirming bank assumes the
credit risk of the issuing bank.
- Deferred Payment: A letter of credit
issued for the purchase and financing of merchandise, similar to acceptance-type letter of
credit, except that it requires presentation of sight drafts payable on an installment
basis.
- Irrevocable: An instrument that, once
established, cannot be modified or cancelled without the agreement of all parties
concerned.
- Non cumulative: A revolving letter of
credit that prohibits the amount not used during the specific period from being available
afterwards.
- Restricted: A condition within the letter
of credit which restricts its negotiation to a named bank.
- Revocable: An instrument that can be
modified or cancelled at any moment without notice to and agreement of the beneficiary,
but customarily includes a clause in the credit to the effect that any draft negotiated by
a bank prior to the receipt of a notice of revocation or amendment will be honored by the
issuing bank. Rarely used since there is no protection for the seller.
- Revolving: An irrevocable letter issued
for a specific amount; renews itself for the same amount over a given period.
- Straight: A letter of credit that
contains a limited engagement clause which states that the issuing bank promises to pay
the beneficiary upon presentation of the required documents at its counters or the
counters of the named bank.
- Transferable: A letter of credit that
allows the beneficiary to transfer in whole or in part to another beneficiary any amount
which, in aggregate, of such transfers does not exceed the amount of the credit. Used by
middlemen.
- Unconfirmed: A letter of credit forwarded
to the beneficiary by the advising bank without engagement on the part of the advising
bank. |
