Letter of credit is a letter from a bank requesting exporter to send goods to the importer and guarantees payment. If the importer (buyer) is unable to make payment, the bank will be required to cover the full or remaining amount of the purchase. It is used in local and foreign trade. Letter of credit may be issue by individual, but mostly it is issued by banker.
Types of letter of credit
1. Irrevocable Credit:
This kind of credit cannot be altered or cancelled without the consent of beneficiary (seller). By issuing irrevocable credit the bank gives an undertaking to accept and pay the bill drawn on it.
2. Revocable Credit:
This kind of credit can be altered or cancel without the consent of beneficiary (seller). By issuing revocable credit the bank does not give an undertaking to accept and pay the bill drawn on it.
3. Documentary Credit:
This kind of credit requires attaching necessary documents with bill like insurance policy, commercial invoice, bill of lading etc.
4. Non-Documentary Credit:
When the credit does not require attaching necessary documents with the bill, it is known as open or non-documentary credit.
5. Omnibus Credit:
Those exporters who have high credit standing can get omnibus letter of credit. This letter of credit grants the exporter to draw money from bank in lump sum against the pledge of a general lien on goods.
6. Fixed Credit:
When a letter of credit is issued for a fixed amount, it is called fixed letter of credit. It is exhausted when the full amount is received.
7. Revolving Credit:
Revolving letter of credit is used for several payments. This type of credit can cover multiple transactions between same buyer and same seller.
8. Transferable Credit: