Letter of Credit

LC (Letter of Credit) is one of the most used words in apparel merchandising world. A merchandiser should have clear concept on letter of credit. The phrase “letter of credit” derives from the French word “accréditation,” that means a power to do something, which in turn derives from the Latin word “accreditivus,” that means trust. 

Letter of credit is a written promise to pay seller/exporter for goods and/or services, by a buyer's/importer's bank (called the issuing bank) to the seller's/exporter's bank (called the accepting bank, negotiating bank, or paying bank). Related documents should be presented to the bank for the payment. The documents prove that the seller has performed his duties as per the standard and quality of goods/service mentioned in the sales contract/proforma invoice that was agreed and signed by both of the parties before issuing letter of credit. 

An Import/Export Letter of Credit (popularly called Master LC) is used in international trade between buyers and sellers of different countries but Back to Back letter of credit can be used in both local and international trade. Let us get introduced with different types of letters of credit used in apparel export business: 

Import/Export Letter of Credit 

The same credit is termed as Import Letter of Credit or Export Letter of Credit. It depends on whose perspective it is being considered. For the importer it is termed as Import Letter of Credit and for the exporter it is termed Export Letter of Credit. 

Irrevocable Letter of Credit 

Without the authentication of the seller/exporter(beneficiary), buyer/importer (applicant) cannot cancel or make any amendment of this type of Letter of Credit through the issuing Bank. It can only be cancelled without the authentication of the seller/exporter (beneficiary) if it is expired. Exporters always prefer this type of letter of credit. 

Revocable Letter of Credit 

Without the authentication of the seller/exporter(beneficiary), buyer/importer (applicant) can cancel or make any amendment of this type of Letter of Credit through the issuing Bank. This type of letter of credit is totally manipulated by the buyer. None accepts this type of letter of credit these days. 

Transferable Letter of Credit 

Transferable Letter of Credit is required when the exporter is middleman or agent (not the actual supplier) of the goods but buyer finds it valuable to work with this type of agent/middleman. This is also fact that sometimes agent/middleman does not want the buyer and supplier know each other. In this type of Credit, the exporter has the right to transfer the credit to one or more subsequent beneficiaries to procure the goods and arrange them to be sent to the buyer. Usually buying houses prefer this type of letter of credit. 

Nontransferable Letter of Credit 

The credit cannot be transferred to anyone by the exporter/beneficiary. 

Confirmed Letter of Credit 

An additional confirmation or guarantee that commits to payment of the letter of credit. A confirmed letter of credit is typically used when the issuing bank of the letter of credit may have questionable creditworthiness and the seller seeks to get a second guarantee to assure payment. 

Unconfirmed Letter of Credit 

Unconfirmed Letter of Credit doesn't acquire the opposite bank's confirmation. 

Usance Letter of Credit 

As per agreement by both of the exporter/beneficiary and importer/applicant this type of letter of credit requires an indicated duration for payment instead of getting paid immediately after the valid documents are checked. By this time importer/buyer can take the opportunity to arrange money selling the goods. 

At Sight Letter of Credit 

As mentioned in this type of letter of credit, payment is made to the exporter/beneficiary immediately upon presentation of the correct document. Apparel exporter prefer this type of letter of credit. 

Red Clause Letter of Credit 

This is the specific type of letter of credit that carries a provision (traditionally written or typed in red ink) which allows a exporter/beneficiary to draw up to a fixed sum from the advising or paying-bank, in advance of the shipment or before presenting the prescribed documents. 

Back to Back Letter of Credit 

The Back to Back Letter of Credit (sometimes referred to as the Baby or Slave Letter of Credit) is issued on the strength of the Master Letter of Credit (Master LC). Back to Back Letter of Credit is issued by the exporter’s bank (advising bank) to the supplier to procure raw materials. Permission of the ultimate buyer or that of the issuing bank is not required to issue a back to back letter of credit.