LETTER OF CREDIT
The marketing of merchandise in foreign involves a long period of time, the seller or exporter may be unable to carry the burden of financing, such a lengthy transactions for he may not wish to tie up his capital for such a long period. It is the assurance of the bank that the payment would be made on completion of transactions in terms of L/C. The terms of credit could be documents against payments (DP) or documents against acceptance (DA).
TYPES OF L/C
There are several methods for making payment of an import or export transaction. These are listed below:
Irrecoverable Letter Of Credit
The issuing bank (importer’s bank) gives a lasting undertaking to accept and pay bills drawn upon it, to the exporter, upon fulfilling the terms and conditions stipulated in the Letter of Credit (LC). It gives complete protection to the exporter.
Recoverable Letter of Credit
The issuing bank (importer’s bank) can modify the LC without any obligation on its part. These are usually not accepted by the exporters.
Confirmed Letter of Credit
This kind of LC has the protection of the credit standing of the importer’s as well exporter’s banks. The exporter’s bank which confirms this LC, takes full responsibility of making payment if the importer’s bank fails to do so.
Unconfirmed Letter of Credit
Though the issuing bank gives a commitment to honor the drafts, however, it does not give any guarantee. From the exporter’s point of view confirmed irrecoverable LC is the best form of receiving payment.
