An Import Letter of Credit can be used as a means for financing import transactions (purchase of goods and /or services). It also minimizes risks associated with the transaction.
An irrevocable letter of credit may not be canceled or changed without any consent of all parties involved (importer, exporter and the issuing bank).
It is payable upon presentation of certain documents.
It can be transferred to a third party if stipulated in the letter of credit.
Mitigate risks in international trade when the parties to the transaction have new and untested business relations.
The seller may request 100% letter of credit instead of an advance payment.
The bank that has issued the letter of credit has an obligation to pay when credit conform documents are presented to the bank. The issuing bank will effect payment even if the buyer defaults and is unable to meet their payment obligations.
Types of letter of credit
- Import /Export – The same credit can be termed an import or export LC depending on whose perspective is considered.
- Revocable LC – The buyer and the bank that established the LC are able to manipulate the LC or make corrections without informing or getting permission from the seller.
- Irrevocable LC – Any changes /amendment or cancellation can be done through the issuing bank, must be authenticated and approved by the beneficiary.
- Confirmed LC
- Unconfirmed LC