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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:
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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.
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Clean: A letter of
credit that requires the beneficiary
to present only a draft or a receipt
for specified funds before receiving
payment.
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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.
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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.
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Irrevocable: An
instrument that, once established,
cannot be modified or cancelled
without the agreement of all parties
concerned.
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Non cumulative: A
revolving letter of credit that
prohibits the amount not used during
the specific period from being
available afterwards.
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Restricted: A
condition within the letter of
credit which restricts its
negotiation to a named bank.
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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.
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Revolving: An
irrevocable letter issued for a
specific amount; renews itself for
the same amount over a given period.
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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.
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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.
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Unconfirmed: A
letter of credit forwarded to the
beneficiary by the advising bank
without engagement on the part of
the advising bank. |
