• There are several types of letters of credit.

○ The differences are found in the wording.

• Revocable versus Irrevocable
○ You should always insist and carefully check that a letter of credit is irrevocable.
 Once an irrevocable letter of credit is open it cannot be changed without the
written consent of all parties including the beneficiary.
 A revocable letter of credit can be change or withdrawn without notifying the
beneficiary.
• Confirmed versus Advised
○ Confirmed is preferred, as the Confirming Bank promises to pay.
○ Advised does not guarantee the creditworthiness of the Opening Bank.
• Straight versus Negotiation
○ A negotiation letter of credit can be presented to any bank.
○ A straight letter of credit can only be paid in the country of the Paying Bank.
• Sight versus Usance
○ At sight means the Beneficiary is paid as soon as the Paying Bank has determined
that all necessary documents are in order.
○ Usance time can be between 30 and 180 days after the bill of lading date.
 This is a form of delayed payment, and should be avoided.

Revocable [edit]
A revocable letter of credit is one which can be amended or cancelled by the applicant or the issuing
bank at any time, without prior notice, discussion or agreement with the beneficiary. A revocable
letter of credit offers no protection to the beneficiary and is seldom if ever used.that is in the relation
with transferable lc.
Irrevocable [edit]
An irrevocable letter of credit can not be amended or revoked without the agreement of ALL the
parties to the letter of credit, so it provides the assurance that providing the beneficiary complies with
the terms, he/she will be paid for the goods or services. Under UCP 500, a letter of credit is deemed
irrevocable unless otherwise stated.
Unconfirmed [edit]
An unconfirmed irrevocable letter of credit provides a commitment by the issuing bank to pay, accept,
or negotiate a letter of credit. An advising bank forwards the letter of credit to the beneficiary without
responsibility or undertaking on its part except that it must use reasonable care to check the
authenticity of the credit which it advised. It does not provide a commitment from the advising bank
to pay, so the beneficiary is reliant upon the undertaking of the overseas bank. The beneficiary is not
protected from the credit risk of the issuing bank nor the country risk.
Confirmed [edit]
A confirmed irrevocable letter of credit is one to which the advising bank adds its confirmation,
makes its own independent undertaking to effect payment, negotiation or acceptance, providing
documents are presented which comply with the terms of the letter of credit. The advising bank,
which may also be the confirming bank, assumes the country (political and economic) risk of the
applicant’s country as well as the credit risk, failure and default of the issuing bank and effects
payment to the beneficiary without recourse.
In order for a letter of credit to be confirmed, a bank accepting this risk would have a correspondent
relationship with the issuing bank. If the advising bank does not have such a relationship, the letter of
credit can be confirmed by an independent bank. The negative aspect here is the cost of adding
another bank to the scenario.
A seller should consider requesting a confirmed credit when
• the credit standing of the issuing bank is unknown to the seller or viewed by the seller as
questionable.
• exchange controls in the buyer’s country may prevent local banks from honoring certain
external payments.
• the importing country is suffering economic difficulties: large external debt and/or high debt
service ratios, a persistent negative balance of payments, or a record of being late or having
defaulted on its international payments.
Transferable Credit [edit]
Under a transferable letter of credit a beneficiary (the first beneficiary) can ask the
issuing/advising/confirming bank to transfer the letter of credit in whole or in part to another party/ies
such as supplier/s (second beneficiary/ies). A transferable letter of credit is usually used when the
beneficiary is not the manufacturer/original supplier of some/all of the goods/services. This process
enables the beneficiary to pay the manufacturer/original supplier by letter of credit. If the bank agrees,
this bank, referred to as the transferring bank, advises the letter of credit to the second beneficiary/ies
in the terms and conditions of the original letter of credit with certain constraints defined in Article 48
of UCP 500.
In general, unless the letter of credit states that it is transferable, it is considered non-transferable.
Assignment of Proceeds [edit]
The right to the proceeds of a letter of credit can sometimes be assigned where the beneficiary of a
letter of credit is not the actual supplier of all or part of the letter of credit and wants the bank to pay
the supplier out of funds received from the letter of credit. The beneficiary may choose this option if
he or she
• does not want to request a transferable letter of credit from a buyer in order to keep the buyer
from knowing who is the actual supplier of the goods.
• does not have the necessary credit with the bank to issue a new letter of credit to a supplier.
An assignment of proceeds takes the form of an irrevocable instruction from the beneficiary to the
bank requesting that it pay the supplier out of the proceeds of the letter of credit which becomes due
when documents are presented in compliance with the terms of the letter of credit.
Revolving [edit]
Although infrequently used today, revolving letters of credit were a tool created to allow companies
conducting regular business to issue a letter of credit that could “roll-over” without the company
having to reapply, thus enabling business flow to continue without interruption as long as the terms
and conditions, quantities, and other transaction details did not change. In addition, if a letter of credit
were a revolving one, there were few ways to stop it from rolling over; so, should a conflict arise
between the parties while the letter of credit was in place or should the products change, there was
little recourse for either party. In the business world today, the fact is that, unless required by law or
because of high risk, on-going business is usually conducted without of letters of credit
Standby [edit]
As is the case with the revolving letter of credit, standby letters of credit are infrequently used today.
A standby letter of credit is one which is issued as a back-up or form of insurance for the seller should
the buyer default on the agreed-upon payment terms. A standby letter of credit is issued in the same
way a documentary credit is in that the collateral needed for issuance is required by the issuing bank
and the beneficiary must comply with every detail as outlined in the letter of credit. The problem with
this instrument is that the applicant has no guarantee, other than the seller’s word, that the standby
will not be drawn against even if payment is made as agreed. This situation is challenging, especially
if the letter of credit is confirmed and the advising bank sees only documents pertaining to the
shipment as outlined in the letter of credit and has no knowledge of other payments being made.

2)Back to Back LC:

In this type of Letter of Credit, one Irrevocable Letter of Credit facilitates the seller to obtain another
Letter of Credit. To obtain the Back to Back Letter of Credit the permission of the Buyer or the
applicant of the first Letter of Credit is not required. This type of Letter of Credit is generally used by
the middleman or agencies to hide the identity of the real suppliers or manufacturers. The seller can
utilize this Irrevocable Letter of Credit as a security for his bank, to issue an L/C IN FAVOUR OF
HIS SUPPLIERS in order to get a very competitive rate for his purchases and increase his profit
margin in the process. Thus this can very well be used by the seller to raise quick funds and complete
his orders in the scheduled time.