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Letters of credit, or documentary credits, are one of the principal methods of financing
trade across national boundaries. Also defined as simply as a letter of notification of a
bank addressed to one or more of its correspondent banks certifying that the person credit
up to a certain maximum amount under certain expressed conditions.

Kinds of Letters of credit:

1.) Revocable- A revocable letter of credit is one in which the issuing bank reserves
the right to cancel the authority and withdraw the undertaking.
2.) Irrevocable and confirmed- This letter cannot be canceled by the issuing bank
before the expiration without the consent of the beneficiary that is of the person
who is authorized to draw under the terms of the letter of credit.
3.) Irrevocable and unconfirmed- a letter of credit may be issued as irrevocable, but
is not confirmed by the notifying bank is well known and highly rated,
confirmation by the notifying bank would add little strength to it.

Significance of letter of credit:

The use of letter of credit in international trade is very significant. Through this
instrument, the bank adds its own credit.

Parties of the Letter of Credit;

1.) The importer who applies for the opening of the letter of credit to finance his
foreign trade shipment.
2.) The importer’s bank, that is the bank in the country of importation which issued
the letter of credit upon request or opening bank .
3.) The exporter, the partly who sells goods on credit and as such he is the one in
whose favor the credit is drawn. For this reason, he is aptly called the beneficiary
4.) The exporter’s bank, that is, the bank that confirms and guarantees the credit on
request from the issuing bank gives notice to the beneficiary.

The exporter ships his goods and presents his documents to the banks for payment. The
credit may provide for payment to the exporters to present a bill of exchange (Also
known as draft),
The documents to be presented are those which have been indicated in the application
for the issuance of letter of credit. Among such documents are:

Bills of lading:

A bill of lading is a written account of goods shipped by any person, signed by the
agent of the owner of the vessel, or by its master, acknowledging receipt of goods,
and promising, damages of the sea expected

Insurance Documents:

Insurance documents must be as specifically described in the credit, and must be

issued and/ or signed by insurance companies or their agents or be under writers.

Consular Invoice:

The consular invoice when required by the importing country is by far the most
exacting document an exporter is likely to meet.

Commercial Invoice:

Whenever possible, commercial invoices shall be produced to support the entry of

imported merchandise into the country.

Payment Methods:

A letter of credit may provide for the credit amount to be made available to the
exporter in a number of different ways.

Sight payment credit – in a “sight payment” credit the bank pays the stipulated sum
immediately against the exporter.

Negotiation credit – Payment is also made immediately under a “negotiation” credit.

Deferred payment credit – the mechanism for a “deferred payment” credit is the same
as for a sight payment credit. Except that the bank agrees to pay on a specified future
date or event after presentation of the export documents.

Acceptance credit- an “acceptance” credit offers a more popular method of

providing payment credit.