Letters Of Credit Funding

Types of Letter of Credit

This is an LC that can be cancelled or amended by the applicant or the Opening Bank without prior notice to the Exporter.

With an irrevocable Letter of Credit the Issuing Bank gives its irrevocable undertaking to pay if all the terms of the LC are met. The Issuing Bank can only amend or cancel its undertaking if all parties to the LC consent to the change.

NB: Although there are two types of Letter of Credit: revocable and irrevocable, LCs dealt with by Barclays are irrevocable. Under UCP600 (Uniform Customs and Practice for Documentary Credits), LCs are assumed to be irrevocable.

A Confirmed LC is one to which a second bank, usually in the Exporter's country and at the Exporter's request, adds its own commitment (confirmation) that payment will be made. Confirmation is generally used when there is perceived to be some risk that the bank issuing the Letter of Credit may not be able to fulfil its obligation to pay. This could be due to bank failure or instability in the country of the Issuing Bank.

If the LC is unconfirmed, the Advising Bank merely informs the Exporter of the terms and conditions of the LC without adding its own undertaking to pay or accept under the terms of the LC.

A Transferable Letter of Credit is one that can be transferred from the first Beneficiary to one or more additional Beneficiaries by the Transferring Bank.

It is normally used in situations where a supplier sells through an intermediary or 'middleman' to the ultimate Importer and is in a strong enough bargaining position to insist upon payment by Letter of Credit. By using a Transferable Letter of Credit, the intermediary is able to provide payment by LC to their supplier without the need for their own credit line with the transferring bank. An LC is only transferable if it is expressly stated to be so by the Issuing Bank.

There are other less commonly used variations of Letter of Credit, for example Back-to-Back, Red Clause and Revolving. Barclays can advise you of the type of Letter of Credit best suited to meet your needs. More detailed information on other types of LC.

A Documentary Letter of Credit (LC) is a written undertaking given by a bank on behalf of an Importer to pay the Exporter a given sum of money within a specified time, providing that the Exporter presents documents which comply with the terms laid down in the Letter of Credit.

Letters of Credit can be for any amount, in any freely traded currency, and, subject to the presentation of compliant documents, may be payable:

at sight, which means as soon as a compliant set of documents are presented to the paying bank; or,

after a specified term, e.g. at 30, 60, 90 or 180 days of sight or Bill of Lading date.

If the documents are not presented exactly as specified in the Letter of Credit, payment will not be made unless the Importer gives their authority to waive or amend the specified condition.

A fundamental principle of Letters of Credit is that banks deal with documents and not with the goods to which the documents refer.

For example, if the Importer is not happy with the quality of the goods but the documents comply with the terms and conditions of the Letter of Credit, the Importer's bank is obliged to pay the Exporter.

  • Parties involved in a Letter of Credit transaction
  • Types of Letter of Credit

Parties involved in a Letter of Credit transaction

In the process of a Letter of Credit transaction, there are essentially four parties involved. These parties can be referred to by a number of terms, outlined below.

Buyer meaning Importer, Applicant, Accountee or Accreditor.
In this guide we use the term Importer.

Seller meaning Exporter or Beneficiary; here we use the term Exporter.

The Issuing or Opening Bank (Importers Bank)

The Advising/Confirming Bank - usually a bank in the Exporters country which may or may not be the Exporters Bank.

Apply For LC