International Banking Services

In case you are new to international business you would sooner or later find that someone would ask you for an international letter of credit. Do you know what does this term mean? Let us see what this is and how it is used.

Basically speaking, a letter of credit is a financial instrument that plays a dual role, i.e. (i) guarantees payment to the supplier, (ii) guarantees that you get what you ordered for. Hence, the international letter of credit would ensure that both parties get what they rightly deserve. This is why this financial instrument is so much popular all over the world.

There are many types of letters of credit. Each one of the most commonly used international letter of credit (LOC) are briefly described below:

1. Transferable international letter of credit - This type of LOC would allow the user to pass on the benefits of the instrument to another party. The LOC here could be both revocable or irrevocable. 2. Standby international letter of credit - This is more or less used as a payment guarantee. There would be a special agreement here whereby if the client/ patron does not pay, the supplier can use this instrument for the purpose. Hence, this is closer to a standby payment rather than a payment mechanism. 3. Revocable Letter of Credit - This type of international letter of credit is risky for the suppliers and they do not normally prefer it. This is because such a letter could be modified at any time by the provider, changed completely or even revoked/ canceled. The very purpose of the instrument is not fulfilled here and hence, the suppliers avoid receiving this particular type. It is too much risk. 4. Irrevocable international letter of credit - An irrevocable LOC is just as its name implies - does not allow any changes to it once it has been issued. If you must have any change at all, you would need to draw up a new agreement with the party involved. This is one of the most preferred types of LOC that suppliers like better because it assures them of their payment.