International trade is a very profitable business, and for this reason, many people all around the world want to get involved in international trade. However, despite the profitability of the business, international trade has its own set of risks. When a seller is exporting his products to a foreign country the buyer of the products pays back the seller with money. However, in case the buyer defaults, then the seller would need a financial guarantee to ensure that their operations are running smoothly. A letter of credit is one such financial guarantee that is used for doing day-to-day international trade.
However, a letter of credit is very complex and there could be various types of letter of credit. A seller should use a letter of credit that is most suitable for their business and which is most beneficial for them.
Some of the most popular types of letter of credit are as follows :
- Confirmed and Unconfirmed LC: In confirmed LC a second LC is issued by another second bank when the first bank defaults. Whereas in unconfirmed LC only one bank issuing the LC will be liable for payment of this LC.
- Irrevocable and Revocable LC: An irrevocable LC cannot be canceled or modified without the consent of the seller whereas a revocable LC can be canceled or modified by the issuer at the buyer’s instructions without the prior agreement of the seller.
- Transferable LC: Transferable LC enables the seller to assign part of the letter of credit to other parties.
- Stand-by LC: This LC gives more flexible collaboration opportunities to all the parties involved.
- Back-to-Back LC: This LC type considers issuing the second LC on the basis of the first letter of credit and making the first LC collateral.
- Payment at Sight LC: This type of LC allows the payment to be made to the seller immediately after the required documents have been submitted.
- Deferred Payment LC: According to this LC the payment to the seller is made at a later period defined in the letter of credit.
- Red Clause LC: This type of LC lets the seller request an advance for an agreed amount of the LC.
People who are involved in any kind of international trade can contact 360TF.Trade provides many types of letter of credit and can choose the most suitable type of letter of credit.
