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Q.Are there different types of letters of credit?
A.Yes. The most common letters of credit, include:
- A Revocable Letter of Credit, which allows for amendments, modifications and cancellation of the terms outlined in the letter of credit at any time and without the consent of the exporter or beneficiary;
- An Irrevocable Letter of Credit, which requires the consent of the issuing bank, the beneficiary and applicant before any amendment, modification or cancellation to the original terms;
- A Standby Letter of Credit, which is a form of a bank guarantee. It may be used as necessary to cover nonpayment of a financial obligation. A standby letter of credit normally is intended to be drawn on only in the event of nonpayment;
- A Transferable Letter of Credit, which enables the seller to transfer all or part of his rights to another party; and
- Back-to-Back letters of credit, which are two individual letters of credit that together offer an alternative to a transferable letter of credit. Although back-to-back letters of credit provide small and medium exporters virtually unlimited working capital to finance their sales and complete more export transactions, many banks are reluctant to take on this type of arrangement.
A letter of Credit can also be either confirmed or unconfirmed. A Confirmed Letter of Credit is one in which a second guarantee is added to the document by another bank. An Unconfirmed Letter of Credit, is one in which the document bears the guarantee of the issuing bank alone.
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