Upon issuance of an irrevocable standby letter of credit, bank guarantee or other guarantee, the Bank or other issuing institution will be bound to make payment thereunder upon timely compliance by the party entitled to request payment thereunder with the terms of the instrument and presentation of the documents, if …

Answer: The letter of credit cannot be cancelled by the issuing bank by himself on the grounds that bad quality of goods. Only a court order could stop issuing bank to pay for the complying documents.

An irrevocable letter of credit is an agreement between a buyer (often an importer) and the buyer’s bank. The bank agrees to pay the seller (the exporter) as soon as certain conditions are met. Because it is irrevocable, the terms of the letter cannot be changed without the agreement of everyone involved.

Letters of credit normally cost 1% of the amount covered in the contract. For example, if a buyer needs a $100,000 letter of credit and the letter of credit will cover 10% of the contract ($10,000) then the buyer will pay $100 for the letter of credit.

An irrevocable letter of credit cannot be canceled, nor in any way modified, except with the explicit agreement of all parties involved: the buyer, the seller, and the issuing bank. For example, the issuing bank does not have the authority by itself to change any of the terms of an ILOC once it is issued.

In most cases, the letter of credit charges is paid by both the applicant and the beneficiary of the LC. A percentage of the invoice value underwritten in charged, which is from 0.1% to 2.0% of the commercial invoice value per month.

Advantages and Disadvantages of Letter of Credit

• Safely Expand Business Internationally.
• Highly Customizable.
• Seller Receives Money on Fulfilling Terms.
• Works as a Credit Certificate for Buyer.
• Seller is Free of Credit Risk.
• Quick to Execute for Creditworthy Parties.
• Payment Assured in Disputable Transactions.

A Bank Guarantee is similar to a Letter of credit in that they both instil confidence in the transaction and participating parties. However the main difference is that Letters of Credit ensure that a transaction goes ahead, whereas a Bank Guarantee reduces any loss incurred if the transaction does not go to plan.

The lender charges 2%, plus documentation fees paid by the borrower at closing – or 2.5% for amounts below $50,000 – for standby letters of credit. (Fees for commercial letters varies.)

letter of credit

Letters of credit are typically provided within two business days, guaranteeing payment by the confirming Citibank branch. This benefit is especially valuable when a client is located in a potentially unstable economic environment.

Letter of credit is a safe mode of payment commonly for any business especially in international business also. Letter of credit is been known to be one of the safest payment options for importers in international trade transactions.

But, there are also disadvantages that come with Letters of Credit:

• Costly.
• Sensitive expiration dates.
• Require amendments if there are any changes, hence delaying the transaction.
• Reliability of payment under the Letter of Credit is dependent on the issuing bank.

As you know, letter of credit is a safe mode of payment commonly for any business especially in international business also. Once after opening letter of credit in your name as beneficiary, your overseas buyer sends a copy to you by fax or mail. The original can be collected from your bank.

c. ____________LC is the safest LC in export business.

2. Is LC at sight safe? A sight LC is one of the safest modes of transactions as the issuing bank and the confirming bank both act as a guarantor to honor the agreement.

Main types of LC

• Irrevocable LC. This LC cannot be cancelled or modified without consent of the beneficiary (Seller).
• Revocable LC.
• Stand-by LC.
• Confirmed LC.
• Unconfirmed LC.
• Transferable LC.
• Back-to-Back LC.
• Payment at Sight LC.

A deferred payment letter of credit is naturally a better deal for buyers than for sellers, as it allows the buyer time to find fault with something the seller does. These letters may also be known as term or usance letters of credit.

There are five commonly used types of letter of credit. Each has different features and some are more secure than others. Sometimes a letter of credit may combine two types, such as ‘confirmed’ and ‘irrevocable’.

The letter of credit can be accounted for as an asset on the balance sheet. Record the letter of credit’s payment to the seller. Debit the “Inventory” or other asset account for the value of the goods purchased, and credit the “Letter of Credit” account for the payment issued by the bank.