What is transferable divisible letter of credit
Letters of credit | What are the different types of letters of credit?
Importers and exporters usually need intermediaries such as banks or alternative financiers to guarantee the payment and also the delivery of goods. Cash advances or trade credits on open accounts usually develop after the buyer and seller develop a trustworthy relationship. Hence, trade finance structures are used to support these relationships.
Letters of credit are instruments that guarantee payment to the seller when certain conditions are met. They are widely used in international transactions and are of many different types. We have presented and defined the most important types of letters of credit below.
The letter of credit can be deleted or changed at any time without notification by the buyer or the issuing bank. It is important to note that in the latest version of the UCP 600, revocable letters of credit were voided for any transaction made under their jurisdiction.
The letter of credit cannot be unilaterally reversed unless all parties (the issuing bank, confirming bank, buyer and seller) agree.
The status of a letter of credit is confirmed once the confirming bank (the exporter) has added its obligation to the issuing bank. The obligation can be a guarantee or an assurance of payment.
An unconfirmed LC is only guaranteed by the issuing bank (i.e. there is no confirmation from another bank). This type of confirmation is most common for letters of credit, although payment from countries with economic instability or political unrest can be at risk.
If the beneficiary receives the goods or services from a third party, the payment must be transferable to the actual suppliers.
A non-transferable letter of credit prevents payments from being transferred to third parties.
Here the issuing bank has to pay the beneficiary through the advising bank.
The issuing bank is obliged to pay the beneficiary through a bank designated by the beneficiary.
In the case of a restricted letter of credit, only one named bank can be used to negotiate a letter of credit. Therefore, the issuing bank's authorization to make payment to the beneficiary is limited to a specific designated bank.
The bank is unspecified, which means that the letter of credit can be negotiated through any bank of the beneficiary.
In the event of the use of a letter of credit, payment will be deferred to give the buyer time to inspect or even sell the goods.
If a letter of credit is on sight, it is payable once the documents have been verified and presented.
NEXT >> UCP 600 and the Letter of Credit
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