Letter of Credit (LC)

A document, issued by a bank per instructions by a buyer of goods, authorizing the seller to draw a specified sum of money under specified terms, usually the receipt by the bank of certain documents within a given time. Some of the specific descriptions are:

•  Back–to–Back: A new letter of credit issued to another beneficiary on the strength of a primary credit. The second L/C uses the first L/C as collateral for the bank. Used in a three–party transaction.

•  Clean: A letter of credit that requires the beneficiary to present only a draft or a receipt for specified funds before receiving payment.

•  Confirmed: An L/C guaranteed by both the issuing and advising banks of payment so long as seller’s documents are in order, and the L/C terms are met.Only applied to irrevo-cable L/C’s. The confirming bank assumes the credit risk of the issuing bank.

•  Deferred Payment: A letter of credit issued for the purchase and financing of merchan-dise, similar to acceptance–type letter of credit, except that it requires presentation of sight drafts payable on an installment basis.

•  Irrevocable: An instrument that, once established, cannot be modified or cancelled with-out the agreement of all parties concerned.

•  Non cumulative: A revolving letter of credit that prohibits the amount not used during the specific period from being available afterwards.

•  Restricted: A condition within the letter of credit which restricts its negotiation to a named bank.

•  Revocable: An instrument that can be modified or cancelled at any moment without no-tice to and agreement of the beneficiary, but customarily includes a clause in the credit to the effect that any draft negotiated by a bank prior to the receipt of a notice of revocation or amendment will be honored by the issuing bank. Rarely used since there is no protec-tion for the seller.