Letter of credit is a conditional bank guarantee which guarantees that the payment will be made after the document, which indicates that goods specified in the provisions of letter of credit have been loaded or the service has been fulfilled by the importer's bank upon the request of the importer, is submitted by the exporter within a specified period of time.
In international trade, exporter and importer don't know each other very well so there is a mutual lack of confidence and risk. Exporter wants to collect the charge of the goods it sells while the purchaser wants to get the goods on time as specified in the contract. In this regard, letters of credit become the payment type which provides the highest level of guarantee for both parties. Because there is a liability of payment in terms of the purchaser if the provisions of the contract are fulfilled, otherwise no payment is made. On the other hand, the payment is guaranteed by the bank in terms of the seller if the provisions of the letter of credit are fulfilled.
Please click for the proposal form for issuing letter of credit.
Advantages for the Purchaser:
• Purchaser is taken under guarantee because the Bank doesn't make any payments to the seller who doesn't fulfill or has missing parts in fulfilling the provisions of letter of credit.
• It enables the goods to be loaded in accordance with the provisions of contract and on time. Otherwise, the seller is not paid.
Advantages for the Seller:
• If the shipment of goods and the preparations of documents are in accordance with the provisions of letter of credit as well as international trade rules, receivables are taken under guarantee because the bank which issues letter of credit definitely guarantees the payment.
• Since the payment is made when the provisions of letter of credit are fulfilled, the seller has the ease of financing.
•Supervisor – Importer - Exporter:
It's the party which requests the issuance of letter of credit. It submits all the details regarding the issuance of letter of credit to the issuing bank. If the supervisor submits all the required information to its bank at once, it is for its own benefit. Otherwise, any changes which will be made after the issuance of letter of credit will be subject to the acceptance of the exporter.
•Beneficiary – Exporter – Seller :
It's the party having a position of the seller of goods or services which are subject to letter of credit. It has a liability of preparing the documents in accordance with the provisions of letter of credit and also and submitting them to its bank. A beneficiary who doesn't submit accordingly cannot derive benefit from the guarantee of letter of credit.
• Issuing Bank :
It's the bank which issues letter of credit upon the request of supervisor or on its behalf. Issuing bank commits an irrevocable payment against the beneficiary when it issues a letter of credit.
It's the bank which adds its confirmation to the letter of credit upon the request or authorization of the issuing bank. If the confirming bank accepts this authorization, it commits an irrevocable payment just as the issuing bank.
•Bank in Charge :
It's the bank which is authorized with submission fulfillment, in other words; to make payment upon an appropriate submission, by the issuing bank. In letters of credit which are issued as 'Available with any bank' the bank in charge is any other bank. Contrary to the confirming bank, the bank in charge has no liability of fulfilling the submission but it fulfills the submission, if necessary, on behalf of the issuing bank or confirming bank if any.
It's the bank which advises the issuance of letter of credit to the beneficiary. Since the beneficiaries are generally in another country than the countries where issuing banks are located, letters of credit are advised through advising banks. Advising banks has no responsibilities other than determining the validity of the letter of credit.
• By Payment L/C
Payment is made after the submission of the document which is issued in accordance with the provisions of letter of credit.
•By Deferred Payment L/C
It's guaranteed that the payment will be made in a specified period after the documents required in the letter of credit are accepted in the eye of issuing bank, confirming bank or the bank in charge.
• By Acceptance L/C
Payment is made within tenor after the documents and policy required in the letter of credit are accepted in the eye of issuing bank, confirming bank or the bank in charge.
•By Negotiation L/C
Purchasing is carried out when the appropriate document which is submitted under the letter of credit is valued by a Party which is provided with a negotiation authorization.
•By Mixed Payment L/C
It's a kind of letter of credit which enables that a part of the payment can be made in exchange for sight and the remaining parts can be paid in cash or as deferred.
• Revolving L/C
It's a kind of letter of credit in which the Purchaser and Seller has a long term commercial relationship and it is preferred when there is always a shipment of good. Revolving letters of credit enable an automatic renewal of the current letter of credit within specific conditions without applying to the bank in order to issue a new letter of credit.
• Transferable L/C
It's generally preferred when the beneficiary is not the producer of the good which is subject to letter of credit and it enables the beneficiary to transfer the rights and liabilities arising out of the letter of credit to a third party or parties.
• Back to Back L/C
Seller can purchase the goods, which it has to supply within the frame of a letter of credit which is issued on its behalf, from the main seller residing in another country and send them to the supervisor of letter of credit. This type of letter of credit, which is issued by the beneficiary of the original letter of credit on behalf of the main seller, is called as back to back letter of credit.
• Red Clause L/C
This kind of letter of credit is generally used in order to fulfill the financing needs of the seller prior to the shipment. Seller can demand a partial payment as an advance payment for the production of goods which are subject to letter of credit. If the purchaser accepts this case and lays down this amount as a condition for the letter of credit to be issued, it is called as red clause letter of credit.
Standby letters of credit are a kind of guarantee letters which are rather used in international architecture works. In Standby letters of credit, contrary to normal L/C application, payment is made when a mistake or negative situation occurs, not upon the submission of a specific document.