Distinguish characteristics of different types of letters of credit
Letter of credit is an integral part of international trade. Currently, how many types of letters of credit are accepted and their advantages and disadvantages? Choosing the right form of letter of credit in international purchases and payments is an important thing for every business.
What is a letter of credit?
Letter of Credit, also known as L / C (Letter of Credit) is a letter issued by the bank according to the requirements of the importer, commitment to the seller / exporter will pay a certain amount of money in a certain time. If the seller can present a valid set of documents.
This is the form where the Bank acts on behalf of the Importer to guarantee payment for the importer. Therefore, the bank will give some requirements to customers such as: Deposit request, loan … Based on the solvency and prestige of customers, banks may apply the deposit exemption or reduction level. The difference is announced by the Bank Director in each specific period.
Types of letters of credit:
Based on the nature of each transaction, letters of credit are divided into the following categories:
Revocable L / C letter (Revocable L / C)
As a letter of credit that, after being opened, the importing organization may modify, supplement or cancel at any time without prior notice to the beneficiary L / C. This type of letter of credit is rarely used because the L / C can be canceled only a promise of no guarantee of a certain guarantee.
Irrevocable letter of credit (Irrevocable L / C)
As a type of letter of credit, after being opened, the bank opening L / C must be responsible for paying the export organization and the importing organization will not arbitrarily modify, supplement or cancel the contents. of L / C without the consent of the export organization.
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