A letter of credit is essentially a bank guarantee/ legal contract which guarantees payment to the exporter for the goods he delivers to the importer. The buyer's bank usually issues it and is either presented to the seller's bank or chosen financial institution. Letters of Credit are fundamental components of international trade as it helps to mitigate payment-related risks involved in such transactions. As a legal entity, an LC assures the seller of payment once he completes specific documentary requirements. For SME's and start-ups, Letters of Credit is incredibly useful, as it will them in building their financial credibility and thereby attract foreign parties. UAE companies can also benefit from incorporating letters of credit in their international deals. Most western businesses are skeptical about trading with businesses based in the Middle East. However, with an international letter of credit, UAE companies can guarantee payment to their western partners in the event of a disaster.
Letters of credit are of several types, namely, commercial, business, documentary, and irrevocable letter of credit. At Credico Capital, we specialize in securing each of these LCs and other key financial banking instruments. As one of the top LC issuers in Dubai, we have worked with countless UAE establishments to facilitate deals with international parties. To know more about Letters of Credit and how it can help your business, contact our team today!
*The rules surrounding the issuing and usage of Letters of Credit are governed by a set of 39 articles published in UCP 600 (Uniform Customs & Practice for Documentary Credits), the official publication of the International Chamber of Commerce (ICC).
Whether it is a commercial, business, or international letter of credit, the process of acquiring one begins at a bank. A good credit score and appropriate income are the two basic requirements needed to apply for any type of LC. Most business owners find the LC bank process to be intimidating. Under such circumstances, you should consider availing the service of a third-party trade finance specialist such as Credico Capital. Our team of financial experts seeks to work closely with our customers to ensure that their application is approved without any troubles. Listed are some of the primary advantages of Letter of Credit:
A commercial letter of credit is the most basic LC. It has applications in a variety of international trade deals. At Credico Capital, we offer ourselves as a hassle-free route to customers in need of a commercial letter of credit to service their business financing requirements.
The name of this form of LC depends on the party utilizing it. If being used by an importer, it is dubbed an “import letter of credit.” It becomes an “export letter of credit” when its obtained by an exporter.
A revocable letter of credit allows the buyer or their bank to alter the terms of an LC if required. The changes can be made without the seller's approval. However, a revocable LC is a rarity as most businesses opt for irrevocable LCs.
Unlike a fixed letter of credit that expires when the credit or term is over, a revolving LC is a guaranteed payment arrangement that facilitates repeat sales transactions in international trade. In most cases, a revolving letter of credit is considered active for a period of one year.
A back to back LC consists of two individual letters of credit to secure financing for a single transaction. Here the buyer gives the first LC to the seller, who then obtains a second LC and provides the same to the supplier. It is suitable only for three-party deals.
A documentary letter of credit ensures payment to the seller as long as they can provide the required documentation. These documents generally come in the form of proof of shipment or certificate of authenticity.
A standby letter of credit serves as something of a “last resort.” No party involved in a standby LC expects to have reason to invoke it. However, should events transpire, which inhibit the buyer’s ability to pay, the seller can fall back on the standby LC.
As suggested by its name, a Transferable letter of credit is a trade finance instrument that can be turned over from one beneficiary to another. Transferable LC is widely used for financing transactions when there is a middleman between the buyer and the seller.