Letter of Credit

Letter of Credit:

A document issued by financial institution which provides a guarantee of payment on behalf of the client in favor of the seller or beneficiary. If the buyer failed to make the payment the bank will make the necessary payment according to the contract. 

The party who is to recieve the benefit(Payment) of L/C is reffered to as Beneficiary.
The bank that issues the L/C reffered to as  Issuing Bank

The bank which advise the L/C to the seller is known as Advising Baan>

Types of Letter of Credit

UPCDC consisting the rules unifying banking practicves regarding documentary credits says that all credit may be either 

1. Revocable

2. Irrevocable

Revocable L/C: 

A revocable L/C may be amended or cancelled by the issuing bank ay any moment and without prior notice to the beneficiary.

Irrevocable Letter of Credit (ILOC):

Is a letter of credit which can't be cancelled or amdended by the issuing bank without the agreement of the parties of the letter of credit transaction.

Under UCP 500 All credit should clearly indicate whether they are revocable for irrevocable.

If it is not mentioned then the credit shall be deemed to be irrevocable.

Current Letter of Credit Rules UCP 600 do not cover revocable L/C. This point is made clear in article 3 UCP 600.

Number of Parties involve in the Letter of Credit (L/C)

There are minimum 4 parties and maximum 7 parties involve in opening a L/C

1. Importer
2. Exporter
3. Issuing Bank
4. Advising Bank
5. Reimbursement Bank
6. Add-Confirmation Bank
7. Negotiating Bank

Documents are required for opening  Letter of Credit

1. Valid Trade License
2. Valid IRC
3. Valid Membership Certificate from association
4. TIN/VAT registration certificate
5. Indent/Proforma Invoice
6. Insurance cover note
7. L/C application
8. L/C authorized form
9. IMP
10. Charge Documents