x You are participating in international trade and must make payments for LC transactions but do not know what valid LC types are available?
x You have no experience with LC payments and want to find out what it really is? What are the advantages and disadvantages of international payment using this form?
x Do you need to update details of the LC payment process in international trade transactions?
In an increasingly complex international business context, choosing the appropriate Letter of Credit (L/C) type can help businesses minimize risks and optimize profits. Join Proship.vn to find out what types of LC are there in international payments? What are the advantages and disadvantages of LC? What is the LC payment process?...below.
What is L/C payment?
L/C payment stands for "Letter of Credit", also known as Letter of Credit. A letter issued by the bank at the request of the importing party. The content of the letter is a commitment to pay a certain amount of money to the exporter at a certain time, if the exporter can present a set of payment documents that match the terms and information stated in the letter of credit.
The exporter has a representative bank and when making a sale transaction, the exporter will transfer a set of valid documents to his representative bank.
Types of LC in international payments today
Types of LC in international payments include:
Revocable L/C (Revocable LC)
Is a L/C payment method that can customize the content inside or edit itself without notifying the exporter. With this type of letter of credit, the exporter is susceptible to risks when the goods are shipped before the importer transfers money.
Irrevocable L/C (Re-revocable LC)
It is a form widely applied in import and export transactions. This letter of credit cannot be amended, supplemented or canceled during the L/C validity period if the parties have not yet reached an agreement.
Revolving LC (Revolving LC)
Recirculating L/C is used many times because it can automatically restore its value after expiration. This is also one of the types of LCs that cannot be revocable.
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Back to Back Re-revocable L/C
Back-to-back L/C applies when exporters purchase goods (usually raw materials and components) from other exporters. The exporter will send his bank the letter of credit that the importer sent him as a basis for opening a L/C for the supplier of goods.
Once the back-to-back L/C is opened, the two sets of L/C will be independent of each other. At this time, the bank opening the back-to-back L/C is obliged to pay the goods to the exporter.
Transferable L/C (Re-revocable Transferable LC)
Transferable L/C payment is an irrevocable method. In this transaction, the first beneficiary is allowed to transfer to the second person (the second person is not allowed to transfer to another person). The transferred L/C value can be full or partial.
Deferred payment L/C (Deferred payment L/C)
Deferred L/C payment will be irrevocable, whereby the issuing bank will have to commit to the exporter to pay within a specific period of time specified in the original documents without the need for a bill of exchange.
L/C at sight (L/C at sight)
L/C payment at sight is when the exporter receives the money immediately and presents the correct set of documents to the notifying bank. At the same time, the exporter must issue a bill of exchange to immediately pay the importer.
Standby L/C and Confirmed Re-revocable L/C
Currently, there are very few import and export transactions using standby L/C and confirmed L/C. Because these two types of L/C only work to ensure payment commitments from banks or parties who doubt the payment capacity of the discounting bank.
Special L/C (red clause - Red Clause LC)
This type of L/C is not widely used, because using this L/C, the exporter will receive a certain amount of money as a percentage of the L/C value. At this time, the issuing bank will authorize the discounting bank to pay the exporter an amount based on the exporter's export documents.
The exporter will have to reimburse if a valid set of documents is not presented and the advance amount is still based on the exporter's request.
Evaluate the advantages and disadvantages of L/C
Do different types of LCs in international payments have any advantages and disadvantages?
Advantages of L/C
Benefits of LC types bring:
- Can help improve the relationship between parties in a transaction;
- Ensuring safety for international payment transactions;
- Increase transparency and trust between parties.
Disadvantages of L/C
LC still has some disadvantages:
- L/C processing time can be long, making transactions slow;
- L/C issuance and processing costs can be very expensive;
- L/C does not fully protect the buyer or seller (if a dispute arises).
L/C payment process in international trade transactions
The payment process for LC types is carried out through the following steps:
- Step 1:
When signing a contract, the exporter and importer will include payment terms by L/C method.
- Step 2:
The importer will send a request to the bank he uses to issue L/C payment.
- Step 3:
The issuing bank prepares the L/C and sends a notification to the exporter through the exporter's correspondent bank or branch.
- Step 4:
After receiving the information, the notifying bank will check the L/C information. If it is in accordance with regulations, this bank will notify the exporter.
- Step 5:
The exporter will check the letter of credit information and, if there are no problems, will deliver the goods to the importer in accordance with regulations. If the letter of credit has errors, the importer will request correction.
- Step 6:
Upon successful delivery, the exporter will prepare a set of documents and present them to their bank to request payment.
- Step 7:
At this time, the bank will check the documents and, if valid, will make the required payment. If there are errors, payment will be refused.
- Step 8:
If the information is valid, the designated bank will send this set of documents to the issuing bank to request a refund of the money spent.
- Step 9:
The issuing bank will check the document information and, if valid, make payment to the designated bank.
- Step 10:
After transferring the money, the issuing bank will demand money from the importer. At this time, the importer will pay and receive a set of documents from this bank.
- Step 11:
The importer will check the documents and, if the information is complete, pay the bank or accept the bill of exchange.
As above, we at Proship Logistics have listed most common types of LC in international payments At the same time, here you will also understand what types of LC payments are, what are the advantages and disadvantages of LC, is the LC payment process in international trade transactions really complicated? concerns, contact immediately 0909 344 247 for answers.
