A LC is usually issued for each purchase and payment is made upon a confirmation of the shipment receipt, while a guarantee can be issued for a longer period of time with regular purchases and payments are made within the guarantee amount.
LC confirmation is required by the exporter that a local bank’s LC to be confirmed by a high-ranking International bank which means the International bank is obliged to honor the LC payment as well.
The terms of the LC and guarantee can not be amended or cancelled by one party’s request. In case of both parties agreed LC and guarantee terms can be amended as many times. For example: increase the amount of the LC, postpone the last date of shipment, change the name of the port of shipment etc.
Trade agreements and LC and guarantees are separate agreements. Although the bank opens LC and guarantees based on underlying sales agreements, the parties will need to agree on the terms of the LC and guarantee, regardless of the terms of the agreement.
There are varies of ways in terms of payment of a letter of credit. For example:
1) At sight payment: that is payable immediately (within 2 to ten days according to the bank internal rule) after the seller meets the requirements of the letter of credit,
2) Deferred payment: after the agreed period of time after the shipment date (30, 60, 90 days, etc.),
3) Mixed payment: a combination of sight and delayed payment terms,
4) Post-financing: prepayment by a bank financing and conversion into a loan in order to defer payment of the letter of credit.
The letter of credit will be issued as following two types in terms of funds:
1) Funded letter of credit: the buyer places funds for the required payment are held in a separate account. In this case, the risk fee and annual fee are not be charged.
2) Unfunded letter of credit: The bank opens a LC by backing credit assessment, as it will bear the payment risk on behalf of its customers.
A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount.
In other words, a letter of credit is a guarantee of a bank’s payment of the full amount in a timely manner upon submission of documents proving that the goods were delivered in accordance with the agreed terms.
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