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Bank Letter
of Credit

Bank Letter
of Credit

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.

Primarily issued by a buyer’s bank, Letters of Credit are fundamental components of international trade as they help 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).

HOW DOES A LETTER OF
CREDIT WORK?

Whether it be a commercial, business, or international letter of credit, the process of acquiring one begins with 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 seek to work closely with our customers to ensure that their application is approved without any issues. Listed are some of the primary advantages of Letter of Credit:

  • A letter of credit ensures that payment is sent to the exporter once the document’s terms have been fulfilled. It helps to build trust between a buyer and seller who have not worked together in the past.
  • When a reputable bank and a trusted LC agent is involved, the required credit document can be obtained and put into place quickly.
  • Letters of credit are significantly more customizable than alternative methods of financing. It allows importers and exporters to craft terms and conditions that are specific to their situation.
  • For those hoping to do business on an international front, a letter of credit can serve as a foundation for expansion while mitigating risks. It also helps smaller businesses with cash flow constraints.

DIFFERENT TYPES OF LETTER OF CREDIT WE OFFER

Commercial Letter
of  Credit

A commercial letter of credit is the most basic LC with applications in a variety of international trade deals. Credico Capital offers a hassle free route to clients in need of a commercial letter of credit to service their business financing requirements.

Import/Export
Letter of Credit

Import/Export Letter of Credit derives its name and function from the origin of the transaction. Importers utilize this instrument to secure goods while exporters rely on it to secure payment. Between companies with relatively new engagements, the Letter of Credit allows for an added layer of confidence that both sides will uphold their end of the deal.

Revocable &
Irrevocable Letter of Credit

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.

Revolving Letter
of Credit

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.

Back to Back
Letter of Credit

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.

Documentary
Letter of Credit

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.

Standby Letter
of Credit

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.

Transferable
Letter of Credit

As the name suggests 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 broker between the buyer and the seller.