The concept and essence of the letter of credit

In the credits it is possible to allocate three groups of participants. It is the applicants - pay letter of credit, the beneficiary recipient of payment under a letter of credit, the Bank acts as the guarantor of the transaction between the parties. This form of settlement is practiced in foreign and domestic trade.

In practice, a letter of credit works? For example, the seller and the buyer have signed the contract, but to work on a prepaid basis due to the high risk of non-delivery or nonpayment of the goods they are not ready. Then the buyer applies to Bank for opening letter of credit in the amount of the contract. Specifies the conditions under which the money should be written off in the seller's account. This, for example, all documents for shipment (invoice, invoice). The less trust between companies, the wider the list of documents. In a statement on the letter of credit also spells out the name of the beneficiary, the letter of credit opening date and other parameters.

The seller, receiving notification of an incoming letter of credit provides the Bank under the contract document and gets his money for goods.

These services are provided by banks is not free. Commission for opening a letter of credit is paid by the buyer, it varies depending on the Bank.

Advantages of documentary credits are additional guarantees of payment for the vendor, the monitoring of the conditions of delivery by banks. Deficiencies in the complicated paperwork and high fees banks.

Classification of letters of credit

Today there are many varieties of letters of credit, among which the payer can choose the best.

In Russia, the letters of credit are divided into the following groups:

- revocable and irrevocable - today, all letters of credit are irrevocable;

- confirmed and unconfirmed;

- covered (deposited) and guaranteed.

A confirmed letter of credit at another Bank (other than the Issuer) is obliged to pay the full amount to the beneficiary upon presentation of documents that comply with the conditions of the letter of credit, regardless of the enumeration him money. If the obligation of another Bank, the letter of credit is unconfirmed.

Covered letter of credit, the entire amount transferred by the Bank to cover the Bank of the beneficiary at the expense of the payer or credit.

A large part of the credit is uncovered. According to him, the Bank transfers the money to the beneficiary's account and allow them to deduct the required amount from its correspondent account.

Distinguish other types of letters of credit. The red clause letter of credit provider may obtain an advance of the submission of shipping documents. Revolving credit is used when regular supply and has the ability to automatically resume.
Transferable letter of credit allows the transfer of the LC to other beneficiaries.