Export Letter of

Credit Cycle

5. Product
is Shipped

1. 1.

Beneficiary Buyer & Seller Agree 2. Applicant

Exporter/Seller 4. Application Importer/Buyer
Letter of
6. Credit
Documents 8. 2.
Documents

10.
3. Letter of
Credit
7.
Documents

Exporter’s Bank/ Importer’s Bank/

Advising Bank Issuing Bank
9.
 Confirmed
Letter of Credit
Cycle

5. Product
is Shipped

1. 1.

Beneficiary 4. Buyer & Seller Agree 2. Applicant

Exporter/Seller Confirmed Application Importer/Buyer

6. Letter of
Credit /C
Documents dL 8. 2.
me 3a.
nfir L/C Documents
. Co Confirming Bank
3a
10.
3. Letter of
Credit
7.
Documents

Exporter’s Bank/ Importer’s Bank/

Advising Bank/ Issuing Bank
Confirming Bank 9.

Types of Letters of Credit

• Revocable
• Irrevocable
• Unconfirmed
• Confirmed
• Transferable
• Revolving
• Standby
• Red-Clause letter of credit
 Transferable
Letter of Credit

3. Transferable LC
2. Transferable LC
$30,000 Exporter/Seller
$50,000

7.
8.
Documents
Documents
& BL Seller/Exporters Bank
& BL
Advising Bank
Manufacturer’s Transferring Bank
Bank
4. LC 9. $50,000 Importer’s Bank/
$30,000 6. Received Issuing Bank
Documents
& BL 9.
Documents 1. LC
10.
& BL Application
$30,000
Received

Product

5. Product Shipped to Seller

or directly to Importer Importer

Revocable/Irrevocable
• L/C that may be amended or canceled any time by the buyer (the account party)
without the approval of the seller (the beneficiary).

Unconfirmed/ Confirmed Letter of Credit

• A letter of credit which has not been guaranteed or confirmed by any bank other
than the bank that opened it. The advising bank merely informs the beneficiary of
the letter of credit terms and conditions.
• A letter of credit which a bank other than the bank that opened it agrees to honor
as though they had themselves issued it. This additional confirmation is in
addition to the obligation of the bank which issued the letter of credit.
Transferable letter of credit
• Document that allows the first beneficiary on a standby bank assurance of funds
to transfer all or part of the original letter of credit to a third party.

Revolving letter of credit (L/C)

• Single L/C that covers multiple-shipments over a long period. Instead of

arranging a new L/C for each separate shipment, the buyer establishes a L/C that
revolves either in value (a fixed amount is available which is replenished when
exhausted) or in time (an amount is available in fixed installments over a period
such as week, month, or year). L/Cs revolving in time are of two types: in the
 cumulative type, the sum unutilized in a period is carried over to be utilized in the
next period; whereas in the non-cumulative type, it is not carried over

Standby letter of credit

• A guarantee of payment issued by a bank on behalf of a client that is used as
"payment of last resort" should the client fail to fulfill a contractual commitment
with a third party. Standby letters of credit are created as a sign of good faith in
business transactions, and are proof of a buyer's credit quality and repayment
abilities. The bank issuing the SLOC will perform brief underwriting duties to
ensure the credit quality of the party seeking the letter of credit, then send
notification to the bank of the party requesting the letter of credit (typically a
seller or creditor).

Red clause letter of credit (L/C)

• L/C that carries a provision (traditionally written or typed in red ink) which
allows a seller to draw up to a fixed sum from the advising or paying-bank, in
advance of the shipment or before presenting the prescribed documents.
• It is normally used only where the buyer and seller have close working
relationship because, in effect, the buyer is extending an unsecured loan to the
seller (and bears the financial risk and the currency risk).
• Rare nowadays, the red clause L/Cs were once popular in fur trade with China
and wool trade with Australia.