A Letter of Credit (LC) is a mode of payment used for the importation of visible goods.
It is a written undertaking given by a Bank (issuing Bank) at the request of its customer (applicant), in which the Bank obligates itself to pay the exporter (seller/beneficiary) up to a stated amount within a prescribed time frame upon presentation of stipulated documents that conform to the terms and conditions of the documentary credit.
The major participants in an LC transaction are:
There are two broad types of LC established in GTBank, which include:
A confirmed letter of credit is a letter of credit with a second guarantee obtained by a borrower in addition to the first letter of credit. A confirmed letter of credit is typically used when the issuing bank of the first letter of credit may have questionable creditworthiness and the seller seeks to get a second guarantee to assure payment. If the first letter of credit is not backed by a second guarantee then it may be considered unconfirmed.
The LC can be established against:
- Cash
- Banks Import Finance Facility
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.
The LC can be established against:
- Cash
- Bank Import Finance Facility
Other letters of credit that GTBank establishes are:
• Back to Back Letter of Credit:
Back-to-back letters of credit are actually made up of two distinct LCs, one issued by the buyer's bank to the intermediary and the other issued by the intermediary's bank to the seller. With the original LC from the buyer's bank in place, the broker goes to his own bank and has a second LC issued, with the seller as beneficiary. The seller is thus ensured of payment upon fulfilling the terms of the contract and presenting the appropriate documentation to the intermediary's bank. In some cases, the seller may not even know who the ultimate buyer of the goods is.
• Transferable Letter of Credit:
A transferable letter of credit is a letter of credit that permits the initial beneficiary of the credit to make some or all of the credit transferable to another party, thereby creating a secondary beneficiary. The party that initially accepts the transferable letter of credit from the bank is referred to as the first beneficiary.
• Inoperative Letter of Credit:
A letter of credit is an undertaking to pay against conforming documents, however with an inoperative credit this undertaking is contingent upon the letter of credit becoming operative.