A Confirmed Letter of Credit (CL/C)
A letter of credit given by foreign banks. The validity is confirmed by a first-class (usually US or European) bank. A seller with CL/C terms assures of payment even if the foreign buyer or the foreign bank defaults.
A Documentary Letter of Credit (DL/C)
However, A Bank guarantees the payment of buyers drafts for a specific period and for a specific amount in a DL\C. The documentary line of credit offers a more secure medium for transactions in import-export trade than the documentary bills collection (see Bill of Exchange). The letter of credit is the medium by which the seller obtains payment when banks approve of transmissions, In the seller’s country. The necessary documents are required to be given to the bank on the decided date. If the terms of the credit are agreed, a seller can receive payment from a bank immediately.
On the contrary, a seller with CL/C terms has a guarantee of payment even if the foreign buyer or the foreign bank defaults. A CL/C (Confirmed Letter of Credit) is a letter of credit given by a foreign bank with validity confirmed by a first-class (usually US or European) bank.
Irrevocable Letter of Credit (IL/C)
In case of an Irrevocable Letter of Credit (IL/C), no cancellation or amendment can happen without consent from the issuing bank, the confirming bank (if confirmed) and the beneficiary. The bank guarantees the payment if the credit terms and conditions are fully met by the beneficiary. An IL/C is the letter where once the seller approves of the buyer’s conditions in the letter, they constitute a definite undertaking by the buyer’s bank and cannot be revoked without the seller’s agreement.
Revocable Letter of Credits
On the other hand, you can use the Revocable Letter of Credits. The buyer can amend or cancel the terms of trade at any time without informing the seller.
Revolving Letter of Credit (RL/C)
Additionally, you have the Revolving Letter of Credit (RL/C) where the amount involved is automatically reinstated on complete utilization of the amount. This means the amount becomes available again without issuing another L/C and usually under the same terms and conditions within a period of time (usually several months to one year). It saves the administrations in case of multiple shipments.
Stand-By Letter of Credit
However, for a guarantee on the finance statement, you have the SL/C. The Stand-By Letter of Credit is a financial guarantee or performance which a bank issues on behalf of a buyer. It is a written obligation of the issuing bank to pay a sum to a beneficiary on behalf of their customer in the event that the customer himself does not pay the beneficiary. The SL/C is regulated by the ICC-500 rules.
In case, a buyer wishes to enter into negotiations with the Seller in the hope of purchasing a commodity, the buyer can use an LOI. The Letter of Intent is a document given by the Buyer to the Seller for negotiations. The LOI is only a starting point for negotiations and not a legally binding document.
RWA – Ready, Willing and Able
Similarly, the buyer can have an RWA – Ready, Willing and Able, a document which is issued by the Buyer’s bank. In this case, the bank confirms that their client has the sufficient fund in their possession and are ready, willing and able to engage in the contract.
Otherwise, the seller may also issue a Performance Bond to the buyer. This is a bank guarantee stating the seller would meet the terms of the contract. Often, the bank issues an amount of 10% to 15% of the total amount of the contract. the Buyer can draw upon a Performance Bond in the event that the Seller breaks the contract and fails to provide the product which was stipulated in the contract.
POP (Proof of Product)
In several instances, the customers and agents may request for document provide them with some guarantee of the existence of the product and ability of the supplier to deliver the product. This document is the POP (Proof of Product). In practice many POPs are false. POP offers no proof at all because once a POP drafting happens it is automatically out of date – the product can be sold to another buyer and therefore no longer exists.
Nevertheless, a seller/buyer might occasionally request for a POP as an apparent proof that a seller/broker has the product, which is possibly not the case.
Bank Confirmation Letter (BCL)
However, it is only the buyer’s bank that can issue a POP when the Buyer’s bank issues a Bank Confirmation Letter (BCL) to the Seller’s bank via SWIFT. A global service, Swift (Society for Worldwide Interbank Financial Telecommunication) is responsible for facilitating communication between banks. Most payments happen via SWIFT.