Letter of credit is the document which states the bank’s obligation to repay the seller of the goods and services the predetermined amount of money in the timely submission of the document that confirms the shipment of the products and provision of the services.
Now, let’s go through the five main types of letters of credit.
Standby Letters of Credit
Standby letter of credit is a letter issued by a bank on behalf of the client guaranteeing the payment to the third party in case the client fails to fulfill his/her contractual obligations.
Revocable Letters of Credit
In case of Revocable Letter of Credit the bank that initially issued the letter has the right to make amendments or cancellations of the credit without prior notice to the beneficiary. Meanwhile, the bank also has the right to nominate other bank that will be obliged to make a payment or other operations on a revocable letter of credit in case the customer fails to fulfill the contractual obligations.
Irrevocable Letters of Credit
Irrevocable Letter of Credit cannot be cancelled or amended without the mutual agreement of the credit parties.
Unconfirmed Irrevocable Letters of Credit
In case of unconfirmed irrevocable letter of credit, no amendments and cancellations can be made without the mutual agreement of the issuing bank and the beneficiary.
Confirmed Irrevocable Letters of Credit
Confirmed irrevocable letter of credit also requires the written consent of the confirming bank in order to make adjustments or cancellation.