Revolving letter of credit
| Revolving letter of credit |
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| See also |
The revolving letter of credit is a special type of letter of credit, which is constructed in a way so that it revolves either:
- in time embracing multiple-shipments over a long period of time according to a single letter of credit,
- in value.
The main goal of the revolving letter of credit is to meet the needs of firms in various countries whose business transactions are[1]:
- regular with one another more or less and
- continuous, at the least over a certain period of time.
The letter of credit
The letter of credit can be arranged to cover payment for numbers of shipments which will cover the complete contracted price for the merchandise. In the beginning, the letter of credit will be supplied to cover payment for the first shipment. Later, as soon as the beneficiary is paid for that special shipment and the goods are shipped, the amount drawn under the letter of credit for the next shipment is reinstated. Afterward, it looks the same until the whole aggregate of goods covered through the letter of credit has been paid of the drawings and has been shipped[2].
Types of the letter of credit
There are some types of letter of credit[3]:
- The irrevocable letter of credit,
- Documentary letter of credit,
- Clean letter of credit,
- The revocable letter of credit.
The irrevocable letter of credit
The irrevocable letter of credit is one which may not be modified or canceled without the agreement of the beneficiary. The irrevocable credit is definite as undertaking on the part of the issuing bank. Moreover, the irrevocable letter of credit constitutes:
- every bonafide holder of the drafts drawn under the credit or
- the engagement of that bank to the beneficiary,
presuming that the terms and conditions of the credit have complied.
Documentary letter of credit
Secured or a documentary letter of credit is that one which the supplying bank undertakes to honor the bills drawn according to it to merely when it receives with it certain documents such as:
- certificate of origin,
- insurance policy invoice,
- bill of lading, etc.
That documents are held through the issuing bank as security for the advance executed by it.
Clean letter of credit
An open or a clean letter of credit is that one where no documents are engaged. The issuing bank commits to honor the bills beyond the production of any documents. That the letter of credit is expended for customers of high financial standing.
The revocable letter of credit
The revocable letter of credit can be canceled or revoked at any time without:
- notice to the beneficiary and
- without the consent of.
While the revocable letter of credit does not sufficiently protect the beneficiary so the exports are not common on the basis of that type of letter of credit.
Footnotes
References
- Hinkelman E.G., (2005)., Dictinoary of International Trade: Handbook of the Global Trade Community Includes 21 Key Appendices, World Trade Press
- Periasamy M., (2009)., Financial Management,Tata McGraw-Hill Education
- Sumangil C.A., (2014)., Keys to Understanding Documentary Letters of Credit, Lulu Press
Author: Mateusz Gołda
