Getting To Know Letter Of Credit Types And How It Works In Import Exports

YOGYAKARTA - It is important to understand the types of Letter of Credit (L/C) by export and import businesses to ensure the security of international transactions. Each type has different functions and mechanisms that help protect the interests of exporters and importers.

Through the Letter of Credit system, payments can be made more securely because they involve banks as intermediaries. This article will discuss various types of L/C, how it works, as well as examples of its implementation in the global world of trade.

Letter of Credit (L/C) or credit certificate is a payment guarantee from the buyer's bank to the exporter after the goods are delivered and the complete documents are submitted. This instrument functions to protect both parties in import export transactions.

Well, with L/C, exporters get payment certainty, while importers get assurance that payments are only made after delivery obligations are fulfilled.

This system makes international trade safer, especially when transacting with new partners or high-risk countries.

For more complete information, read an article VOI has written with the title Letter of Credit Understanding in International Trade,

Reporting from the investopedia page, the following are some of the most frequently used Letter of Credit types in international trade transactions (This list does not cover all existing types, but includes the most commonly used forms):

This type is most often used compared to a revocable letter. In this type, changes or cancellations cannot be made without the consent of all parties involved.

Point plus irrevocable L/C is that it can provide a high level of security for sellers and buyers because it cannot be changed or canceled unilaterally.

Unlike the previous type, the revocable letter of credit allows the publisher bank to change or cancel credit without the approval of the beneficiary. However, this type is rarely used because it is at high risk for exporters and is not regulated in the UCP provisions.

In this type, there is additional confirmation from other banks besides the publisher bank, or usually the seller's bank. This bank provides additional payment guarantees, so that exporters have double protection.

This type is suitable for use if the exporter does not fully believe in the publisher bank in the buyer country.

This type is only guaranteed by a bank publisher without confirmation from other banks. The cost is lower for buyers, but the safety is smaller for sellers because it relies entirely on the reputation of the publisher bank.

Different from other L/Cs, standby letter of credit works like collateral or insurance. If the recipient does not get payment according to the agreement, this credit letter can be disbursed. Generally used in construction projects, international trade, or large commercial transactions.

This type allows recipients (sellers) to move part or all credit value to other parties. Usually used when a seller uses a supplier or subcontractor to fulfill orders.

This credit letter is used for repeated transactions within a certain period. Buyers can make several withdrawals to a predetermined extent. This type is suitable for long-term business relationships with regular delivery.

Finally, this type provides an opportunity for sellers to accept partial payments in advance before the goods are delivered. These initial funds can be used to finance the production or purchase of export raw materials, especially if the goods are special or of high value.

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