What Are the Types of Letter of Credit (LC)?

The Letter of Credit (LC) is the most fundamental instrument for minimising payment risk in international trade. However, every commercial transaction differs in structure, level of trust and financing need. For this reason, different types of letter of credit have been developed to protect the parties and add flexibility to the process.

Choosing the right type of letter of credit is vital both for managing cash flow and for securing delivery of the goods.

01The Most Commonly Used Types of Letter of Credit

The following types of letter of credit are prominent in international banking practice (UCP 600):

1. Irrevocable Letter of CreditNow regarded as the standard type. It cannot be cancelled or amended without the consent of all parties (buyer, seller and bank). It offers the seller the highest level of assurance.
2. Confirmed Letter of CreditIn addition to the payment guarantee of the importer’s bank, a bank in the exporter’s country also assumes responsibility for payment. This is preferred in particular where there is limited confidence in the buyer’s bank or in the economic stability of its country.
3. Sight Letter of CreditPayment is made the moment the seller presents documents complying with the terms of the letter of credit to the bank. Used where a fast cash cycle is required.
4. Usance (Deferred Payment) Letter of CreditPayment is made a set period after presentation of documents (for example, 90 days after shipment), giving the buyer financing flexibility.
5. Transferable Letter of CreditA model used particularly by intermediary firms. The first beneficiary (the intermediary) may transfer its rights under the letter of credit to the actual manufacturer of the goods (the second beneficiary).
6. Back-to-Back Letter of CreditThe opening of a second letter of credit for the same transaction, secured against the first. It allows intermediary firms to trade at high volume without deploying their own equity.
7. Red Clause Letter of CreditA special type that authorises the seller to draw an advance from the bank to cover raw material purchases or production costs before shipping the goods.

02Why Work with MCF Danışmanlık?

Choosing the wrong type of letter of credit can leave your capital blocked for months, or cost you title to the goods. As MCF Danışmanlık Ltd., we provide:

Risk analysis of your commercial operation to determine the most suitable type of letter of credit,

Accurate drafting of the wording (verbiage) in line with UCP 600 rules,

Coordination of “confirmed” or “transferable” letter of credit processes with prestigious banks through our London- and Dubai-based partner network,

delivered as professional advisory services throughout.