A letter of credit can be defined as a ‘conditional transfer‘ in its simplest form. This is a trade (foreign trade – goods were being bought and sold considering that in the description and the seller to prove with documentation that fulfill predetermined conditions to the bank, the bank is under the obligation to pay also in this case. ‘Proof of conditions with documents’ is one of the most important features of letters of credit. Banks, which come into play as an element of trust somewhere in the payment process, make transactions only through documents, not paying attention to the goods, services or other transactions covered by the documents. There are basically four parties to a letter of credit transaction (this number may increase due to the fact that the banks involved in the transaction may have different functions /obligations):
Letter of credit supervisor (Applicant): Buyer, importer who wants the letter of credit to be opened.
Beneficiary (Beneficiary) : The party to which the letter of credit is opened in favor of, the seller, the exporter.
Issuing Bank (Issuing Bank) : The importer’s bank that opens the letter of credit.
Advisory Bank and Confirming Bank: The bank that notifies the beneficiary of the letter of credit. In most cases, the notification bank is also the Confirmation Bank.
Some Types of Letters of Credit:
Payable Letter of Credit (At Sight Payment L/C):
Letters of credit are letters of credit in which the amount of the letter of credit is paid in accordance with the terms of the letter of credit and after the submission of the letter of credit to the bank authorized by the bank.
Current Payment Letter of Credit (Deferred Payment L/C):
Letters of credit are letters of credit in which the amount of the letter of credit is paid to the exporter after a specified period of time without any policy, and not upon presentation of the document to the bank. The specified period may begin from the date of presentation of the invoice, bill of lading or vesaikin to the bank.
Acceptance Pay (L/C)
In the conditions of a letter of credit, payment must be paid for a certain period of time, and a term policy must be submitted with a passport for acceptance. If the letter of credit is not approved, the supervisor is assigned to the bank, and if it is approved, the policy is assigned to the confirmation bank.
Transferable Letter of Credit (Transferable L/C):
Letters of credit are letters of credit in which the beneficiary of the letter of credit (the exporter – seller company in whose favor the letter of credit has been opened) has the opportunity to transfer all or a certain part of the amount of the letter of credit to another company / companies. The intermediary firms in question use a transferable letter of credit as a financing instrument, especially since they do not have sufficient financial strength or are unable to provide bank loans for the purchase and sale of goods that reach large amounts.
Advance Payment – Red Conditional Letter of Credit (Red Clause L/C):
A ‘Red Clause’ letter of credit is a type of letter of credit that provides financing to the seller. It allows you to pay part or all of the amount of the letter of credit to the beneficiary (exporter) in the form of an advance payment before shipment.
A Letter of Credit Opened in Exchange for a Letter of Credit (Back to Back L/C):
These types of letters of credit generally have the same purpose as transferable letters of credit. They use it if the beneficiaries of the letter of credit are not the original manufacturer of the goods, or if the existing letter of credit cannot be transferred or meets the need, although it is transferable.
Advantage for the Exporter: Securing pay
A letter of credit is a contract concluded between the bank that opened the letter Dec credit and the exporter.
The exporter is not dependent on the importer for pay.
Pay will be provided from the bank, not from the importer.
By adding the confirmation of the Confirmation Bank, the exporter eliminates the political and economic risk of the Issuing Bank and the country where the Issuing Bank is located. The Confirming Bank assumes all the responsibilities assumed by the bank that opened the letter of credit.
Advantage for the Importer: Submission of appropriate documents indicating that the loading has been made
The bank that opens the letter of credit pays the payment in the event of the submission of documents proving that the exporter has made the loading on time and in accordance with the conditions of the letter of credit.