How do you choose the best letter of credit type for your import/export operations?

1 LC Types

There are four main types of LCs: irrevocable, revocable, confirmed, and unconfirmed. An irrevocable LC cannot be changed or canceled without the consent of all parties involved. A revocable LC can be changed or canceled by the issuing bank at any time. A confirmed LC means that a second bank, usually in the seller's country, adds its guarantee to the issuing bank's. An unconfirmed LC means that only the issuing bank is responsible for payment. Generally, irrevocable and confirmed LCs are more secure and preferable for sellers, while revocable and unconfirmed LCs are more flexible and cheaper for buyers.

2 LC Costs

Another factor to consider is the cost of using an LC. There are fees involved in opening, confirming, advising, amending, and negotiating an LC. These fees vary depending on the bank, the country, the currency, and the amount of the transaction. The fees are usually borne by the buyer, unless otherwise agreed by the parties. Therefore, you should compare the fees and charges of different banks and types of LCs before choosing one.

3 LC Terms

A third factor to consider is the terms and conditions of the LC. These include the expiry date, the shipment date, the documents required, the partial shipments, the transshipments, and the discrepancies. The expiry date is the deadline for presenting the documents to the bank for payment. The shipment date is the latest date for dispatching the goods. The documents required are the proof of delivery and performance, such as invoices, bills of lading, certificates of origin, and inspection reports. The partial shipments are the allowance for sending the goods in more than one consignment. The transshipments are the allowance for changing the mode or carrier of transport during transit. The discrepancies are the errors or inconsistencies in the documents that may cause rejection or delay of payment. You should ensure that the terms and conditions of the LC are clear, realistic, and acceptable for both parties.

4 LC Risks

A final factor to consider is the risks involved in using an LC. Although an LC reduces the risk of non-payment and fraud, it does not eliminate them completely. There are still possibilities of bank failure, political instability, legal disputes, and forgery. You should also be aware of the risks of over-reliance on an LC, such as losing competitive edge, damaging customer relationships, and missing opportunities. You should balance the benefits and drawbacks of using an LC and consider other alternatives, such as advance payment, open account, documentary collection, or trade credit insurance.

Choosing the best letter of credit type for your import/export operations depends on several factors, such as security, cost, terms, and risks. You should evaluate your situation and needs carefully and consult with your bank and your trading partner before making a decision.

5 Here’s what else to consider

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