Unconfirmed, Back To Back And Standby LC

Written by: Wade Henderson
Total views: 0 | Word Count: 392 | Date: Tue, 28 Jul 2009 | 0 comments

Here we will present you a list of the most frequently used irrevocable letters of credit or LC

We say that a LC is Unconfirmed when the documents that back it up only show the bank guarantee issued by the importer's bank. The role of the notifying bank is to let the exporter know what the LC establishes but without paying for the merchandise. It is the responsibility of the exporter to obtain payment for the merchandise from a bank usually located in the country of the importer.

Back to back: these are two letters of credit which, together, comprise an alternative transferable LC. These kinds of letters of credit allow exporters (sellers or brokers) who do not qualify for a bank loan without collateral to obtain a second LC in favor of the supplier.

There are cases when the exporter that receives a LC to sell products abroad is in need of supplies that are bought abroad. In order for exporters to import supplies, other LC asr issued. The good news is that once one LC has been issued, getting a second one is much easier, even if the first one contains errors. It is the issuing bank who is responsible for the payment to the seller.

Many banks are reluctant to such agreements because back to back letters of credit involve two separate transactions. It is likely that several banks are involved and the risks of confusion and dispute are higher.

In order for banks to protect themselves against any problem with back to back LC, they are more demanding of information to the exporter. Exporters then need to show documentation that proves that the shipment arrive according to the conditions established in the LC. The expiration dates of the two LCs also have to coincide, being the second one before the first one. Naturally, the first LC will allow the exporter enough time to provide the necessary documents.

Finally, there are also Standby LCs. Their main objective is to provide protection to the exporter against nonpayment. An exporter will use a Standby letter of credit when the importer refuses to pay in spite of having received the merchandise as requested in the LC. These letters have a period of validity of one year after they are issued.

About the Author

Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letters of Credit Documentary Credit This and other unique content 'Project Financing' articles are available with free reprint rights.

Top Authors