Types of Documentary Credits

A documentary credit (DC) is a conditional written undertaking by a bank (‘issuing bank’), given to the seller (‘beneficiary’) at the request of the buyer (‘applicant’) to pay a sum of money against presentation of documents complying with the terms of the credit within a set of time limit.
The commercial value of a DC depends upon its type. The most commonly used DCs are the following: 


REVOCABLE

Can be amended or cancelled without prior warning or notification to the seller.
How REVOCABLE DCs affect
The Buyer: Has maximum flexibility, as DC can be amended or cancelled without prior notice to the seller, up to the moment of payment by the bank at which the ‘issuing bank’ has made the credit available.
The Seller: Faces the risk that the DC can be amended or cancelled while the goods are in transit and before the documents are presented or before payment is made.

IRREVOCABLE

Can be amended only with the agreement of all parties.
How IRREVOCABLE DCs affect
The Buyer: Has less flexibility, as the credit can only be amended or cancelled if all parties agree. The DC is issued in this form because the buyer and seller have agreed to this in the sales contract.
The Seller: Has a greater assurance that he will receive payment; but he remains dependent on the undertaking of a foreign bank.

CONFIRMED IRREVOCABLE

As there are often two banks involved (the ‘issuing bank’ and the ‘advising bank’ who passes the DC onto the beneficiary), the seller can ask the buyer to arrange through his bank (the ‘issuing bank’) for an irrevocable DC to be confirmed by the ‘advising bank’. If the ‘advising bank’ agrees, the irrevocable DC becomes a confirmed irrevocable DC.
How CONFIRMED IRREVOCABLE DCs affect
The Buyer: Has little benefit from this as it is an additional requirement by the seller.
The Seller: Has a double assurance of payment, since a bank usually in the seller’s country has added its own undertaking to that of the ‘issuing bank’. Confirmation charges are normally borne by the seller.
There are also other, quite specialised DC types: Back-to-Back, Transferable, Revolving, Standby and Red Clause.
 
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