A letter of loan or a letter of loans is a financed document provided, mainly by a bank or a financial institution, by a third party (with no direct transaction interest), guaranteeing the seller payment of the funds for goods and services when the required documents have been received. A credit letter has three key elements, that is the recipient / seller of an LC, the purchaser/applicant that purchases the goods or services, and the issuing bank that sends the LC upon the request of the purchaser. Sometimes another bank is involved in advising the beneficiary as a consulting bank.
What are the 9 types of loans?
- Commercial Letter of Credit: This is a standard letter of credit that’s commonly used in international trade, and may also be referred to as a documentary credit or an import/export letter of credit.1 A bank acts as a neutral third party to release funds when all the conditions of the agreement have been met.
- Standby Letter of Credit: This type of credit letter is different: it pays for anything that doesn't happen. 2 A standby credit letter compensates when something goes wrong instead of allowing a transaction. Standby credit letters are typically like commercial credit letters, but only if the payee can demonstrate that he or she has not received the promise of the agreement. Standby credit letters are a form of insurance that makes sure that you receive payments and can also ensure that services are delivered satisfactorily.
- Confirmed (And Unconfirmed) Letters of Credit: Another bank (this is presumably one which the trusts recipient), when a letter of credit is confirmed, ensures that payment is made. 3 Exporters may not trust a bank issuing a credit letter on behalf of the purchaser. For example, the seller can lack confidence that the payment will always arrive if the exporter is not aware of this bank. The exporter may therefore require a bank to confirm the letter in its home country. If the issuing bank does not pay — and the exporter can satisfy all of the letter of credit requirements — the confirming bank must pay the exporter (and attempt to collect from the issuing bank later).
- Back-to-Back Letters of Credit: A back to back letter of credit allows intermediaries to connect buyers and sellers.4 This somewhat complicated strategy uses two letters of credit so that each party gets paid individually: An intermediary gets paid by the buyer, and a supplier gets paid by the intermediary. The final buyer and the intermediary might use a “master” letter of credit, and the intermediary and supplier use a letter of credit based on the master letter.
- Revolving Letters of Credit: A revolving letter of credit is useful for multiple payments.5 If a buyer and seller expect to do business repeatedly, they may prefer not to get a new letter of credit for every transaction (or for every step in a series of transactions). This type of letter of credit allows businesses to use a single letter of credit for numerous transactions until the letter expires, and letters might be valid for three years or less.
- Sight Letter of Credit: Payment under a sight letter of credit occurs as soon as the beneficiary submits acceptable documents to the appropriate bank.6 The bank has several days to review the documents and ensure that they meet the requirements in the letter of credit. If the documents are in good order, the bank must pay immediately.
- Deferred Payment Letter of Credit: With this type of letter of credit, payment does not happen immediately after the documents are accepted.4 Some agreed-to period of time passes before the seller receives funds. A deferred payment letter of credit is naturally a better deal for buyers than for sellers, as it allows the buyer time to find fault with something the seller does. These letters may also be known as term or usance letters of credit.
- Red Clause Letter of Credit: With a red clause, the beneficiary has access to cash up front.7 The buyer allows for an unsecured loan to be issued as part of the letter of credit, which is essentially an advance payment. The seller or beneficiary can then use the money to buy supplies, manufacture goods or complete work, and ship goods to the buyer.
- Irrevocable Letter of Credit: An irrevocable letter of credit cannot be changed without authorization from all parties involved.8 Almost all letters of credit now are irrevocable, because revocable letters of credit simply do not provide the security that most beneficiaries want.
