Types of commercial letters of credit

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Types of commercial letters of credit
  • Revocable or irrevocable
  • Revocable
  • Irrevocable
  • Confirmed or unconfirmed
  • Confirmed
  • Unconfirmed
  • Sight payment, deferred payment or acceptance
  • Sight payment (a sight credit)
  • Deferred payment
  • More...

Types of commercial letters of credit

Commercial letters of credit (also known as traditional letters of credit or L/Cs) are used as a method of payment in the context of international and domestic trade. For information on commercial letters of credit in general, see Practice Note: Characteristics of commercial letters of credit.

The simplest form of a commercial letter of credit is an undertaking by a bank (known as the issuing bank) to pay the beneficiary of the letter of credit (usually the seller of goods) a specific sum within a specified time limit against the presentation of specific documents (eg the shipping documents of the goods being sold to the buyer) in accordance with the terms of the letter of credit.

Different variations of commercial letters of credit exist. Each type has advantages and disadvantages. For a seller who requests payment under a sales contract by way of letter of credit, irrevocable confirmed letters of credit which provide for payment at sight are the most advantageous.

The Uniform Customs and Practice for Documentary Credits (the UCP) is incorporated into most commercial letters of credit and this can affect how a type of letter of credit functions. The current version of the UCP is known as UCP 600. For more information, see Practice Note: ICC Standard rules and practices for commercial letters of credit: UCP, eUCP and ISBP.

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