Revolving Letter of Credit
A revolving letter of credit is a document issued by a financial institution or banking organization to guarantee payment of an emerging debt arising from the execution of a sales contract. This document is often used in international trade transactions or in the establishment of a sale and repayment structure between the exporter and the intermediary. Generally, the revolving letter of credit substitutes for a line of credit, allowing the seller to extend a certain amount of funds to the buyer in exchange for periodic payments. These letters of credit are also known as back-to-back letters of credit as they are used to secure a line of credit for a seller in exchange for the guarantee of repayment.
Revolving letters of credit are primarily issued to guarantee the seller’s payment of a sales contract. The issuer (bank) of the letter of credit requires the buyer to provide proof of payment before approving the sale. The buyer also has the option of requesting periodic payments in the event the intermediary cannot pay in full. This type of payment structure is often used when the buyer and the exporter are in different countries or when foreign currencies are involved in the transaction.
The structure of a revolving letter of credit usually includes a set of contract obligations which the exporter must fulfill. The document often outlines payment terms, product specifications, and other criteria which both parties must adhere to. In addition, the buyer or intermediary can also specify additional criteria regarding the payment of the sale, such as the type of payment. This could include a bank transfer, deposit, or other form of payment.
The issuing bank of a revolving letter of credit also requires that the buyer provide full documentation regarding the payment of the sale, including purchase orders, invoices, and other documents related to the transaction. The copy of the document must be sent to the issuer where it will be examined prior to the issuance of the letter of credit. The issuer reviews the document to ensure that all conditions have been met. Once the document has been reviewed and approved, the bank will provide a revolving letter of credit for the buyer. The letter of credit guarantees payment in the event that the intermediary does not meet the payment obligations of the sales contract.
The use of a revolving letter of credit is a great way to secure payment for the seller, while ensuring that the buyer’s interests are protected. It is an important tool used in international commerce and allows buyers and sellers to conduct business on a secure and reliable basis.