L/C at sight

Irrevocable documentary credit is document, in which the applicants bank / issuing bank is committed to pay a certain amount on the agreed conditions. The document is a binding contract with irrevocable conditions, so it can not be changed without the agreement of all parties involved.

An irrevocable documentary credit is an unconditional payment guarantee, that the bank is ready to pay an agreed amount to the beneficiary, provided that the specified documents are presented in accordance with the conditions stipulated in the credit. The credit is available to the presenter even if other contingencies related to the credit transaction occur. The irrevocability of a documentary credit is one of its most important characteristics.

The irrevocability of a documentary credit is based both on the express terms of the credit and the Uniform Customs and Practice for Documentary Credits (UCP) which is the official body for introducing and interpreting uniform rules and procedures for documentary credit. The UCP is reviewed and amended from time to time but the current edition (UCP 600) clearly states that the credit should not be revoked or modified without the authorisation of all parties to the credit.

The granting of irrevocable documentary credit to a beneficiary gives it a clear commercial advantage. Not only does it provide a guarantee until payment is due, but it also confirms the business transaction. This assurance of payment reduces the risk of non-payment and increases the commercial the attractiveness of the transaction.

Irrevocable documentary credit is different from another type of letter of credit called revocable letter of credit. As its name implies, revocable letter of credit can be changed or cancelled at any time before it matures. Therefore, it does not provide the same level of guarantee as an irrevocable letter of credit and is usually used for less critical transactions.

In conclusion, an irrevocable documentary credit is a document which guarantees that payment will be made by an issuing bank in accordance with the agreed terms and conditions. This type of letter of credit offers a strong protection to the beneficiary and is therefore used for more critical business transactions. The credit must comply with the UCP 600 rules in order to ensure its irrevocability.

A stand by letter of credit, also known as a SBLC, is a type of secure payment instrument issued by a bank (the issuing bank), on behalf of a customer, in favor of another bank (the beneficiary bank), and guarantees payment to the beneficiary bank, in the event of the customers non-performance of the contract mentioned in the SBLC.

Types of SBLCs

There are two main types of SBLCs - on demand SBLCs and usances SBLCs. An on demand SBLC is financially binding as soon as it is issued, whereas a usance SBLC only becomes binding when all the conditions set out in the agreement are met.

Using an SBLC

SBLCs are commonly used in international trade and other high value transactions, and provide the beneficiary bank with a guarantee that if the customer, who is responsible for paying the beneficiary bank, fails to do so, the issuing bank will cover the total amount owed.

Advantages of SBLCs

The advantage of these instruments over conventional loans is that they provide the borrower with a very secure form of financing and a high degree of risk mitigation against potential default by the borrower. SBLCs also help to facilitate long term financing arrangements as they can be used as collateral for secured borrowing, allowing the borrower to access capital faster and at a lower cost than conventional loans.

Disadvantages of SBLCs

The main disadvantage of SBLCs is their cost. It is often very expensive to purchase an SBLC, and this cost can vary significantly depending on the issuing bank. Additionally, SBLCs can be complex to set up, require a high degree of trust between the two parties involved and may require additional legal work to be completed in order to ensure the SBLC is valid and binding.