Different Types of Letter of Credit (LC)

 

Commercial letter of credit (CLC):

A commercial letter of credit (CLC) is a bank-issued document that ensures a supplier to a company gets paid for the goods and services it provides.

To get a CLC for one of your suppliers, your company must apply to your bank just like a loan application. If approved, your bank will then issue the CLC in favour of your supplier. When the supplier provides goods and/or services to your company according to the criteria set out in the CLC by your banker, the bank will directly pay your supplier on your behalf. Because of this, a CLC is referred to as a “direct payment credit facility.” This is different from a letter of guarantee, where the bank will pay only if your company cannot.

Sight letter of credit (SLC):

A sight letter of credit refers to a document that verifies the payment of goods or services, payable once it is presented along with the necessary documents. This type of letter of credit is payable to the beneficiary once the required documents are presented to the financial institution backing the letter.

Deferred payment letter of credit:

A deferred payment letter of credit, also known as a usance letter of credit, is a commercial letter of credit that provides that the beneficiary will be paid, not at the time the beneficiary makes a complying presentation, but at a later, specified, maturity date.

Irrevocable letter of credit (ILOC):

An irrevocable letter of credit (ILOC) is a guarantee for payment issued by a bank for goods and services purchased, which cannot be cancelled during some specified time period. ILOCs are most commonly used to facilitate international trade.