Unconfirmed, Back To Back And Standby Lc

Here we will present you a list of the most frequently used irrevocable letters of credit or LC

Unconfirmed: A LC is unconfirmed when the document supports only the guarantee of the issuing bank. The notifying bank simply informs the exporter about the terms and conditions of the LC without adding their payment obligations. The exporter bears the risk of paying the bank which is usually located in a foreign country.

Back to back: these are two letters of credit which, together, comprise an alternative transferable LC. These kinds of letters of credit allow exporters (sellers or brokers) who do not qualify for a bank loan without collateral to obtain a second LC in favor of the supplier.

When a LC is issued in favor of an exporter in a foreign country, some financial institutions will also issue LC to the suppliers of that exporter so that he or she is able to buy the merchandise it needs for the products. When one LC has been approved, the second one is valid in spite of the first one being not well written. The issuing bank is expected to pay for the products according to what the LC says.

Many banks are reluctant to such agreements because back to back letters of credit involve two separate transactions. It is likely that several banks are involved and the risks of confusion and dispute are higher.

In order for banks to protect themselves against any problem with back to back LC, they are more demanding of information to the exporter. Exporters then need to show documentation that proves that the shipment arrive according to the conditions established in the LC. The expiration dates of the two LCs also have to coincide, being the second one before the first one. Naturally, the first LC will allow the exporter enough time to provide the necessary documents.

There are also Standby LCs. They are different from regular LCs in that they are used mostly to provide protection against nonpayment. The bank that issues this LC protects the seller from nonpayment. If the exporter is not paid according to what the LC dictates for a service that he or she performed according to contract, the exporter has the liberty of using the Standby LC to request reimbursement. Standby LCs have a duration of one year.