The types of documentary credits are as follows

The types of documentary credits are as follows:

1. Import or export documentary credits

2. Revocable documentary credits

3. Irrevocable documentary credits

4. Confirmed documentary credits

5. Unconfirmed documentary credits

6. Transferable documentary credits

7. Non-transferable documentary credits

8. Credit or term documentary credits (usance)

9. Sight documentary credits

10. Back-to-back documentary credits (reliability)

11. Red matter documentary credits

12. Revolving documentary credits

Definition of each of the documentary credits

1. Import or export documentary credits:

A documentary credit is a reliable method of payment in international trade, whereby the operating bank undertakes to pay a certain amount to the seller at a certain time and under certain conditions. Payment from the bank is made if the seller presents the desired documents and evidence according to the terms of the credit.

2. Revocable L/C:

This type of letter of credit is not very useful. According to this letter of credit, changes can be made to the transaction without the seller's knowledge, the buyer and the issuing bank. Therefore, it is difficult to gain the seller's trust in this type of credit.

3. Irrevocable L/C:

In this type of credit, the consent of the buyer, the seller and the issuing bank is required to make and implement any changes to the transaction. Sellers are usually more receptive to this type of credit. Changes cannot be made without the consent of all three.

4. Confirmed L/C

In this type of credit, the buyer must submit the credit issued by the first bank to a bank of the seller's choice. Confirmed L/C is a type of credit used when the buyer submits the credit issued by his bank to the bank that the seller has announced.

This type of credit indicates a lack of confidence in the credit standing of the issuing bank or the unstable political or economic situation of the buyer's country.

5. Unconfirmed L/C

Under normal circumstances and without the need for confirmation from the second bank, the opening of the credit is carried out by the bank providing the credit. If the word "confirmed" is not mentioned, it is assumed that the credit is of the unconfirmed type.

6. Transferable L/C

In this type of credit, the seller has the right to transfer part or all of the credit to another person or persons. This type of credit is a very good advantage for sellers.

7. Untransferable L/C

According to the definition given for transferable L/C, the definition of this case is the opposite of the previous case and the seller does not have the right to transfer part or all of the credit to another person or persons.

8. Usance L/C

Another case of documentary credits that is not widely used is the untransferable L/C. According to this credit, the transaction amount is not paid to the seller immediately after receiving the goods. Rather, the seller gives the buyer a period of time to pay after receiving the goods. This credit is usually used in a country with high inflation and a shortage of foreign currency.

Although many banks that open credit for individuals encourage the use of this type of credit, its use is usually due to the seller's lack of trust in the buyer and his ability to pay.

9. At Sight L/C

In this type of credit, the seller must present the documents and evidence of the shipment of goods and services to the bank providing the credit before receiving the full amount from the bank. After the conditions and accuracy of the transaction are confirmed by the bank, the entire amount will be immediately deposited into the seller's account.

10. Back to back L/C

This type of credit consists of 2 separate credits. The first credit is in favor of the first seller who is not able to procure and ship the goods. This credit is opened by the first seller and the second credit is in favor of the seller who can procure and ship the goods to the buyer. In fact, in these credits, the second seller is an intermediary between the first seller and the buyer.

11. Red Clause L/C

Sellers try to use these credits for their transactions. According to this credit, the issuing bank deposits an amount as an advance payment for the goods into the seller's account before the seller ships the goods. This deposit means the advance payment of the total price of the goods. The reason for naming this credit as red matter is that the bank opening the credit first wrote this credit in red to attract attention. One of the most widely used types of documentary credits is red matter credits.

12. Revolving L/C

One of the most popular types of documentary credits is the revolving L/C. Because after paying the credit amount to the seller, the buyer does not need to open another credit and is charged the same amount.