Letter of Credit Types Explained

"We have a letter of credit in place" is one of the least informative sentences in international trade. Is it confirmed? Is it at sight or at 90 days? Is it transferable? Those answers determine how much risk the exporter actually carries and when the receivable turns into cash. This article breaks down the main letter of credit types and the rule set that governs them. If you need the fundamentals first, our companion piece on what a letter of credit is covers the parties and the basic mechanism.

UCP 600: The Common Rulebook

Documentary credits are governed by UCP 600, the Uniform Customs and Practice for Documentary Credits published by the International Chamber of Commerce. When a credit states that it is subject to UCP 600, document examination, compliance standards and time limits are all assessed against those rules.

Three provisions shape day-to-day practice: banks have a maximum of five banking days following presentation to examine documents; a credit is irrevocable unless it says otherwise; and banks deal exclusively with documents, not with goods, services or performance. The detailed examination standards sit in a companion publication known as the ISBP. Together they let two banks on different continents evaluate the same document set against the same criteria.

Irrevocable vs Revocable

A revocable credit can be amended or cancelled by the issuing bank without the beneficiary's consent, which makes it worthless as security. Under UCP 600 every credit is irrevocable unless expressly stated otherwise, meaning no change is possible without the agreement of the issuing bank, the beneficiary and any confirming bank.

Irrevocability is therefore the minimum standard an exporter should write into the sales contract. If the word "revocable" appears in the text, request an amendment before any goods are produced or shipped.

Confirmed vs Unconfirmed

In an unconfirmed credit the payment undertaking belongs to the issuing bank alone. The exporter is insulated from the buyer's credit risk but still exposed to the issuing bank and to the transfer risk of that country.

In a confirmed credit a second bank, usually in the exporter's own country, adds its independent undertaking. Once compliant documents are presented, the confirming bank must pay regardless of whether it has been reimbursed by the issuing bank.

Confirmation carries an additional fee, priced according to the perceived risk of the issuing bank and its jurisdiction. Where currency transfer restrictions or unfamiliar correspondent banks are in play, that fee is usually the cheapest risk mitigation available. Negotiate it at contract stage; asking for confirmation after the credit has been issued is far harder.

Types by Timing of Payment

Sight credit

Payment is made shortly after compliant documents are examined. This is the fastest route from shipment to cash and the natural choice for new trading relationships.

Usance or deferred payment credit

Payment falls due at an agreed tenor, commonly 30, 60 or 90 days from the bill of lading date or from presentation. It gives the buyer time to sell the goods before paying. Under a confirmed usance credit the exporter can discount the receivable with a bank and receive funds early, which is the standard way to offer competitive terms without straining working capital.

Acceptance credit

A usance structure operated through a draft. The bank accepts the bill of exchange, and the accepted draft becomes a discountable instrument in its own right.

Special-Purpose Structures

Transferable credit

Allows an intermediary beneficiary to transfer all or part of the credit to the actual manufacturer. This is common in trade organisation models, where the credit received from the buyer is partly transferred to the supplier and the margin remains with the intermediary. Transfer is only possible if the credit is expressly marked transferable.

Back-to-back credit

When transfer is not available, the existing credit is used as security for a second, entirely separate credit issued in favour of the supplier. Because two independent credits are running in parallel, document alignment and deadline control become considerably more demanding.

Revolving credit

Used for repeat shipments to the same buyer, where the available amount is reinstated periodically instead of a new credit being issued for every consignment. It reduces administrative load on long-term supply contracts.

Standby letter of credit

Fundamentally different from the others: it is a guarantee rather than a payment mechanism. If the buyer pays normally, the standby is never drawn. It is called upon only if the obligation is not met, functioning much like a bank guarantee, and it often supports open account or long-term supply arrangements.

Matching the Structure to the Transaction

The right choice depends on how the payment structure interacts with the delivery term and the shipping schedule; our guide to Incoterms explains that connection.

Structuring It Correctly

In practice the difference is made less by the label on the credit than by whether the chosen type genuinely fits the transaction and whether the wording reflects it. Yurt Bereket Global plans the payment structure, delivery term, shipping calendar and document set as a single design when it brings manufacturers and international buyers together. Yurt Bereket Global is not a bank, a law firm or an independent financial adviser: issuance, confirmation and legal interpretation remain with banks and legal professionals, while we coordinate the commercial side of the operation.

You can read more on our secure international trade page and under letter of credit and secure payment.