Types of LC (Letter of Credit) in the Garment Industry

What is a letter of credit (LC)?

A letter of credit (LC) is a financial document issued by a bank that guarantees payment to a seller for goods or services provided. LCs are commonly used in international trade to protect both the buyer and the seller.

Types of LCs in the garment industry

There are several different types of LCs that can be used in the garment industry. Some of the most common include:

• Import/export LC: This type of LC is used for both imports and exports of garments.

• Revocable LC: A revocable LC can be canceled or amended by the issuing bank at any time without notice to the beneficiary.

• Irrevocable LC: An irrevocable LC cannot be canceled or amended without the consent of all parties involved.

• Confirmed LC: A confirmed LC is an irrevocable LC that is also guaranteed by the confirming bank. This means that the beneficiary is guaranteed payment even if the issuing bank fails.

• Unconfirmed LC: An unconfirmed LC is an irrevocable LC that is not guaranteed by a confirming bank. This means that the beneficiary's risk is slightly higher if the issuing bank fails.

• Sight payment LC: A sight payment LC requires the beneficiary to submit documents to the nominated bank and receive payment immediately.

• Deferred payment LC: A deferred payment LC requires the beneficiary to submit documents to the nominated bank and receive payment on a specified date in the future.

• Transferable LC: A transferable LC allows the beneficiary to transfer all or part of the credit to another beneficiary.

• Non-transferable LC: A non-transferable LC cannot be transferred to another beneficiary.

Back-to-back LC

A back-to-back LC is a special type of LC that is commonly used in the garment industry. It involves two separate LCs: one issued by the buyer to the intermediary and one issued by the intermediary to the supplier. Back-to-back LCs are often used when the intermediary needs to procure raw materials from the supplier before the buyer's LC is funded.

Which type of LC is right for you?

The best type of LC for you will depend on your specific needs and circumstances. If you are new to international trade, it is a good idea to consult with a trade finance specialist to get advice on the best type of LC for your business.

Here are the details about a letter of credit (LC):

Import/export LC

An import/export LC is a type of letter of credit that is used for both imports and exports of goods. It is a legally binding contract between the buyer, the seller, and the issuing bank. The issuing bank guarantees payment to the seller for the goods provided, provided that the seller meets all of the terms and conditions of the LC.

Import/export LCs are commonly used in the garment industry because they offer a number of advantages for both buyers and sellers. For buyers, LCs provide certainty that they will receive the goods they ordered and that they will not have to pay for goods that are not delivered or that do not meet the agreed specifications. For sellers, LCs provide certainty that they will be paid for the goods they deliver, even if the buyer defaults on their payment.

How does an import/export LC work?

The buyer initiates the process by opening an LC with their bank. The LC will specify the goods to be exported, the quantity, the price, and the terms and conditions of payment. The issuing bank will then send a copy of the LC to the seller's bank.

Once the seller has shipped the goods, they will submit a set of shipping documents to their bank. The bank will then review the documents to ensure that they meet all of the terms and conditions of the LC. If the documents are in order, the bank will pay the seller.

Types of import/export LCs

There are several different types of import/export LCs, each with its own advantages and disadvantages. Some of the most common types include:

• Revocable LC: A revocable LC can be canceled or amended by the issuing bank at any time without notice to the beneficiary. This type of LC is not recommended for import/export transactions, as it does not provide the seller with much protection.

• Irrevocable LC: An irrevocable LC cannot be canceled or amended without the consent of all parties involved. This type of LC is more secure for the seller, as they know that they will be paid for the goods even if the buyer defaults on their payment.

• Confirmed LC: A confirmed LC is an irrevocable LC that is also guaranteed by a confirming bank. This type of LC is even more secure for the seller, as they are guaranteed payment even if the issuing bank fails.

• Unconfirmed LC: An unconfirmed LC is an irrevocable LC that is not guaranteed by a confirming bank. This type of LC is less secure for the seller, but it is also less expensive.

Which type of import/export LC is right for you?

The best type of import/export LC for you will depend on your specific needs and circumstances. If you are new to international trade, it is a good idea to consult with a trade finance specialist to get advice on the best type of LC for your business.

Benefits of using an import/export LC

There are several benefits to using an import/export LC, including:

• Reduced risk: LCs reduce the risk for both buyers and sellers by providing certainty of payment.

• Increased efficiency: LCs can help to streamline the import/export process by providing a clear set of terms and conditions for both parties to follow.

• Improved cash flow: LCs can help sellers to improve their cash flow by providing them with payment upfront.

Import/export LCs are a valuable tool for businesses involved in international trade. They can help to reduce risk, streamline the process, and improve cash flow. If you are considering importing or exporting goods, it is a good idea to talk to your bank about whether an LC is right for your business.

Revocable LC

A revocable LC is a type of letter of credit that can be canceled or amended by the issuing bank at any time without notice to the beneficiary. This type of LC is not recommended for import/export transactions, as it does not provide the seller with much protection.

Why are revocable LCs not recommended for import/export transactions?

There are a few reasons why revocable LCs are not recommended for import/export transactions:

• Sellers have no certainty of payment. The buyer can cancel the LC at any time, even after the goods have been shipped. This means that the seller could be left with unpaid goods and no recourse.

• Sellers may have difficulty obtaining financing. Some banks may be reluctant to finance shipments under revocable LCs, as they are considered to be more risky.

• Sellers may have difficulty recovering costs. If the buyer cancels the LC after the goods have been shipped, the seller may have difficulty recovering the costs of shipping and other expenses.

When are revocable LCs used?

Revocable LCs are sometimes used for small or low-risk transactions. For example, a buyer may use a revocable LC to purchase a small quantity of samples from a new supplier.

Is it possible to amend a revocable LC?

Yes, it is possible to amend a revocable LC. However, the issuing bank can refuse to amend the LC without providing any reason. This means that the seller has no control over whether or not the LC is amended.

What should sellers do if they are asked to accept a revocable LC?

Sellers should carefully consider the risks involved before accepting a revocable LC. If the seller is not comfortable with the risks, they should negotiate with the buyer to use a more secure type of LC, such as an irrevocable LC or a confirmed LC.

Revocable LCs should be avoided for import/export transactions whenever possible. Sellers should carefully consider the risks involved before accepting a revocable LC.

Irrevocable LC

An irrevocable LC is a type of letter of credit that cannot be canceled or amended without the consent of all parties involved. This type of LC is more secure for sellers than a revocable LC, as they know that they will be paid for the goods even if the buyer defaults on their payment.

Why are irrevocable LCs more secure for sellers?

Irrevocable LCs are more secure for sellers because the issuing bank is legally obligated to pay the seller if the seller meets all of the terms and conditions of the LC. This means that the seller has more certainty of payment, even if the buyer tries to back out of the deal.

What are the benefits of using an irrevocable LC?

There are several benefits to using an irrevocable LC, including:

• Reduced risk: Irrevocable LCs reduce the risk for sellers by providing certainty of payment.

• Increased confidence: Irrevocable LCs can help to build confidence between buyers and sellers, as both parties know that the deal is legally binding.

• Improved cash flow: Irrevocable LCs can help sellers to improve their cash flow by providing them with payment upfront.

When are irrevocable LCs used?

Irrevocable LCs are commonly used for large or complex import/export transactions. For example, a buyer may use an irrevocable LC to purchase a large quantity of goods from a new supplier.

Is it possible to amend or cancel an irrevocable LC?

It is possible to amend or cancel an irrevocable LC, but it is more difficult than with a revocable LC. The issuing bank will only agree to amend or cancel an irrevocable LC if all parties involved agree.

What should sellers do if they are offered an irrevocable LC?

Sellers should carefully review the terms and conditions of the LC before accepting it. They should also make sure that they understand all of their obligations under the LC. If the seller is not comfortable with the terms and conditions of the LC, they should negotiate with the buyer to make changes.

Irrevocable LCs are a valuable tool for businesses involved in international trade. They can help to reduce risk, build confidence, and improve cash flow. Sellers should carefully consider the terms and conditions of an irrevocable LC before accepting it.

Confirmed LC

A confirmed LC is an irrevocable LC that is also guaranteed by a confirming bank. This means that the seller is guaranteed payment even if the issuing bank fails.

Why are confirmed LCs more secure for sellers?

Confirmed LCs are more secure for sellers because the confirming bank is a second source of payment. If the issuing bank fails, the confirming bank will still be obligated to pay the seller. This gives the seller more peace of mind and reduces their risk.

What are the benefits of using a confirmed LC?

There are several benefits to using a confirmed LC, including:

• Maximum security: Confirmed LCs offer the maximum level of security for sellers.

• Reduced risk: Sellers have no risk of not being paid, even if the issuing bank fails.

• Increased confidence: Buyers and sellers can have greater confidence in the transaction, knowing that there is a second source of payment.

When are confirmed LCs used?

Confirmed LCs are typically used for high-value or high-risk transactions. For example, a buyer may use a confirmed LC to purchase a large quantity of goods from a new supplier in a country with a high risk of political instability.

Is it possible to amend or cancel a confirmed LC?

It is more difficult to amend or cancel a confirmed LC than an irrevocable LC. The issuing bank and confirming bank must both agree to any changes to the LC.

What should sellers do if they are offered a confirmed LC?

Sellers should carefully review the terms and conditions of the LC before accepting it. They should also make sure that they understand all of their obligations under the LC. If the seller is not comfortable with the terms and conditions of the LC, they should negotiate with the buyer to make changes.

Confirmed LCs are a valuable tool for businesses involved in international trade. They can provide the maximum level of security for sellers and help to reduce the risk of non-payment. Sellers should carefully consider the terms and conditions of a confirmed LC before accepting it.

Unconfirmed LC

An unconfirmed LC is an irrevocable LC that is not guaranteed by a confirming bank. This means that the seller has a slightly higher risk of non-payment than with a confirmed LC.

Why are unconfirmed LCs less secure for sellers?

Unconfirmed LCs are less secure for sellers because there is no secondary source of payment if the issuing bank fails. This means that the seller is more likely to lose money if the buyer defaults on their payment.

What are the benefits of using an unconfirmed LC?

Unconfirmed LCs are less expensive than confirmed LCs, as the buyer does not have to pay for the confirming bank's fees. This can make them a more attractive option for buyers, especially for small or low-value transactions.

When are unconfirmed LCs used?

Unconfirmed LCs are commonly used for small or low-value transactions between buyers and sellers who have a good relationship. They may also be used for transactions where the buyer is willing to accept a slightly higher risk of non-payment in order to save money on the confirming bank's fees.

Is it possible to amend or cancel an unconfirmed LC?

It is more difficult to amend or cancel an unconfirmed LC than a revocable LC. The issuing bank may agree to amend or cancel the LC, but they are not obligated to do so.

What should sellers do if they are offered an unconfirmed LC?

Sellers should carefully consider the risks involved before accepting an unconfirmed LC. If the seller is not comfortable with the risks, they should negotiate with the buyer to use a more secure type of LC, such as a confirmed LC.

Unconfirmed LCs can be a good option for buyers and sellers who are willing to accept a slightly higher risk of non-payment in order to save money on the confirming bank's fees. However, sellers should carefully consider the risks involved before accepting an unconfirmed LC.

Sight payment LC

A sight payment LC is a type of letter of credit that requires the seller to submit shipping documents to the nominated bank and receive payment immediately. This type of LC is commonly used in the garment industry because it allows sellers to receive payment quickly and improve their cash flow.

How does a sight payment LC work?

The buyer initiates the process by opening a sight payment LC with their bank. The LC will specify the goods to be exported, the quantity, the price, and the terms and conditions of payment. The issuing bank will then send a copy of the LC to the seller's bank.

Once the seller has shipped the goods, they will submit a set of shipping documents to their bank. The bank will then review the documents to ensure that they meet all of the terms and conditions of the LC. If the documents are in order, the bank will pay the seller immediately.

Benefits of using a sight payment LC

There are several benefits to using a sight payment LC, including:

• Immediate payment: Sellers receive payment immediately upon submission of the shipping documents.

• Improved cash flow: Sellers can use the payment to improve their cash flow and finance their operations.

• Reduced risk: Sellers have less risk of non-payment because the issuing bank is obligated to pay them immediately.

When are sight payment LCs used?

Sight payment LCs are commonly used for all types of import/export transactions, including the garment industry. They are especially popular for transactions where the seller needs to receive payment quickly.

Is it possible to amend or cancel a sight payment LC?

It is possible to amend or cancel a sight payment LC, but it is more difficult than with other types of LCs. The issuing bank will only agree to amend or cancel the LC if all parties involved agree.

What should sellers do if they are offered a sight payment LC?

Sellers should carefully review the terms and conditions of the LC before accepting it. They should also make sure that they understand all of their obligations under the LC. If the seller is not comfortable with the terms and conditions of the LC, they should negotiate with the buyer to make changes.

Sight payment LCs are a popular choice for buyers and sellers in the garment industry because they offer several benefits, including immediate payment, improved cash flow, and reduced risk. Sellers should carefully review the terms and conditions of a sight payment LC before accepting it.

Deferred payment LC

A deferred payment LC is a type of letter of credit that allows the seller to receive payment on a specified date in the future, rather than immediately upon submission of the shipping documents. This type of LC is commonly used in the garment industry for transactions where the buyer needs time to sell the goods before paying the seller.

How does a deferred payment LC work?

The buyer initiates the process by opening a deferred payment LC with their bank. The LC will specify the goods to be exported, the quantity, the price, and the terms and conditions of payment. The issuing bank will then send a copy of the LC to the seller's bank.

Once the seller has shipped the goods, they will submit a set of shipping documents to their bank. The bank will then review the documents to ensure that they meet all of the terms and conditions of the LC. If the documents are in order, the bank will hold the funds until the deferred payment date. On the deferred payment date, the bank will release the funds to the seller.

Benefits of using a deferred payment LC

There are several benefits to using a deferred payment LC, including:

• Increased cash flow: Sellers can use the proceeds from the LC to finance their operations until the deferred payment date.

• Reduced risk: Sellers have less risk of non-payment because the issuing bank is obligated to pay them on the deferred payment date.

• Convenience: Buyers can have time to sell the goods before paying the seller.

When are deferred payment LCs used?

Deferred payment LCs are commonly used for transactions where the buyer needs time to sell the goods before paying the seller. This is often the case for seasonal goods, such as winter coats or summer dresses. Deferred payment LCs are also used for transactions where the buyer is new to the international trade market and needs time to build a relationship with the seller.

Is it possible to amend or cancel a deferred payment LC?

It is possible to amend or cancel a deferred payment LC, but it is more difficult than with sight payment LCs. The issuing bank will only agree to amend or cancel the LC if all parties involved agree.

What should sellers do if they are offered a deferred payment LC?

Sellers should carefully review the terms and conditions of the LC before accepting it. They should also make sure that they understand all of their obligations under the LC. If the seller is not comfortable with the terms and conditions of the LC, they should negotiate with the buyer to make changes.

Deferred payment LCs are a valuable tool for buyers and sellers in the garment industry. They can help buyers to finance their operations and sellers to receive payment on a more convenient schedule. Sellers should carefully review the terms and conditions of a deferred payment LC before accepting it.

Transferable LC

A transferable letter of credit (LC) is a type of letter of credit that allows the beneficiary to transfer all or part of the credit to another party. This type of LC is commonly used in the garment industry for transactions where the beneficiary needs to subcontract part of the production process to another supplier.

How does a transferable LC work?

The beneficiary can transfer all or part of the credit to another party by submitting a transfer request to the issuing bank. The transfer request must include the name and address of the new beneficiary, as well as the amount of the credit that is being transferred.

If the issuing bank approves the transfer request, they will notify the new beneficiary and send them a copy of the LC. The new beneficiary can then submit shipping documents to their bank and receive payment for the goods.

Benefits of using a transferable LC

There are several benefits to using a transferable LC, including:

• Flexibility: Beneficiaries can transfer all or part of the credit to another party, which gives them more flexibility in meeting their production needs.

• Convenience: Beneficiaries do not have to open a new LC with their bank, which can save time and money.

• Reduced risk: Beneficiaries can transfer the credit to a trusted supplier, which reduces the risk of non-payment.

When are transferable LCs used?

Transferable LCs are commonly used in the garment industry for transactions where the beneficiary needs to subcontract part of the production process to another supplier. This is often the case for complex orders that require specialized skills or equipment. Transferable LCs can also be used for transactions where the beneficiary is new to the international trade market and needs to build a relationship with a supplier.

Is it possible to amend or cancel a transferable LC?

It is possible to amend or cancel a transferable LC, but it is more difficult than with other types of LCs. The issuing bank will only agree to amend or cancel the LC if all parties involved agree.

What should beneficiaries do if they are offered a transferable LC?

Beneficiaries should carefully review the terms and conditions of the LC before accepting it. They should also make sure that they understand all of their obligations under the LC. If the beneficiary is not comfortable with the terms and conditions of the LC, they should negotiate with the buyer to make changes.

Transferable LCs are a valuable tool for beneficiaries in the garment industry. They can help beneficiaries to be more flexible in meeting their production needs and reduce the risk of non-payment. Beneficiaries should carefully review the terms and conditions of a transferable LC before accepting it.

Non-transferable LC

A non-transferable letter of credit (LC) is a type of letter of credit that cannot be transferred to another party. This type of LC is commonly used in the garment industry for transactions where the buyer does not want the beneficiary to subcontract part of the production process.

How does a non-transferable LC work?

The non-transferable LC will specifically state in the LC that it is not transferable. This means that the beneficiary cannot transfer all or part of the credit to another party.

If the beneficiary tries to transfer the credit to another party, the issuing bank will not honor the transfer request. The beneficiary will then have to fulfill all of the obligations under the LC themselves.

Benefits of using a non-transferable LC

There are several benefits to using a non-transferable LC, including:

• Increased control: Buyers have more control over the production process by preventing the beneficiary from subcontracting part of the work.

• Reduced risk: Buyers have less risk of non-payment because they know that the beneficiary is responsible for fulfilling all of the obligations under the LC.

When are non-transferable LCs used?

Non-transferable LCs are commonly used in the garment industry for transactions where the buyer does not want the beneficiary to subcontract part of the production process. This is often the case for high-value orders or orders that require specialized skills or equipment. Non-transferable LCs can also be used for transactions where the buyer is new to the international trade market and needs to build a relationship with the beneficiary.

Is it possible to amend or cancel a non-transferable LC?

It is possible to amend or cancel a non-transferable LC, but it is more difficult than with other types of LCs. The issuing bank will only agree to amend or cancel the LC if all parties involved agree.

What should beneficiaries do if they are offered a non-transferable LC?

Beneficiaries should carefully review the terms and conditions of the LC before accepting it. They should also make sure that they understand all of their obligations under the LC. If the beneficiary is not comfortable with the terms and conditions of the LC, they should negotiate with the buyer to make changes.

Non-transferable LCs are a valuable tool for buyers in the garment industry. They can help buyers to have more control over the production process and reduce the risk of non-payment. Beneficiaries should carefully review the terms and conditions of a non-transferable LC before accepting it.

Final thought

Letters of credit (LCs) are a complex financial instrument, but they can be a valuable tool for buyers and sellers in the garment industry. By understanding the different types of LCs and their uses, buyers and sellers can choose the right LC for their transaction and reduce the risk of non-payment.

It is important to carefully review the terms and conditions of any LC before accepting it. This will help to ensure that both parties understand their obligations and that the LC is in line with their needs.