Types of Credit
There are several types of documentary credits. Each serves a specific purpose in trade and carries distinct features. Understanding these differences helps you choose the right structure for your transaction.
Sight Credits
A sight credit is payable immediately upon presentation of compliant documents. The nominated, confirming, or issuing bank pays “at sight” when documents meet the credit terms. This gives the seller quick access to funds and limits payment delay.
Usance Credits
A usance credit provides payment at a future date (maturity). The issuing bank pays once the period stated in the LC expires and presentation is compliant.
- Acceptance credit: The bank accepts a bill of exchange (draft) and pays at maturity.
- Deferred payment credit: Similar to acceptance credits but no draft is required. The bank pays later once compliance is confirmed.
Mixed Payment Credits
These combine sight and usance features. Part of the amount is paid immediately, while the rest is paid later. Common in staged or large shipments.
Negotiation Credits
A negotiation credit allows a nominated bank to advance funds against compliant documents or drafts. It helps exporters access liquidity while awaiting final payment.
Confirmed Credits
A confirmed credit includes an additional guarantee from a second bank, usually in the exporter’s country, offering extra security against political or credit risks.
Transferable Credits
These allow the first beneficiary to transfer the LC (fully or partially) to another party. Used by intermediaries dealing with multiple suppliers.
Under UCP 600, only these can change:
- Amount
- Unit price
- Expiry date
- Shipment or presentation period
Back-to-Back Credits
Similar to transferable credits but involves two separate LCs. Useful when confidentiality between parties is required or the original LC isn’t transferable.
Revolving Credits
A revolving credit allows repeated use of the same LC for regular trade. It saves time and cost by avoiding repeated LC issuances.
Advance Payment Credits
These allow funds to be drawn before shipment for manufacturing or preparation costs.
- Red clause credits: Funds released pre-shipment to buy materials or pack goods.
- Green clause credits: Similar, but also covers warehousing and insurance costs.
Standby Letters of Credit (SBLC)
SBLCs act as a guarantee rather than a payment method, ensuring performance or payment obligations are met. If the applicant defaults, the beneficiary may draw under the SBLC.
- Performance standby
- Bid-bond standby
- Financial standby
- Advance payment standby
SBLCs are generally governed by ISP98 instead of UCP 600.