Trade Finance Products
Trade Finance Instruments for Businesses
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.
A restricted Letter of Credit limits where and through which bank the credit can be used. It directs the beneficiary to present documents to a specific nominated bank. Only that bank is authorised to handle the documents, pay, or negotiate under the credit.
An unrestricted Letter of Credit allows the beneficiary to present documents through any bank. The credit does not limit the choice of the presenting or negotiating bank. This gives the exporter more flexibility and speed in completing the transaction.
Letters of Credit are either revocable or irrevocable. The distinction determines whether the terms of the credit can be changed or cancelled after issuance.
Letters of Credit and Bank Guarantees are both tools used to manage risk in trade and finance. They look similar but serve different purposes. Understanding the difference helps you choose the right instrument for your transaction.
A Bank Guarantee is an undertaking by a bank to pay the beneficiary if the applicant fails to meet an obligation. Whether it is revocable or irrevocable determines if the bank or applicant can cancel or change the guarantee without consent from the beneficiary.
Sight Letter of Credit is the most direct form of payment under a documentary credit. It requires the issuing, confirming, or nominated bank to pay the beneficiary immediately upon presentation of compliant documents. The term “at sight” means payment is due as soon as the bank verifies that the documents meet the LC’s terms and conditions.
A Usance Letter of Credit, also called a Term LC, allows payment at a future date after the presentation of compliant documents. The payment is made at the end of a set credit period known as the usance period or maturity date.