There are four types of letter of credit:
1. Revocable
2. Irrevocable
ADVERTISEMENTS:
3. Confirmed
4. Unconfirmed.
The terms revocable and irrevocable refer to instructions received by the advising bank form the opening bank. Confirmed and Unconfirmed refer to the advice sent by the advising bank to the exporter.
1. Revocable:
The credit can be revoked at a time and there is no protection for the exporter. For example, he could ship the goods, take the documents to the advising bank, and find that the bank will not accept the documents and pay him because the letter of credit had been revoked.
This type of credit is not used a great deal – usually only when there is a high degree of trust between exporter and seller and a credit is required as a vehicle for financing purposes.
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2. Irrevocable:
The opening bank cannot revoke the credit, so the exporter has reasonable protection. This is the most common type of letter of credit in use today.
3. Confirmed:
The advising bank guarantees payment, even if there are exchange difficulties. So the exporter is fully protected, provided no circumstances arise to prevent him from complying with the conditions on the letter of credit.
4. Unconfirmed:
The advising bank does not guarantee payment. Unconfirmed credits are not so satisfactory to the exporter, but they are cheaper.
ADVERTISEMENTS:
Most exporters usually insist on a ‘confirmed’, irrevocable’ letter of credit. Under all circumstances they will receive payment for their goods, as long as they keep to the conditions stipulated in the letter of credit.