15.10.2016 17 734 0 Reading time: 11 min.

Today we will continue our conversation about banking services and consider what is a letter of credit, where such a service can be used, why it is interesting. This service is more popular for representatives of large and medium-sized businesses, however, recently it has increasingly extended to small entrepreneurs, and even to individuals who are not involved in business. Therefore, knowing what a bank letter of credit is and what types of letters of credit there are will be useful for everyone, even just for general development.

What is a letter of credit?

A letter of credit is an obligation of the payer's bank to make a payment to the recipient's bank only after the payee provides his bank with certain documents required by the terms of the letter of credit.

Letters of credit belong to the so-called. documentary operations of the bank, that is, operations based on document flow. Most often, documentary operations, in particular letters of credit, are used by enterprises engaged in export-import activities, but this is not the only area of ​​their application.

Why are letters of credit needed? In simple words - in order to prevent fraud between the parties to a certain transaction. The bank simply acts as a legal guarantor between the parties to the transaction, for which it receives its commission.

Letter of credit - basic terms and concepts

Let's look at the basic terms and concepts associated with opening letters of credit.

Letter of Credit Issuer- the bank to which the client applied to open a letter of credit.

Beneficiary bank- the bank that services the client in whose favor the letter of credit is opened.

Beneficiary- recipient of payment under a letter of credit.

Deal- a specific purchase and sale transaction for which a letter of credit is opened for settlement.

Letter of credit amount— the amount of the transaction for settlement of which a letter of credit is opened.

L/C term- a limited period during which the letter of credit is valid.

Type of letter of credit— conditions for opening a letter of credit (I will consider the most common options in more detail below).

Fee for opening a letter of credit— the cost of opening a letter of credit, established by the bank’s tariffs. Typically calculated as a percentage per annum of the amount of the letter of credit, it may also include some kind of fixed or minimum payment. In this case, the issuing bank pays part of the received commission to the beneficiary bank for its services.

Let's look at the operation of a letter of credit using an example. Let's say we have a supplier and a buyer of a certain product who do not trust each other and want to insure themselves. The buyer is afraid to send money without seeing the goods, and the supplier is afraid to send the goods without seeing the money.

In such a situation, opening a letter of credit can help. The buyer opens a letter of credit at his bank, deposits the payment amount into a special account, and instructs the supplier to send it to his bank, but only after the supplier provides documents confirming the fact of sending the goods.

The buyer's bank sends a notification to the supplier's bank about the opening of a letter of credit, and the supplier's bank notifies the supplier about this. The supplier, knowing that funds to pay for the goods have already been reserved and will be sent to him, sends the goods and provides documents confirming this fact to his bank. The supplier's bank checks the legal purity of these documents and, based on this, makes the necessary payment, which is reported to the buyer's bank. After this, the buyer's bank transfers the reserved funds of its client to the supplier's bank. The supplier gets his money, the buyer gets the goods, and the banks get their commissions. Everyone is happy. This is the classic scheme of a letter of credit, and depending on the type of service, some actions may vary.

For clarity, an approximate scheme of the operation of a letter of credit can be presented in the following figure (the numbers indicate the order of actions):

Types of letters of credit

Let's look at the most common types of letters of credit - they can be divided according to several criteria.

Based on whether the letter of credit can be canceled, revocable and irrevocable letters of credit are distinguished.

Revocable letter of credit implies the ability of the issuing bank to withdraw (cancel) its order to transfer funds before the submission of the necessary documents by the opposite party, that is, to cancel the operation, without notifying the recipient bank.

Irrevocable letter of credit does not imply the possibility of its cancellation without notifying the receiving bank and without the consent of the direct recipient of the payment. That is, it can also be canceled, but only with the consent of the two parties, and not unilaterally like a revocable letter of credit.

Irrevocable letters of credit are used in practice much more often than revocable ones, since they better satisfy the interests of both parties to the transaction.

According to the degree of responsibility of both banks, confirmed and unconfirmed letters of credit are distinguished.

Confirmed letter of credit guarantees that the recipient's bank, or another third bank, will pay the recipient the amount due, even if the sender's bank does not transfer the money to him.

Unconfirmed letter of credit assumes that the payment will be received by the recipient only if it is actually transferred by the issuing bank.

According to the possible source of funds for payment execution, covered and uncovered letters of credit are distinguished.

Covered (deposited) letter of credit means that the issuing bank transfers the payment amount to the recipient's bank for the entire validity period of the letter of credit. This amount is guaranteed coverage and is immediately at the disposal of the recipient's bank.

Uncovered (guaranteed) letter of credit means that the issuing bank allows the recipient's bank to debit the payment amount from its correspondent account, or stipulates some other conditions for receiving reimbursement. In practice, this type of letter of credit is most often used.

Let's look at some other well-known types of letters of credit.

Letter of credit with red clause means that the issuing bank undertakes to make the agreed amount of the advance payment to the recipient's bank even before receiving supporting documents from the recipient.

Revolving letter of credit opens when it is necessary to regularly perform homogeneous operations. Each time it acts on a specific batch of goods and then resumes its effect on the next batch.

Transferable letter of credit implies the possibility of transferring its part to another beneficiary, if necessary.

Standby letter of credit or stand-by letter of credit- this is a kind of symbiosis of a letter of credit and a bank guarantee, under which the supplier receives payment for the goods, even if the buyer refuses to pay him - the payment is made by the bank at its own expense.

Advantages and disadvantages of letters of credit

All the advantages and disadvantages of the letter of credit form of payment come down to one thing. The advantage is the bank’s guarantee that the client will receive the necessary product or service, his money will not be lost, and the opposite party to the transaction is not a fraudster and will not deceive him. The disadvantage is that opening a letter of credit costs money, usually a few percent of the payment amount. Thus, you simply have to pay extra for an increased level of transaction security.

Where are letters of credit used?

Let's consider the most common areas of application of letters of credit:

• Export-import operations;
• Trade operations within the country;
• Large transactions between individuals (for example, the purchase and sale of real estate).

Now that you know the concept and essence of a letter of credit, let's summarize and highlight the most important thing.

A bank letter of credit is a kind of guarantee of the legal purity of a transaction, eliminating almost all risks of fraud, because documents confirming the fact of transfer of goods from the seller to the buyer are checked by experienced bank lawyers. Opening a letter of credit when carrying out export-import operations is also interesting because, regardless of the countries where the supplier and buyer are located, such operations are regulated by a universal document - international Uniform Customs and Practice for Documentary Credits UCP-600, which eliminates the risk of non-compliance of the laws of different countries with the conduct of a certain transaction. Opening a letter of credit will cost the buyer a certain amount, but this amount is significantly lower than, for example, when receiving a loan, and a letter of credit of a certain type includes many parameters of a credit transaction, but also ensures a safe transaction. That is, this is a fairly profitable service, but it requires additional costs.

Now you have an idea of ​​what a letter of credit is, why it is needed, and what types of letters of credit can be found in practice.

Increase your financial literacy with the site - join the number of our regular readers and subscribers. See you in new publications!

Rate:

Hello! In this article we will talk about the system of payments using letters of credit.

Today you will learn:

1. Where can a letter of credit come in handy?
2. What types of letters of credit are most common;
3. How to draw up an agreement using a letter of credit;
4. How to use a letter of credit.

Letter of credit: the essence of the concept

The business sphere is full of not only conscientious companies that operate in accordance with the law and the terms of the contract. There are also scammers whose main goal is to leave the counterparty with nothing. You give them a product or money for it, but as a result you are left without both.

However, expanding the production volume of an enterprise implies that it will cooperate with new business partners, whose integrity is not always possible to verify.

What to do if you enter into an agreement with a company unknown to you and are worried about the outcome of the transaction? What should you do if the other party is late in payment or if goods are not shipped in response to your advance? Such issues and resulting problems are easily resolved with the help of a letter of credit.

Letter of Credit is a special settlement system that guarantees both parties to the transaction a positive outcome. This is a banking product with the participation of two banks: in the first an account is opened for the seller, and in the second for the buyer. The credit institution transfers funds from the account only if the terms of the agreement between the parties to the transaction are fulfilled and supporting documents are provided.

A letter of credit implies the presence of two participants in addition to banks:

• Applicant (or buyer);
• Beneficiary (seller).

The initiator of the contract is the buyer. It is he who is interested in receiving the object of the transaction, and therefore applies to the bank with an application to open a letter of credit.

This service is provided on a fee basis: banks charge commissions, which in some cases are quite impressive. However, a letter of credit is a guarantee of contract performance, which plays an important role for both parties to the agreement.

The buyer's bank will transfer funds to the seller's account only if the terms of the signed agreement are fulfilled (for example, when goods are shipped). If the seller violates the terms of the agreement, the bank will return the funds to the buyer’s account.

A letter of credit is a rather complicated operation that requires complex processing. However, it is very popular, as it is the key to successful cooperation between participants in various transactions.

For which payments is a letter of credit used?

A letter of credit is a fairly universal concept that can be used in transactions between:

• Individuals.

Legal entities are the main users of such banking services. Often, transactions involve companies whose names are not well known, and therefore one of the parties to the transaction tries to hedge their bets.

One company supplies the goods, and the second acquires them. A letter of credit allows them to avoid controversial situations when making payments. The same applies to the provision of various services or performance of work.

Individual entrepreneurs can also offer the counterparty to issue a letter of credit if they doubt its reliability. When planning to ship goods for a large amount, it is better to fix the settlement process in a very clear agreement so as not to lose your own funds.

The use of letters of credit is also common among individuals. Most often it accompanies large purchases. For example, you. A seller has been found, however, for some reason you doubt that he will fulfill his obligations under the contract.

To be sure of his integrity and accurately receive funds from the sale, you should contact the bank and conclude an agreement on the terms of a letter of credit. Most often, scammers immediately disappear with such offers, since the bank will require them to deposit the full amount into their account.

If the buyer is a decent person, then no problems arise in the process of issuing a letter of credit.

The essence of a letter of credit is the same for different parties to transactions: the fulfillment of obligations under it is insured. The use of this banking service is relevant to any items of purchase and sale: from small goods to expensive real estate.

Types of letters of credit

Letters of credit are a payment instrument used not only for domestic trade.

Based on this, there are two types of it:

• International (applied for transactions involving export or import);
• Domestic (used exclusively for purchase and sale within the country).

Letters of credit can also be distinguished:

• Revocable. You can cancel an already opened letter of credit at any time by one of the parties to the transaction. However, this type of calculation is extremely unreliable and does not inspire confidence among market participants. Therefore, in our country their use is limited by regulations. This is done in order to avoid fraudulent actions by one of the parties to the agreement;
• Irrevocable. Once a letter of credit has been signed, it cannot be cancelled. This type of calculation gives confidence to the parties to the transaction in its successful outcome.

Depending on the terms of the transaction, letters of credit are divided into:

• Confirmed. In this case, the executing bank (the one that transfers funds to the seller’s account) offsets the money to the second party to the transaction, even if there is no money in the account. In other words, the bank is looking for a third party to the transaction as a credit institution that will transfer the required amount upon fulfillment of the terms of the agreement. However, in this case, the executing bank bears the risk of non-return of the transferred funds. As a result, this form of letter of credit is not used very often;
• Unconfirmed. Transfer of funds to the second party of the transaction is carried out only if there are funds in the account. Banks prefer this form of payment to avoid losing their own money.

The procedure for writing off funds divides letters of credit into two types:

• Coated. The issuing bank transfers funds to the nominated bank when the agreed conditions are met. The amount credited is called coverage, which is where the name letter of credit comes from. The covered form of payment is used exclusively in Russia;
• Uncovered. The issuing bank gives the nominated bank the right to write off funds up to the amount of the letter of credit. This form of payment is widely used abroad, where covered letters of credit are not found at all.

There is also letter of credit with red clause. It implies that an advance payment is transferred to the supplier’s account before the terms of the contract begin to be fulfilled. In this case, documents for shipment, performance of work or provision of services are also provided after the advance payment has been transferred.

Revolving letter of credit means that only part of the services specified in the contract is paid as they are performed. As soon as the next shipment occurs or other work is completed under the agreement, the next transfer is carried out. This form of payment is convenient for a contract concluded for a long term and implying regular interaction between its parties.

If the bank has the right to transfer funds in favor of several other beneficiaries, then transferable letter of credit. If funds are transferred to the account of one party to the transaction when the terms of the contract are violated by the other, then we are talking about a standby letter of credit. It is an additional guarantee for the parties to the agreement. This type of payment is used in countries where the use of a bank guarantee is prohibited.

We issue a letter of credit

To apply payments under a letter of credit between the parties to a transaction, it is necessary to draw up an agreement. It is drawn up on a documentary basis and necessarily indicates the form of payment.

The agreement includes the following points:

• Name of the parties to the transaction (supplier and its buyer);
• Type of payment and its type (for example, irrevocable uncovered letter of credit);
• The amount of funds that will be transferred to the supplier upon fulfillment of the terms of the agreement;
• The period for which the contract is concluded;
• Amount of commissions;
• The procedure for making payments (the entire amount at once or in advance payments);
• Actions of the parties in case of failure to fulfill the conditions for which the payment letter of credit was applied;
• The rights of participants, as well as their responsibilities.

For the signed agreement to come into force, the buyer must contact the bank and write an application indicating the letter of credit payment form.

The statement also states:

• A reference to the agreement under which a letter of credit will be used between the parties;
• The name of the supplier's organization, as well as its data according to the information;
• Type of letter of credit;
• The amount due to the seller;
• Validity period of the contract and, accordingly, the letter of credit;
• Method of implementation of a cash letter of credit (advance or the entire amount, and upon the occurrence of what conditions they are due);
• The name and quantity of goods, the supply of which is indicated in the contract (or maybe these are services or some kind of work);
• Name of the bank that will fulfill the obligations;
• List of documents that will be accepted by the bank as confirmation of compliance with the terms of the agreement.

From the moment the application is signed and registered, the letter of credit comes into force. An executed letter of credit can be extended for a new period by mutual agreement of the parties.

Advantages of settlements using a letter of credit

Letter of credit payment under an agreement is convenient, despite the high commission rates charged by banks when applying for this service.

Among the advantages of mutual settlements using letters of credit are the following:

• Transaction guarantee for seller and buyer. If the terms of the contract are met, the funds will be sent to the seller. If the terms of the agreement are violated, the money will be returned to the buyer’s account. In other words, the risk of contacting unscrupulous persons is zero. In this case, both parties to the transaction will deal with cashless payments, which also greatly simplifies the purchase and sale process);
• The seller will receive the funds due to him under the contract even if the buyer’s financial condition has deteriorated after shipment of the goods (the money is already in the bank account. This is a prerequisite for settlements with letters of credit);
• The nuances of the agreement, forms of payment and types of letter of credit are negotiated independently by the parties to the transaction (they are prescribed in the agreement based on the preferences of the parties. Taking into account such features is very important so that the interests of the participants are not violated during the execution of the agreement);
• It is possible to refuse an accepted letter of credit at any time if the seller and buyer decide so (it is also possible to change the terms of the signed agreement);
• The contract has legal force, unlike an oral agreement, and if one of the parties to the transaction fails to comply with the terms, the issue can be resolved in court;
• A guarantee that the buyer will receive the goods on time (after all, the seller is interested in receiving funds within the short period of time specified in the terms of the contract);
• If credit funds act as a letter of credit, the buyer can save money, since the rate on them is significantly lower than on a regular bank loan.

Of course, the main advantage of a letter of credit is the guarantee that the supplier will receive money or return it if the buyer fails to fulfill the terms of the transaction. Thanks to this advantage, letters of credit are popular.

Payment scheme via letters of credit

A letter of credit is not a simple procedure. But if you use it at least once, then all its rules will become clear to you, and in the future you will easily use this calculation system.

The transaction process based on a letter of credit is structured in several stages. We will highlight the most important of them, which are taken as the basis for any type of letter of credit.

So, the steps when concluding a letter of credit agreement:

• The two parties to the transaction draw up an agreement and indicate in it the letter of credit as a payment system (important nuances of interaction are also described here, as well as the responsibilities of the parties to the agreement);
• The buyer contacts the issuing bank to open a letter of credit and draw up an application (this bank is considered the issuer in relation to the other party to the transaction);
• As soon as the buyer deposits money in the amount of the agreement into the account, the bank registers the letter of credit;
• The issuing bank then notifies the vendor's (seller) bank of the merchant's action;
• The executing bank notifies the other party to the transaction about the successful opening of a letter of credit account;
• The supplier ships the transaction items to the buyer’s address and delivers the supporting documents to the executing bank (this step is called issuing a letter of credit);
• The bank checks the documentation, and if there are no errors in them, and the terms of the agreement are met, then it transfers funds to the seller’s account by means of a payment order.

If the contract between the parties is concluded for a long period and includes several deliveries of goods, each of which is paid separately, then the supplier must go to the bank each time and provide accompanying documents.

In the future, if the buyer and seller are confident in cooperation, they can refuse the letter of credit and make payments independently. While they don’t know each other well, a letter of credit is the most preferred payment option for both parties.

Are you afraid of the risks associated with prepayment for a transaction? Do you want to be on the safe side as a first-time customer working with a new supplier? Take advantage of a letter of credit - one of the most reliable and profitable banking instruments used when concluding contracts.

The letter of credit form of payment is beneficial to both the seller and the buyer. It can be used with equal success not only in domestic Russian transactions, but also in foreign trade transactions. Today, settlement services in the form of documentary letters of credit are provided by most large Russian banks.

Letter of credit: what is it in simple terms?

In simple words, a letter of credit is a special account opened at a bank in which funds can be reserved when conducting transactions for the sale of goods or the provision of services (performing work). If both parties fully comply with the conditions specified in the contract, the bank pays the required amount to the account of the recipient (beneficiary).

Thus, the bank acts as a guarantor and assumes responsibility for making payments. The supplier is 100% sure that the product/service will be paid for, and the buyer knows that he will be able to pay for it on time and without debt.

Letter of credit form

It works according to the following scheme.

1. The parties enter into a contract that stipulates the terms of the letter of credit payment.
2. The buyer submits an application to his bank (issuer) to open a letter of credit account and deposits into it the amount necessary to cover the transaction (reserves funds).
3. After the successful opening of a letter of credit, the issuing bank notifies the seller's bank (advising bank) about this.
4. The advising bank notifies the seller about the opening of the letter of credit. The seller ships the goods and provides supporting documents to his bank.
5. After checking the documents, payment is transferred to the seller’s account by the issuing bank or advising bank (depending on the terms of the agreement).

Irrevocable letter of credit

One of the main and frequently used types of documentary payments. Unlike a revocable letter of credit, a confirmed or unconfirmed irrevocable letter of credit is not revoked or amended by either party (including the bank) without the prior consent of the seller/supplier. It is considered the most reliable form of letter of credit payments, as it completely frees the trade and monetary transaction from all possible risks, primarily financial.

If during the transaction the supplier and buyer come to a mutual agreement, the terms of the irrevocable letter of credit may be changed.

Letter of credit agreement

The agreement on a transaction providing for this form of payment stipulates and strictly records any information that can subsequently be used when carrying out a trade and monetary transaction and payment for it:

• names of the supplier and recipient,
• type of letter of credit used (irrevocable/revocable, covered/uncovered),
• the amount reserved on the account to pay for the transaction,
• the duration of the obligation,
• commission size,
• payment procedure,
• procedure in case of non-payment of debt under a letter of credit,
• rights and obligations of all parties.

Payment by letter of credit

Settlements with letters of credit provide for the transfer of funds to the seller’s account only if all the conditions specified in the contract have been met. In particular, money is transferred to the seller’s account after the goods have been fully shipped and all required documents have been submitted to the bank. If the terms of the letter of credit agreement have been violated, the payer (buyer) has the right to refuse payment and return the goods to the supplier.

A nuance: a letter of credit account is opened by the buyer with his own money or with the help of bank credit funds (if he has the right to lend).

Opening a letter of credit

To open a letter of credit account, a written application in the appropriate form is submitted to the banking organization. The statement states:

• number of the agreement under which the letter of credit is opened,
• name and details of the supplier,
• type, validity period, monetary amount of the letter of credit,
• the way to implement it,
• list of shipped (provided) goods/services,
• name of the executing bank under the letter of credit obligation,
• a list of documents that will be used as the basis for payment of funds to the supplier.

Advice to Sravni.ru: use a letter of credit form of payment when it is necessary to conduct secure trade and monetary transactions with new and “problematic” business partners.

A letter of credit is an order from the payer's bank to the recipient's bank

Letter of Credit- this is an order from the payer’s bank, the recipient’s bank, to make payments, by order and at the expense of the client’s funds, to an individual or legal entity within the specified amount and on the terms specified in this order.

When establishing new partnerships between enterprises and organizations, individuals and individual entrepreneurs, the question often arises: How to avoid losing money or goods when concluding a transaction and settlements with an unfamiliar company? How to insure your business against unnecessary and dishonest partners, especially if the contract is for a significant amount? The answer is simple - letters of credit will be used for settlements. Of course, it is quite difficult to learn all the intricacies of working with letters of credit and apply them in calculations, but it gives you a feeling of security. And having studied the letter of credit form of payment once, clients rarely refuse it. So, settlement under a letter of credit is carried out under the control of two banks and excludes non-compliance with the terms of concluded contracts, both on the part of the product supplier and on the part of the buyer.
Letter of Credit– this is the safest form of payment between clients. There was a case in my practice when the majority of consumers of caustic soda from the largest chemical plant switched to settlements with it through a letter of credit. At that time, Khimzavod, being the only caustic soda producer in the post-Soviet space, was on the verge of bankruptcy, but continued to operate and ship products. The crediting of money to the current account from the letter of credit received by the bank was carried out by the bank after the products were shipped and all shipping documents were submitted to the bank in accordance with the contract and the payer’s instructions. All documents were carefully checked. The letter of credit gave confidence to consumers (payers) that if the products were not shipped on time, the funds would be returned by the supplier’s bank without problems or delays. And the plant, being in a “financial hole,” was sure that another consumer would not abandon it without payment.

Letter of Credit- this is a settlement document, on paper, on the basis of which the bank, acting on behalf of the payer to open a letter of credit (hereinafter referred to as the issuing bank), undertakes to make payments in favor of the recipient of funds upon presentation by the latter of documents that meet all the conditions of the letter of credit, or to provide authority to another bank (hereinafter referred to as the executing bank) to make such payments.

Non-cash payments using letters of credit are carried out on the basis of the following regulations:

• Regulations of the Central Bank of the Russian Federation dated October 3, 2002 N 2 - “Regulations on non-cash payments in the Russian Federation”


• Regulations of the Central Bank of the Russian Federation dated April 1, 2003 N 222-P - “Regulations on the procedure for making non-cash payments by individuals in the Russian Federation”


• Civil Code of the Russian Federation (Civil Code of the Russian Federation) dated January 26, 1996 N 14-FZ - Part 2 of Article 867 - 873

Types of letters of credit

When making payments using letters of credit, it is very important to choose the right type of letter of credit. The opening of a letter of credit is carried out by banks on behalf of the payer, therefore, the type of letter of credit, as a rule, is proposed by the payer in the draft agreement.

In accordance with the Regulations of the Central Bank of the Russian Federation, banks can open the following types of letters of credit:

• covered (deposited) letter of credit;
• uncovered (guaranteed) letter of credit;
• revocable letter of credit;
• irrevocable letter of credit;
• confirmed letter of credit (revocable or irrevocable).

Covered letter of credit (deposited)– this is when, when opening a letter of credit, the issuing bank transfers, at the expense of the payer’s funds, the amount of the letter of credit (coverage) at the disposal of the executing bank for the entire validity period of the letter of credit.

Uncovered letter of credit (guaranteed)- this is when, when opening a letter of credit, the issuing bank does not transfer funds, but gives the executing bank the right to write off funds from the correspondent account maintained by it within the amount of the letter of credit. The procedure for writing off funds from the correspondent account of the issuing bank under a guaranteed letter of credit is determined by agreement between the banks.

Revocable letter of credit- this is a letter of credit that can be changed or canceled by the issuing bank on the basis of a written order of the payer without prior agreement with the recipient of funds and without any obligations of the issuing bank to the recipient of funds after the letter of credit is revoked.

Irrevocable letter of credit is a letter of credit that can be canceled only from the moment the executing bank receives the consent of the recipient of funds to change the conditions. Partial acceptance of changes to the terms of an irrevocable letter of credit by the recipient of funds is not permitted.

Confirmed letter of credit (revocable or irrevocable)- this is a letter of credit, upon execution of which the executing bank undertakes to pay the amount specified in it, regardless of the receipt of funds from the bank where the confirmed letter of credit was opened. The confirmation procedure is determined by agreement between the banks.

Currently, there are several other types of letters of credit, which are variations of those described above:

• Letter of credit with red clause- this is a letter of credit, according to which the issuing bank authorizes the executing bank to make an advance payment to the supplier of the goods (the beneficiary - the recipient of the funds) in a specifically agreed amount before the submission of all trade documents, that is, before the shipment of the goods or the provision of services.
• Revolving letter of credit- this is a letter of credit opened for a portion of payments from the total amount under the contract, automatically renewed as payments are made for the next batch of goods. A revolving letter of credit is opened for uniform deliveries spread over time, with the goal of cyclically reducing the contract amount.

The recipient of funds under a letter of credit may refuse to use the letter of credit before its expiration, if the possibility of such refusal is provided for by the terms of the letter of credit. In addition, the terms of the letter of credit may provide for acceptance by a person authorized by the payer.

Payments using letters of credit

Non-cash payments for services rendered, delivery of goods or performance of work are prescribed in contracts, and the form of payment is also prescribed there.
When using a letter of credit form of payment, the contract must reflect the following conditions:

• name of the issuing bank,
• name of the bank serving the recipient of funds,
• name of the recipient of funds,
• letter of credit amount,
• type of letter of credit,
• method of notifying the recipient of funds about the opening of a letter of credit,
• method of notifying the payer about the account number for depositing funds opened by the executing bank,
• validity period of the letter of credit, submission of documents confirming the supply of goods (performance of work, provision of services), and requirements for the execution of these documents;
• terms of payment (with or without acceptance);
• liability for non-fulfillment (improper fulfillment) of obligations.

The agreement may also include other conditions relating to the procedure for settlements under the letter of credit. For example, partial payments under a letter of credit are allowed.

Payment under a letter of credit is made by bank transfer by transferring the amount of the letter of credit to the account of the recipient of the funds.

And most importantly, banks are responsible for violations committed during the execution of the letter of credit payment form in accordance with the law. Taking this into account, it becomes clear that it is not profitable for the executing bank to accept unfinished documents confirming the delivery of goods, performance of work or provision of services.