Lesson 3
The Letter of Credit ( II )

Letters of credit fall under several categories depending on their function, form and mechanism. Here are the major types of credits:

1. Clean credit and documentary credit: Credits that only require clean draft, i. e. draft not accompanied with shipping documents , for payment are clean credit.2 They are generally used in non-trade settlement or in payment in advance by means of the L/C. Most of the credits used in international trade are documentary credits, i. e. credits that require shipping documents to be presented together with the draft.

2. Revocable credit and irrevocable credit; This classification is based on the certainty of the commitment3 to pay on the part of the applicant and the issuing bank4. The credit is a revocable one if such commitments can be altered or even canceled without consulting with5 the beneficiary. It is quite obvious that the exporter has little assurance to get payment, and therefore this type of credits are rarely used. Irrevocable credits are those that cannot be amended or revoked without the consent of all the parties concerned6. Safe and reliable, this type is extensively used in world trade. It must be noted that if there is no specific indication whether a credit is revocable or irrevocable, it should be regarded as irrevocable .

3. Confirmed credit and unconfirmed credit: If a credit is confirmed by a bank other than the issuing bank7, it becomes a con firmed credit. The confirmation is undertaken either by the advising bank or by another leading bank8. Under a confirmed credit, the beneficiary is given double assurance of payment since the confirming bank lias added its own undertaking to that of the opening bank. If the credit is not confirmed by another bank, it is an upconfirmed letter of credit. Though a confirmed credit is considered to be able to provide the greatest degree of security to the beneficiary, it involves additional cost as a result of the confirmation. Therefore if the establishing bank is a reliable prime bank, confirmation may not be necessary.

4. Sight credit and usance credit: A sight credit is one by which payment can be made upon presentation of the draft and impeccable documents by the beneficiary to the bank. It gives the beneficiary better security and helps him speed up his capital turnover. Most of China's export contracts stipulate for sight credit in payment terms. Obviously, a sight credit calls for a sight draft. A usance credit, also referred to as" term credit or time credit, is one by which payment cannot be made until a specific date or a specific time after the date or after sight. The usance varies from 30, 60, 90 days to as long as 180 days or even longer. It is also clear that this type of credit requires a usance draft. If the beneficiary wishes to get payment before the maturity of the draft, he can ask the bank to discount the acceptance14, and immediately pay him the net proceeds, i. e. the face value of the draft minus the discount charges10.

5. Transferable credit and non-transferable credit; If a credit can be transferred by the original beneficiary to one or more parties, it is a transferable credit. The original beneficiary is called the first beneficiary and the party ( or parties) the credit is transferred to is called the second beneficiary. It is usually used when the first beneficiary is a middleman and does not supply the goods himself. A credit can be transferred only once. But transferring a credit to more than one party at the same time is allowed provided partial shipments are permitted. If a credit does not specify whether it is transferable, it should be regarded as a non-transferable documents according to the credit stipulations.

6. Non-draft credit: There is a modern tendency for payment to be made by presentation of the documents without the formality of drawing and presenting a draft. Such credits are non-draft credit. They mainly include payment credit and deferred payment credit which are respectively similar to sight credit and usance credit with the difference that no draft is drawn and presented in the case of non-draft credit'6.

7. Revolving credit: If a credit stipulated that its amount can be renewed or reinstated without specific amendment to the credit being made", it is then a revolving credit. It is particularly useful when the buyer and seller have regular trading relationship and deal in18 a specific quantity of goods each month or any particular period of time.
It has already been mentioned that the letter of credit has greatly facilitated and promoted international trade. However, like any other methods of payment_ it is not perfect. It cannot provide absolute security for the contracting parties. The seller may sustain losses because of the buyer's delay or even failure in the establishment of credit. The buyer may suffer losses as a result of the documents presented by the seller which do not truly represent the goods shipped. And it is not absolutely avoidable that the bank may become insolvent or bankrupt. Besides, it is more expensive to use the letter of credit than remittance or20 collection as the bank will charge its client for all the services it provides. So the letter of credit may not be the most ideal method of payment for a particular transaction, and the contracting parties should make their best choice according to the specific conditions.

Words and Expressions
category n. 种类
fall under 归为…类
mechanism n.机制
clean credit 光票信用证
non-trade settlement 非贸易结算
revocable credit可撤销信用证
irrevocable credit不可撤销信用证
certainty n.确定程度；肯定程度
alter vt.改变
commitment 程度的责任
cancel vt. 取消；作废
consult with 与…协商
revoke vt. 撤销
consent n. 同意
extensively ad.广泛的
indication n. 指明；表明
confirmed credit 承兑信用证
leading bank 主要银行
double assurance 双重保障
involve vt. 牵涉；涉及
sight credit 即期信用证
usance credt 远期信用证
impeccable a. 正确无误的
capital turnover 资金周转
maturity n. 到期；期满
discount vt. 贴现
face value 面值
Transferable credit 可转让信用证
Non-transferable credit 不可转让信用证
Middleman 中间人
Non-draft credit 无汇票信用证
Deferred payment 推迟付款
Revolving credit 循环信用证
Renew vt. 恢复
Reinstate vt. 使复原
Contracting parties 合同各方；缔约各方
Sustain vt. 遭受；蒙受
Insolvent a. 无支付能力的
Bankrupt a. 破产