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Banks will usually charge a fee for a letter of credit, which can be a percentage of the total credit that they are backing. The cost of a letter of credit will vary by bank and the size of the letter of credit. For example, the bank may charge 0.75% of the amount that it's guaranteeing.
A sight LC becomes due as soon as the beneficiary presents the proof of delivery or proof of shipment, and other ancillary documents. On the other hand, a Time LC needs certain days to pass after submitting a letter of credit, proof of delivery or shipment, and other required documents, before the payment becomes due.
A buyer will typically pay anywhere between 0.75% and 1.5% of the transaction's value, depending on the locations of the issuing banks. Sellers may find that their fees are structured slightly differently.
For a secured revocable letter of credit, the buyer has to give a personal guarantee or mortgage security. For an unsecured revocable letter of credit, the bank checks the creditworthiness of the buyer. Please note in both instances, the bank can revoke the LC.
The most common types of letters of credit today are commercial letters of credit, standby letters of credit, revocable letters of credit, irrevocable letters of credit, revolving letters of credit, and red clause letters of credit, although there are several other types of letters of credit.
An irrevocable letter of credit should always be obtained from a commercial bank and not drafted by the importer or exporter.
A revocable letter of credit is uncommon because it can be changed or cancelled by the bank that issued it at any time and for any reason. An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees.
Letters of credit are similar to bank guarantees (BGs), with the difference being that bank guarantees are used for a variety of different situations ? while letters of credit are mainly used for import/export. A letter of credit is also known as a documentary credit (DC or D/C) and is a form of trade finance.