Letter of Credit or often abbreviated as L/C is one of the payment systems used in international trade. L/C is a guarantee of certainty regarding payments from the exporter’s bank at the request of the importer. L/C will be given to exporters if they meet the specified conditions, namely the exporter can provide data or documents related to trade, more precisely the transactions carried out. This payment system is the safest and most frequently used payment system, especially in export-import activities. Why is the L/C payment system so secure? because it is guaranteed by the Bank as a third party which is often called the issuing Bank. Exporters and importers will also benefit from using this payment system, namely they will get a kind of loan from the Bank related to the use of the system.
Letter of Credit (L/C) has several types, such as:
Based on payment time
There is a sight L/CUsance L/C, Deferred Payment and Usance Payable at Sight Basis (UPAS)
By nature
There are Revocable LC, Irrevocable LC, Irrevocable Confirmed LC, Transferable L/C, Back To Back LC, Red Clause LC, Revolving LC and Standby LC
Based on the bank used for disbursement of payments
There are Restricted LC and Unrestricted LC
What is an Irrevocable L/C?
Irrevocable Letter of Credit (ILOC) or Irrevocable LC is a Letter of Credit whose contents cannot be changed or withdrawn. Based on its nature, Irrevocable LC cannot be contested unilaterally, but in fact its contents can still be changed if there is an agreement between all parties involved in the use of the L/C, namely the applicant (importer), beneficiary (exporter and Bank (issuing Bank, confirming Bank, negotiating Bank. Irrevocable LC cannot be canceled when the Bank has agreed to pay the seller (exporter) for the use of the L/C, this aims to minimize risks related to trade transactions, namely between the buyer and seller both will be equally safe until the goods and payment are received .
Simply put, Gendon buys goods from Godril using an L/C (Issuing Bank), when Godril sends goods to Gendon, the Bank has agreed and will make payments to Godril. When the transaction and the Bank’s approval have occurred, the money (payment) from Gendon will definitely reach Godril and the goods from Godril will definitely arrive at Gendon, during that time the transaction cannot be canceled unless Gendon and Godril agree to change the contents of the agreed contract by contacting third party, namely the Bank (Issuing Bank).
Irrevocable LC . Mechanism
Irrevocable LC has fixed terms and conditions and cannot be canceled unless all parties expressly change the contents and conditions in the L/C. Irrevocable LC can also only be obtained from commercial banks, not from the wishes of the importer or exporter. The main purpose of both parties choosing to use an Irrevocable LC is for security reasons, the buyer will not send payment before the goods arrive and are received and the payment will only be received by the seller if the seller has followed and fulfilled all the requirements stated in the L/C.
The way an irrevocable LC works varies according to the documents and details of the letter to be verified. The mechanism of Irrevocable LC is:
1. The bank as the payment guarantor will carry out its duties according to the L/C system
2. Irrevocable LC is made on behalf of the applicant (in this case the buyer) to pay the seller according to the agreed value
3. The seller must have certain documents related to the goods sent as proof of the goods delivery transaction
4. All things related to the transaction must be determined such as the date, time limit, location and so on
5. All attached documents must meet the requirements set out in the L/C
Documents that have been provided by the seller to the Bank so that the Bank will verify and make payments to the seller. All documents that have been sent to the Bank will be sent to the buyer to claim the goods upon arrival.
How to get Irrevocable LC
To obtain an Irrevocable LC, the buyer or seller must first consult with the Bank so that the Bank can determine the Irrevocable LC in accordance with the transaction to be carried out. Do not make your own Irrevocable LC or copy Irrevocable LC, choose another party because it is quite risky, for example if the contents in the Irrevocable LC are not appropriate, the risk will go into the realm of law, if it is involved in international law it will be quite inconvenient because every country has laws on law different. Not to mention other risks such as not receiving payment for goods sold or not being able to receive goods that have been paid for.
Settlement mechanism with an irrevocable letter of credit
The advisory bank cannot force and cannot authorize any of the participants in the transaction to confirm the letter of credit. If confirmation is not initially provided by the terms of the letter of credit, then it is done in the same way as any other change in the terms of the letter of credit.
Sometimes confirmation doesn’t mean that the bank confirming the letter of credit bears all of the buyer’s obligations (soft confirmation), so this seems odd to me.
In such a case, the seller is advised to ensure that the confirmation is given clearly to the extent necessary, for example: in accordance with the provisions of the letter of credit, if it contains the date and number of the letter of credit, as well as the letter of credit itself and all amendments thereto.
The seller may take the risk when he agrees to receive a letter of credit specifying as conditions the documents to be issued by the buyer or on behalf of the buyer, for example:
1. inspection certificate signed by the buyer
2. telegram confirmation of receipt of goods, signed by the buyer
3. a letter from the sender that the goods were received on behalf of the buyer.
In practice, sellers need to ensure as early as possible that no documents are provided other than those published, whose form and content are self-controlled.
