Introduction

Documentary Letters of Credit (DLCs) are versatile trade finance instruments tailored to suit different transaction structures, risk profiles, and commercial requirements.

Understanding the various DLC types is essential for trade finance professionals, exporters, and importers to select the right instrument for each trade scenario.

Keywords: standby LC vs documentary LC, revolving LC, transferable LC, confirmed LC, irrevocable and revocable LC
Related terms: MT700, UCP 600, payment guarantee, trade risk mitigation, LC structures

I. Irrevocable vs. Revocable DLC

Irrevocable LC

• Cannot be amended or canceled without the consent of all parties (applicant, beneficiary, and issuing bank)

• Provides strong payment security for exporters

• Commonly used in international transactions to reduce payment risk

Revocable LC

• Can be amended or canceled unilaterally by the issuing bank without prior notice to the beneficiary

• Offers less security for exporters

• Rarely used in modern trade due to high risk of non-payment

Strategic Consideration: Irrevocable LCs are the standard in global trade, ensuring reliability and legal enforceability.

II. Standby Letter of Credit (SBLC) vs Documentary LC

Standby LC (SBLC)

• Functions primarily as a payment guarantee, only drawn upon default or non-performance

• Protects the beneficiary when the applicant fails to meet contractual obligations

• Common in risk mitigation, project finance, and guarantees

Documentary LC (DLC)

• Payment is made upon compliance with shipping and commercial documents

• Ensures settlement against actual goods or services shipped

• Ideal for routine import-export transactions

Key Distinction: SBLC is contingent and secondary, while DLC is primary and documentary-based.

III. Revolving Letter of Credit

• Allows multiple drawings under a single LC

• Credit limit is replenished after each draw

• Can be time-based (specific periods) or value-based (credit replenishment upon usage)

• Supports long-term contracts, recurring shipments, and periodic trade

Use Case: Textile, commodity, and raw material industries with regular supply agreements.

IV. Transferable Letter of Credit

• Allows the beneficiary to transfer all or part of the credit to one or more secondary beneficiaries

• Facilitates middlemen or trading companies to operate without exposing their financial details

• Requires explicit authorization in the LC terms

Use Case: Intermediary trade, commodity resellers, and agents managing multiple suppliers.

V. Confirmed Letter of Credit

• Issued by the importer’s bank, and an additional confirming bank adds its independent guarantee

• Beneficiary receives double assurance of payment

• Commonly used in emerging markets or when the issuing bank’s creditworthiness is uncertain

Strategic Benefit: Reduces credit risk for exporters and provides higher certainty in cross-border trade.

VI. Summary Table of DLC Types

VII. Strategic Considerations for Selecting DLC Types

1. Risk Appetite: High-risk environments may require confirmed or standby LCs

2. Transaction Complexity: Multiple shipments or intermediaries may need revolving or transferable LCs

3. Trade Partner Credibility: Low creditworthiness importers often necessitate confirmed LCs

4. Operational Efficiency: Revolving or transferable LCs streamline administrative workload for recurring trades

Choosing the right LC type optimizes trade security, financing options, and operational workflow.

VIII. Conclusion

Understanding the different types of Documentary Letters of Credit is essential to mitigate risk, enhance payment security, and ensure smooth trade execution.

By strategically applying irrevocable, confirmed, revolving, or transferable LCs, trade finance professionals can tailor solutions to meet complex international trade requirements, balancing risk management with operational efficiency.

FAQ — Types of Documentary Letters of Credit

Q1 — What is the most secure type of LC?
Confirmed Irrevocable LC, as it provides independent bank guarantee and cannot be amended without consent.

Q2 — When is a standby LC preferred over a documentary LC?
When payment is conditional on default or non-performance rather than document compliance.

Q3 — How does a revolving LC function?
It allows multiple drawings under one LC, with the credit limit replenished automatically.

Q4 — Can a transferable LC be partially transferred?
Yes, the beneficiary can transfer all or part of the credit to secondary parties.

Q5 — Why is confirmation important in some LCs?
It adds a second bank guarantee, increasing confidence in payment in high-risk trade scenarios.