ST.

MARY’S UNIVERSITY

FACUALITY OF BUSINESS

DEPARTMENT OF MARKETING MANAGEMENT

GROUP MEMBERS ID

1.Bemenet Gizachew RMKD/0846

2.Yabsera Semeneh RMKD/0882

3.Yonas Ashenafi RMKD/0886

4.Nahom Girma RMKD/0869

5.Olani Berhanu RMKD/0872

SUBMITTED TO: TAKELE GETENET

SUBMISSION DATE: 11/11/2022

 1. What is a Transferable Letter of Credit?

A transferable letter of credit allows an original or first beneficiary on a standby bank

assurance of funds to transfer the right of payment to other beneficiaries. This process makes it
so the original beneficiary can transfer all or part of their original letter of credit to a third party.

When you apply for a transferable letter of credit, it needs to be specifically designated as such
by the issuing bank. Also specific is the naming of the beneficiary. Some banks only guarantee
payment or credit to one beneficiary. However, that one beneficiary may transfer a letter of
credit to another, who then becomes the secondary beneficiary.

Once named a beneficiary, the second beneficiary has the same rights as the original. This
beneficiary is then allowed to request that the bank transfer part or all of the letter of credit to
another beneficiary. Often, the beneficiary will be a middle person who does not own the goods
at the time of the letter of credit being issued. Because of this, the beneficiary will likely utilize
this letter of credit in order to purchase those goods.

2. What is a Back to Back Letter of Credit?

It is the form of documentary credit where the first party uses a letter of credit to secure another
Letter of Credit facility. It uses two letters of credit for one financial transaction. The sellers use
this option to secure a credit facility by pledging the credit received from the buyer’s bank. It
may work as an alternative to a transferrable letter of credit with some different features. A back
to the back letter is often used by the middleman or sellers outsourcing raw materials in large
quantities. It is not necessary to inform the buyer in the first place about issuing another letter of
credit. The seller or the first beneficiary of the prime credit remains the ultimate obligator for the
trade terms.

3. What is a Revolving Letter of Credit?

A revolving letter of credit is a special letter of credit type, which is structured in a way so that
it revolves either in value or in time covering multiple-shipments over a long period of time
under a single letter of credit.
 Types of Revolving Letters of Credit:

i. Revolvement Based on Time: A fix amount could be drawn under letter of credit
within each specific period of time as indicated in the documentary credit until letter
of credit expires.
Type 1 – Non-Cumulative Revolving Letter of Credit: For a non-cumulative
revolving letter of credit, the beneficiary can draw each revolving amount for any
given period, and any unused portions cannot be drawn on the subsequent periods.
Type 2 – Cumulative Revolving Letter of Credit: Cumulative revolving letter of
credit means that the unused sums in the L/C can be added to the upcoming
shipments.
ii. Revolvement Based on Value: A fixed amount is replenished every time just after it
is utilized by the beneficiary within the overall validity of the revolving letter of
credit. Revolvement dependent upon value could be very risky for the issuing banks
as beneficiaries can make excessive presentations if issuing banks fail to specify
maximum letter of credit limit.

4. What is a Deferred Payment Letter of Credit?

Deferred credit is money that is received by a company but not immediately reported as
income because it has not yet been earned. Under the accrual accounting method, revenues can
only be recognized as earned when the product or service paid for by a customer has been
delivered and the proceeds can be matched with a related expense.

Deferred credit also known as deferred revenue, deferred income, or unearned income is
recorded on the balance sheet as a liability. Items that fall under this category include consulting
fees, subscription fees, and any other revenue stream that is intricately tied to future promises.

Deferred credit is used largely for bookkeeping purposes and as a means to even out, or
"smooth" financial records and give a more accurate picture of business activities. If, for
instance, all of a company’s membership or subscription fees just happened to come in during
the first quarter and all products were then shipped out in the second, the quarter-to-quarter
income statement would obviously be skewed.
 5. What is Standby Letter of Credit?

A standby letter of credit (SLOC) is a legal document that guarantees a bank's commitment of
payment to a seller in the event that the buyer–or the bank's client–defaults on the agreement. A
standby letter of credit helps facilitate international trade between companies that don't know
each other and have different laws and regulations. Although the buyer is certain to receive the
goods and the seller certain to receive payment, a SLOC doesn't guarantee the buyer will be
happy with the goods. A standby letter of credit can also be abbreviated SBLC.

There are two main types of standby letters of credit:

 A financial SLOC guarantees payment for goods or services as specified by an

agreement. An oil refining company, for example, might arrange for such a letter to
reassure a seller of crude oil that it can pay for a huge delivery of crude oil.
 The performance SLOC, which is less common, guarantees that the client will complete
the project outlined in a contract. The bank agrees to reimburse the third party in the
event that its client fails to complete the project.

6. What is a Revocable Letter of Credit?

Revocable Letter of Credit is a type of LC in which a letter can be altered or canceled by the
issuing bank without giving advance notice to the beneficiary. The bank can modify the terms of
the letter or terminate LC after its insurance at any time and for any reason. When the letter is
canceled or changed without the permission of the beneficiary this becomes disadvantageous for
the exporter. Unexpected termination of LC is unprofessional, unethical, and also causes
financial loss. Due to permission, fewer amendment conflicts may arise between the sellers and
buyers. Sudden changes in the contract may drag the importers and exporter in the legal court to
resolve the dispute.

Types of Revocable Letter of Credit

The revocable LC is divided into two subtypes;

1) Secured- In secured revocable LC the applicant gave some personal warranty or mortgage
security to get the letter of credit. In other words, applicant assets are used to secure the LC.
2) Unsecured- As the name suggests there is no security in the unsecured revocable letter of
credit. The bank checks at the applicant’s credit score or history to issue the letter of credit.
Whether the agreement is secured or unsecured, it is important to note that the bank always has
the power to revoke the revocable letter of credit.

7. What is an Irrevocable Letter of Credit?

An irrevocable letter of credit (ILOC) is an official correspondence from a bank that

guarantees payment for goods or services being purchased by the individual or entity, referred to
as the applicant, that requests the letter of credit from an issuing bank.

An irrevocable letter of credit cannot be canceled, nor in any way modified, except with the
explicit agreement of all parties involved: the buyer, the seller, and the issuing bank.

An ILOC is a means of facilitating a transaction between a buyer and seller with the assistance
of their respective banks. The buyer requests an ILOC from his bank, which is then sent to the
seller's bank. In addition to providing credit risk protection, an ILOC typically also specifies
important details of the transaction, such as price, payment terms, and time and place for delivery
of goods. In the event the buyer fails to make payment as agreed, the buyer's bank makes
payment to the seller's bank, which in turn renders payment to the seller, the beneficiary of the
ILOC.

ILOCs can also be either confirmed or unconfirmed. A confirmed ILOC offers additional risk
protection for the seller by providing a guarantee of payment from both the buyer's bank and the
seller's bank. With an unconfirmed ILOC, the seller's bank has no liability for payment and
essentially serves only as a go-between to transfer payment to the seller from the buyer's bank.