In practice, the foreign buyer makes application to his local bank, giving complete details of the purchase transaction, and deposits sufficient collateral to cover the purchase or satisfies the bank that he is a good credit risk for the amount involved. The issuing foreign bank informs the American bank by wire or air mail that a letter of credit has been issued, giving all important details, and the notifying American bank makes the letter of credit information known to the exporter. There are multitudes of exceptions to this over-simplified version of the procedure, but this is the usual method. Please note that the wire, cable or bank letterhead advice that a letter of credit has been opened is not the actual letter of credit instrument, but merely a communication confirming that a letter of credit has been opened and will be forthcoming. Here is a brief description of the types used.
All credits are revocable unless specifically stated otherwise.
The term means that the credit is not a legally binding undertaking and can be changed or withdrawn at any time without the consent or knowledge of the beneficiary, inasmuch as it offers no guarantee of payment. Where seller needs no guarantee other than the buyer's reputation, a letter of credit serves no purpose unless it is used merely as a convenient means of exchanging documents and payment. Under this type of credit the buyer's bank has made an irrevocable commitment to pay the seller, on his proof of compliance with the stipulated conditions of the letter of credit, and this can not be altered by the bank without permission of the exporter. The buyer has-no obligation to accept amendments to the credit. This term means that the credit is not only backed up by the issuing foreign bank, but that payment is also guaranteed by the notifying American bank.