Letters of credit

This chapter examines the first three modes of payment briefly to assess their relative strengths and weaknesses before focusing on letters of credit the most frequently used mode of payment. Three modes of payment are: open account, bill of exchange and documentary bill. A bill of exchange offers the seller the opportunity to realise cash, and the buyer obtains credit under a time bill. Letters of credit are better alternatives to a documentary bill. A near global unification, however, has been achieved through the efforts of the International Chamber of Commerce, which is responsible for the Uniform Customs and Practice of Documentary Credits. In a confirmed credit, other than the four contractual undertakings listed under irrevocable credits, there is a fifth contractual undertaking – that is, between confirming banks and seller. Red clause credits first came to be used in the wool trade in New Zealand, Australia and South Africa.