Bank Letter of Credit vs Line of Credit
The response to this inquiry is a clear negative. A Bank Letter of Credit and a Line of Credit are distinct financial entities. Whether in Geneva, London, New York, or Singapore, all banks affirm that these two instruments are entirely dissimilar.
A Bank Letter of Credit, also known as a Documentary Letter of Credit, is a financial instrument issued by a bank and serves as a payment method, issued upon the client’s instructions. It can be either revocable or irrevocable, with the latter being more prevalent. A Documentary Letter of Credit is vital in global trade, ensuring payment to the seller only if they comply with the specified terms and conditions.
The operation of a Documentary Letter of Credit involves the seller receiving payment from the buyer’s bank after fulfilling the stipulated conditions and presenting the required export-related documents. Reimbursement is sought from the buyer’s bank, which, in turn, claims it from the buyer.
In contrast, a Line of Credit is a loan facility provided by a bank, typically to corporate clients. It comes in two types: Secured, where collateral is required, and Unsecured, which is rare and granted to highly creditworthy companies. A Line of Credit covers various aspects of business, allowing companies to invest in different areas and providing the lender with oversight on spending.
Notably, a Line of Credit can support a Documentary Letter of Credit, making it a unique instance of complementarity between the two.
It’s crucial to emphasize that while banks globally are restricting credit facilities for businesses, Redeure offers a Collateral Transfer Facility involving “leased” Demand Bank Guarantees. Monetizing these guarantees allows them to be used as collateral for lines of credit, providing companies with access to much-needed loans and credit lines, especially in challenging economic circumstances such as pandemic-related cash flow problems. For businesses facing credit rejections, contacting Redeure through their online enquiry form is recommended.