Types of L/C (Irrevocable, Confirmed, Sight, Usance)

In international trade, the Letter of Credit (L/C) is not a rigid, one-size-fits-all instrument. Depending on the financial stability of the buyer, the credit rating of the issuing bank, the geopolitical risk of the importing country, and the working capital structure of the manufacturing factory, documentary credits are structured into distinct specialized types.

For a Commercial Manager, Export Executive, or Garment Merchandiser, selecting and negotiating the correct L/C type determines whether the factory enjoys guaranteed cash flow or gets trapped in months of unbudgeted financing costs and sovereign default risks.

Irrevocable Letter of Credit

An Irrevocable L/C constitutes a definite, legally binding undertaking of the issuing bank that cannot be amended, canceled, or modified without the explicit agreement of all three primary stakeholders: the Issuing Bank, the Confirming Bank (if any), and the Exporter (Beneficiary).

• Governing Rule under UCP 600 Article 3: All Letters of Credit are deemed irrevocable by default, even if the credit does not explicitly state the word "Irrevocable".
• Commercial Protection: If a foreign buyer faces retail store closures or inventory surplus, they cannot instruct their bank to cancel the credit. As long as the garment factory presents compliant shipping documents before expiry, the issuing bank is legally bound to pay.

Revocable Letter of Credit (Historical Concept)

Under older banking rules (UCP 500), a Revocable L/C could be amended or canceled by the issuing bank at any time without prior notice to the beneficiary. Revocable L/Cs have been completely abolished in modern international commerce under UCP 600 due to their lack of commercial security.

When Must a Garment Exporter Require Confirmation?

1. Sovereign Foreign Exchange Risk: When exporting to countries experiencing foreign currency shortages, debt crises, or strict exchange controls.
2. Low-Tier Issuing Bank: When the credit is issued by a private, non-rated bank with no international credit standing.
3. Large Order Volume: When an export order exceeds $500,000 USD and an unexpected payment delay would threaten factory operations.
4. Political Instability: When trade sanctions, civil unrest, or policy changes could freeze international SWIFT wire transfers.

Sight Letter of Credit

Under a Sight L/C (Field 42C: AT SIGHT), the nominated or issuing bank must make payment immediately upon receiving and validating compliant shipping documents within the maximum 5 banking days examination window under UCP 600 Article 14(b).

Usance / Deferred Payment Letter of Credit

Under a Usance L/C (Field 42C: 60 DAYS FROM B/L DATE), payment is deferred to a future maturity date. The drawee bank accepts the Bill of Exchange and issues a formal maturity acceptance advice. The factory receives funds only when the tenor expires.

UPAS (Usance Payable at Sight) — The Strategic Solution

UPAS is an innovative hybrid financing structure that bridges the gap between buyers needing working capital credit and garment factories needing immediate cash:

• How It Works: The L/C is issued with a 60, 90, or 120-day tenor for the buyer, but contains a special discounting clause in Field 47A authorizing the nominated bank to pay the exporter at sight upon document acceptance.
• Financing Source: The issuing bank or its offshore funding branch finances the credit at international benchmark rates (SOFR + margin).
• Who Pays Interest: In standard apparel negotiations, the buyer (applicant) pays the discounting interest. If the factory agrees to absorb interest, it must calculate the exact cost and build it into the garment CM price.

1. Back-to-Back (BTB) Letter of Credit

A Back-to-Back L/C is the bedrock of the Bangladesh apparel industry. When a factory receives a Master Export L/C from a foreign buyer, its local commercial bank uses that Master L/C as collateral to open subsidiary import and domestic L/Cs for yarn, fabric, sewing thread, buttons, zippers, and cartons.

• Self-Liquidating Nature: When export proceeds from the Master L/C are realized, the bank automatically settles the outstanding BTB L/C liabilities and credits the remaining margin (CM earnings) to the factory's account.
• Utilization Limits: Under Bangladesh Bank foreign exchange guidelines, bonded garment manufacturers can open BTB L/Cs up to a sanctioned value entitlement (typically 70% to 75% of the Master L/C FOB value).

2. Transferable Letter of Credit

Governed strictly by ICC UCP 600 Article 38, a Transferable L/C allows the First Beneficiary (typically an export trading house or sourcing agent) to transfer part or all of the credit rights to one or more Second Beneficiaries (actual manufacturing factories).

• Strict Limitations: Terms can only be modified for the unit price (to hide middleman profit), total credit amount, expiry date, shipment date, and presentation period.

3. Standby Letter of Credit (SBLC)

Governed by ISP98 or UCP 600, an SBLC is a financial guarantee used primarily in North America. Unlike standard commercial L/Cs that are designed to be drawn upon performance, an SBLC is a contingent backup safety net payable only if the buyer defaults under an open account contract.

4. Revolving Letter of Credit

A Revolving L/C automatically renews its monetary value or validity across multiple shipments without requiring the buyer to open a new L/C for each consignment. It is ideal for continuous basic programs (e.g., shipping 100,000 pcs of basic white t-shirts every month for a year).

5. Red Clause & Green Clause L/Cs

• Red Clause L/C: Authorizes the advising bank to provide an unsecured cash advance to the exporter prior to shipment to purchase raw materials.
• Green Clause L/C: An advanced version of Red Clause credit providing pre-shipment advances against warehouse receipts or storage collateral.

The Math Behind 90-Day Usance Discounting

Assume an export order for 50,000 pcs Cotton Polo Shirts at $4.50 USD / pc FOB.

• Total Export Value: 50,000 ×4.50 = $225,000.00$
• Contracted Tenor: 90 Days Usance
• Annual Financing Rate: 8.0% per annum (SOFR + Bank Spread)

Discounting Interest = Invoice Value × ≤ft( Annual Rate360 ) × Tenor Days Discounting Interest = $225,000 × ≤ft( 0.08 / 360 ) × 90 = $4,500.00 USD

Financial Impact Analysis:

1. Scenario 1: Pure Usance (Factory Absorbs Cost): Factory loses $4,500 USD from CM earnings ($0.09 per garment) and receives cash after 90 days.
2. Scenario 2: UPAS (Interest on Buyer): Factory receives $225,000.00 USD at sight. The issuing bank charges the $4,500 USD interest directly to the buyer's credit account at maturity.
3. Commercial Executive Takeaway: Never sign a 90-day Usance sales contract without specifying UPAS terms with interest on applicant account!

[ Step 01: Evaluate Foreign Buyer Profile & Country Risk Index ]
                              │
       ┌──────────────────────┴──────────────────────┐
       ▼                                             ▼
[ Prime Buyer & Stable Country ]              [ New Buyer / High-Risk Market ]
       │                                             │
       ▼                                             ▼
[ Require Irrevocable Sight L/C ]             [ Require Confirmed L/C (Field 49) ]
       │                                             │
       ├─────────────────────────────────────────────┘
       ▼
[ Step 02: Does Buyer Request 60 to 90 Days Deferred Payment? ]
       │
       ├──────────────► NO  ──► [ Finalize Sight L/C Terms ]
       ▼ YES
[ Propose UPAS L/C Structure in Sales Contract & PI ]
       │
       ▼
[ Step 03: Ensure Field 47A Specifies Discounting Interest on Applicant ]
       │
       ▼
[ Step 04: Pledging Master L/C to Open Back-to-Back (BTB) L/Cs for Mills ]
       │
       ▼
[ Step 05: Execute Production, Ship Cargo, and Present for Sight Realization ]

Case Study 1: Mitigating Sovereign Default via Confirmed L/C

• Factory: Meghna Knittex Ltd. (Narayanganj, Bangladesh)
• Buyer: Latin Fashion S.A. (South American Retailer)
• Order Value: $380,000 USD (Woven Cargo Pants)
• Challenge: The buyer's domestic economy was experiencing severe currency depreciation and central bank foreign exchange rationing.
• Commercial Strategy: Meghna Knittex refused an unconfirmed credit and required an Irrevocable Confirmed Sight L/C with confirmation added by Standard Chartered Bank PLC, London.
• Outcome: When the South American issuing bank suffered a central bank foreign currency freeze, Standard Chartered London honored their confirmation and paid Meghna Knittex 100% export proceeds upon presentation.

Case Study 2: UPAS Optimization for Winter Fleece Jackets

• Factory: Radiant Apparel Ltd. (Gazipur, Bangladesh)
• Buyer: Scandinavian Outerwear Brand
• Order Value: $620,000 USD
• Problem: The buyer demanded 90 days credit to align payment with retail winter jacket sales. Radiant Apparel could not survive a 90-day cash freeze during peak production season.
• Solution: The commercial team structured the contract as 90-Day UPAS, with Field 47A stating: "Discounting charges and acceptance commission are for the account of applicant. Beneficiary to be paid at sight upon document acceptance."
• Result: Radiant Apparel received $620,000 within 6 days of shipping, while the buyer enjoyed 90 days credit financing funded by their European issuing bank.

1. Treating Unconfirmed L/Cs from Weak Banks as Guaranteed Cash: Overlooking the risk of issuing bank bankruptcy.
2. Absorbing Usance Discounting Fees Unintentionally: Failing to clarify who pays the 60/90 day financing interest in Field 71B.
3. Confusing Advising with Confirming: Assuming your local advising bank will pay if the foreign issuing bank defaults.
4. Accepting Transferable Credits Without Pricing Safeguards: Letting raw material suppliers discover factory garment CM margins.
5. Over-Leveraging Back-to-Back L/C Entitlements: Opening BTB L/Cs exceeding actual fabric consumption requirements.
6. Overlooking Country FX Sanctions: Accepting credits in currencies restricted by international central bank sanctions.
7. Failing to Track Usance Acceptance Advices: Not monitoring the SWIFT MT752 or MT754 acceptance messages from the issuing bank.
8. Accepting SBLCs Without Verifying Expiry Mechanisms: Allowing automatic cancellation clauses without notice.
9. Permitting Revocable Formulations: Accepting credits governed by local non-UCP jurisdictions.
10. Failing to Factor Confirmation Fees into Costing: Forgetting to deduct confirmation expenses when factory pays.
11. Assuming All UPAS Credits Pay at Sight Automatically: Missing required discounting application paperwork at local bank.
12. Mixing FOB and CIF Terms in Back-to-Back L/Cs: Creating freight payment disputes with shipping lines.

1. Irrevocable Credit: A credit that cannot be modified or canceled without beneficiary agreement (UCP 600 default).
2. Confirmed Credit: A credit backed by a second independent bank guarantee against non-payment.
3. Sight L/C: A credit payable immediately upon receipt and validation of compliant documents (within 5 days).
4. Usance L/C: A credit payable at a fixed determinable future date after shipment or acceptance.
5. UPAS (Usance Payable at Sight): A credit offering deferred buyer terms while paying the factory at sight via discounting.
6. Back-to-Back L/C: A subsidiary raw material procurement credit secured by the Master Export L/C.
7. Transferable L/C: A credit that can be transferred in whole or part to secondary manufacturers (UCP 600 Art 38).
8. Standby L/C (SBLC): A secondary bank guarantee payable only in the event of applicant contractual default.
9. Red Clause L/C: A credit providing pre-shipment advance funding to purchase raw materials.
10. Revolving L/C: A credit that automatically reinstates value across multiple recurring consignments.
11. Confirming Bank: The financial institution adding its independent legal payment undertaking.
12. Drawee: The designated banking entity upon which the Bill of Exchange financial draft is drawn.

Q1: What is a UPAS L/C and how does it benefit a garment manufacturer?

Model Answer: UPAS stands for Usance Payable at Sight. It allows the foreign buyer 60 to 120 days deferred credit from their bank, but an interbank discounting arrangement pays the garment exporter 100% of the invoice value at sight upon presentation of compliant documents. It eliminates cash flow lockups for the factory while fulfilling buyer credit requirements.

Q2: When is it mandatory for an apparel exporter to request a Confirmed L/C?

Model Answer: An exporter must require a Confirmed L/C when: 1) The buyer's issuing bank has a low international credit rating; 2) The importing country faces sovereign debt or foreign exchange reserve shortages; 3) The order value is exceptionally high; or 4) The factory has no prior trading history with the buyer.

Q3: What is the primary difference between a Back-to-Back L/C and a Transferable L/C?

Model Answer: A Back-to-Back L/C involves two completely distinct credit instruments where the Master L/C acts as collateral to open separate supplier credits. A Transferable L/C is a single credit transferred to second beneficiaries under UCP 600 Article 38. BTB L/Cs keep garment pricing confidential, whereas Transferable L/Cs involve invoice substitution.

Q4: How is interest calculated on a 90-Day Usance Letter of Credit?

Model Answer: Interest is calculated as: Invoice Value × (Annual Rate / 360) × 90. On a $200,000 order at 8% annual rate, the interest equals $4,000 USD. Commercial executives must ensure this cost is either borne by the buyer in Field 47A or factored into the garment FOB price.

1. Can a bank refuse to pay on a Confirmed L/C if the buyer claims garment quality defects?

No. Under UCP 600 Article 4 (Independence of Credits), credits are separate transactions from the underlying sales contracts. The confirming bank deals strictly with documents, not goods. If the presented documents comply with L/C terms, the bank must pay regardless of buyer commercial claims.

2. Who determines the confirmation fee for an L/C?

The confirming bank sets the fee based on the credit rating of the issuing bank, the sovereign risk rating of the issuing country, and the validity duration of the credit.

3. What happens if the Master L/C expires before the Back-to-Back L/C is settled?

The factory's bank will be forced to settle the BTB L/C from the factory's general cash account or forced loan lines, creating severe working capital distress.

4. What is the difference between cumulative and non-cumulative Revolving L/Cs?

In a cumulative revolving credit, any unused amount from a previous period rolls over into the next period. In a non-cumulative credit, unused amounts expire and are forfeited.

Disclaimer: This lesson is designed for professional operational training in garment export management. Banking regulations, interest rate benchmarks (SOFR/EURIBOR), and Bangladesh Bank foreign exchange circulars are updated periodically; commercial executives must verify terms with authorized dealer banks.