Home › Forums › Letters of Credit

About Revolving L/C

3 replies [Last post]
Mon, 11/16/2009 - 18:49
javeda
Offline
Joined: 05/20/2009
Posts:
Printer-friendly versionSend to friendPDF version

Dear Friends !

 We have an overseas buyer in Iran who imports our products. Opening L/C takes a lot of time before every shipment because we export to Iran on regular basis. Isn't revolving L/C going to help overcome this repeated hassle ? But then the question is :

 1. What is the risk in opening revolving L/C if there is any as compared to normal L/C ?

2. Is it going to be too costly as compared to normal L/C?

3.Can we mention a fixed amount in the L/C which is renewed automatically every time upon receiving the payment from the buyer? 

I will appreciate your advice. Thank you in advance.

 Best Regards

Javed Ali 

‹ Dispute B/W Negotiating and Issuing Bank Late presentation ... ›
Top
Tue, 11/17/2009 - 05:51
#1
Abrar
Offline
Joined: 03/12/2009
Posts:
Revolving LC

1. As an exporter, there is no risk on your part, and certainly more advantageous.

 2. Costs should not be an issue for you unless you are requesting a confirmed LC. However, it is unlikely that you will be able to obtain a confirmed LC, as most Iranian banks wil not issue a confirmed LC, and you may need  to seek a "silent" confirmation from a bank in your own country. Each issuing bank is likely to have set procedures, but it may well be that the applicant could be charged issuance costs for the full life of the LC, and this likely to be higher than for a short-term LC.

3.  A revolving LC can revolve in amount, i,e X amount revolving Y times, or it  can revolve in time, i.e X amount valid to Y date, revolving Z times.

Revolution can be on a cumulative or non-cumulative basis. If on a cumulative basis, any undrawn amount is available again at the next revolution/reistatement. If on a non-cumulative basis, any undrawn amount is lost and not available at next revolution. 

You have not stated the currency of the transaction, nor which national jurisdiction your company falls under, but under the current sanction regime, the main hurdle you may face is the payment of proceeds out of Iran, especially in USD. If under U.S jurisdiction, O.F.A.C regulations (with the exception to narrow band of goods) will prevent you from exporting to Iran. Generally, the U.N Security Council Resolution is likely to apply to most other countries, and this details extent of embargo relating to export products to Iran.  

Top
Tue, 11/17/2009 - 09:31
#2
Abrar
Offline
Joined: 03/12/2009
Posts:
Banking Lines

Just to follow on from LC Sam's points, banking lines in the present financial climate has dwindled and a revolving LC off-balance sheet exposure for any longer than 6 months to 1 year indirectly ties up the bank's capital, which they might wish to utilise elsewhere. They are likely to wish to review the lines on a short term basis, with the option to exit if required.

Top
Tue, 11/17/2009 - 09:08
#3
LC Sam
Offline
Joined: 08/09/2007
Posts:
Revolving LC

Hi Javeda,

Before I start, I have to reiterate Abrar's comments.  As Iran is subject to various sanctions, especially out of the US, make sure that you are following your local laws.

Now with that said, I wanted to add one issue for all revolving letters of credit that the importer deals with.

For all revolving letters of credit (cumulative and non-cumulative), the importer will have to cover the entire liability of the transaction up front.

For example, if the letter of credit is for EUR10,000 and it revolves 3 times, the total liability of the importer at the time of issuance is EUR40,000.  So at the time of issuance, the importer will have to secure with the issuing bank (either by cash or a credit line) the total of EUR40,000 even though any given liability at any time is no more than EUR10,000. 

This makes it more difficult for the importer, and they may not be able to do this.  So in order to ensure that a beneficiary still makes a sale, you could also consider having one letter of credit issued for a longer period of time and then amend the letter of credit after each shipment to increase the amount of the letter of credit.

I hope this helps give a better understanding of the revolving letter of credit process.

Best regards,

LC Sam.

Top