Demystifying Revolving LC


 Here's a simple explanation of Revolving LCs, using a refillable gift card analogy:

Imagine a Letter of Credit (LC) is like a refillable gift card from your favorite store:

  • The buyer (like a friend) buys the gift card for you (the beneficiary).
  • The store (like the issuing bank) promises to let you use the gift card to buy things up to a certain amount.

Revolving LC:

  • Like a gift card that automatically refills: Once you've used up the initial amount, it automatically refills to its original value, so you can keep using it.
  • Rules:
    • The buyer and seller agree on how often it refills (e.g., monthly, quarterly).
    • There's usually a maximum total value it can reach over time.

Here's how it works in trade:

  • Buyer and seller: Agree to use a revolving LC for repeated shipments of goods over a period.
  • Issuing bank: Opens the LC with an initial value and a revolving clause.
  • Beneficiary: Ships goods and presents documents to the bank to get paid.
  • Bank: Verifies documents and pays the beneficiary, then "refills" the LC to its original value.
  • Process repeats: The beneficiary can make multiple shipments and get paid, as long as the LC is active.

Benefits:

  • Convenience: Avoids reapplying for LCs for each shipment, saving time and paperwork.
  • Flexibility: Ensures payment for ongoing trade relationships with frequent transactions.
  • Predictability: Provides a reliable payment mechanism for both buyer and seller.

Common use cases:

  • Regular purchases of raw materials or components for manufacturing.
  • Shipments of agricultural products or commodities on a seasonal basis.
  • Ongoing supply of goods under long-term contracts.

Remember:

  • Revolving LCs requires careful management to track usage and avoid exceeding limits.
  • Clear communication and documentation are essential to ensure smooth operation.
  • Work with experienced banks to effectively manage revolving LC transactions.

Don't hesitate to reach out for your Trade Finance needs.

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