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What is a Revolving Letter of Credit?

A Revolving Letter of Credit is used when importers and exporters sign a long-term sales contract that includes frequent shipments of the same product. Learn more about its uses in this blog.

Often, importers prefer purchasing products from the same exporter if they are satisfied with product quality, shipment and payments. In such cases, a Revolving Letter of Credit can be helpful to both the parties involved. This document provides exporters and importers more confidence in their commercial transactions, ensuring that payments are completed on time. This is usually used in international trade when importers and exporters sign a long-term sales contract that includes frequent shipment of the same product.

What is a Revolving LC?

A Revolving LC is a type of Letter of Credit between two trading parties set over a particular period of time – it is intended to cover shipments over an extended period. It is used for repeated shipments of the same product between the same purchaser (importer) and supplier (exporter). This Letter of Credit can only be used once within the specified timeframe or for a specific number of transactions as agreed upon by the parties. It eliminates the requirement for time-consuming procedures for each transaction¹.

How does a Revolving Letter of Credit work?

As mentioned earlier, a Revolving Letter of Credit is normally offered just once for a certain duration. This eliminates the need for exporters and importers to create a fresh document each time they want to complete a transaction. A Letter of Credit is an assurance from the importer’s bank that payment will be made after the exporter supplies products and shows documents as evidence.

A Revolving Letter of Credit is arranged in the same manner as a regular LC. The importer requests a Letter of Credit from the bank after a sales contract has been finalized. The main distinction between a Revolving Letter of Credit and a regular LC is that the bank is likely to ask the importer to have certain established business credentials and strong credit value².

Types of Revolving Letters of Credit

A Revolving LC can be divided into two categories – one based on time and the other based on value³:

Time-based Revolving Letter of Credit

Until the Letter of Credit expires, a fixed amount may be drawn against it during each window specified in the documentary credit. For instance, an importer can withdraw INR 120,000 from a Revolving Letter of Credit to cover a six-month term. A monthly payment of INR 20,000 might be provided to an exporter during that time. The Revolving LC, in this case, expires after six months. A time-based Revolving Letter of Credit can further be divided into:

Cumulative Revolving Letter of Credit

A Cumulative Revolving Letter of Credit allows the remaining balance to be used for future shipments. If the exporter in the example does not ship any products in the second month, goods worth INR 40,000 (combined for 2 months) can be shipped in the third month. This kind of arrangement gives the exporter some degree of freedom.

Non-cumulative Revolving Letter of Credit

With a Non-cumulative Revolving LC, the recipient can spend all of the revolving funds in one period and leftover funds cannot be used later. So, if the exporter in the example does not ship any products in the second month, only INR 20,000 worth of goods may be delivered in each of the following months.

Value-based Revolving Letter of Credit

Within the total validity of the Revolving Letter of Credit, a specific amount is replenished each time soon after it is used by the recipient. For instance, a Revolving LC is granted INR 120,000 over six months for products costing INR 20,000 each month. Each month, the exporter is limited to shipping and collecting payment for only INR 20,000 worth of products.

Advantages of Revolving Letters of Credit

Some of the advantages of Revolving Letter of Credit are:

• This Letter of Credit does not need to be renewed for each transaction during the particular period as discussed by the parties.
• It facilitates frequent trade between an exporter and an importer.
• It helps create trust between exporters and importers.
• It encourages exporters to produce a consistent number of products particularly for non-cumulative and value-based letters.
• It enables flexibility in terms of types of agreements that exporters and importers might participate in.

A Revolving Letter of Credit helps reduce transactional risks while also developing confidence with your trader. However, it is critical to assess the constraints of obtaining a Letter of Credit. With e-commerce exports, reaching international customers and receiving payments has become easier and simpler. Amazon Global Selling – an e-commerce exports program – not just enables you to sell across 200+ countries and territories but also helps you receive payments directly to your bank in INR or other currency of your choice.

Amazon Global Selling: Easy e-commerce exports

With the growing demand for Indian products in international marketplaces, exporters and Indian sellers are keen to expand their businesses to the world. Amazon Global Selling is an e-commerce exports program that enables exporters and MSMEs to start and grow their export business in 200+ countries and territories. The exporter can register with Amazon Global Selling in four simple steps to export from India and reach millions of customers shopping on 18+ Amazon international marketplaces.

More blogs on Letter of Credit

1. Letter of Credit at Sight: Meaning, process and its benefits

2. What is a Transferable Letter of Credit?

3. Irrevocable Letter of Credit: Meaning, process and benefits

4. Green Clause Letter of Credit: Definition, example and features

5. Documentary Letter of Credit: Overview and working

6. Revocable Letter of Credit: Everything you need to know about its uses

7. Red Clause Letter of Credit: Meaning, example and types

8. Standby Letter of Credit (SBLC): Overview, process and types

9. Usance Letter of Credit: Overview, meaning and process

10. Letter of Credit: Overview, meaning and process

11. Back to Back Letter of Credit: Overview, meaning and process

Frequently Asked Questions

When should a Revolving Letter of Credit be used?

When importing or exporting, you can consider using a Revolving Letter of Credit to reduce risk. It is used for repeated shipments of the same product between the same purchaser (importer) and supplier (exporter).

Who issues a Revolving LC?

The importer’s bank issues a Revolving Letter of Credit.

Published on October 31, 2022.

Sources:
1. https://www.fe.training/free-resources/credit/letters-of-credit/
2. https://www.sofi.com/learn/content/what-is-a-revolving-letter-of-credit/
3. https://www.letterofcredit.biz/index.php/2018/11/07/revolving-letter-of-credit/
4. https://efinancemanagement.com/sources-of-finance/revolving-letter-of-credit

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