GTRMS Blog
GTRMS Blog
How Does One Use Revolving Letters of Credit?
I think I know how revolving letters of credit work but would like an idea of the pitfalls and good practices, successes and failures, etc.
BW
BW,
A revolving L/C is used when a buyer is interested in purchasing pretty much the same quantity of the same goods from a given supplier on a regularly repeating basis over a defined time frame, e.g., 10,000 tons of scrap steel every month for a year. The L/C will state the price to be paid in each shipping period (month, in this example). A revolving L/C should only be used when the underlying contract works the same way. The contract, and therefore the L/C, is for the full value of all potential shipments.
A letter of credit may revolve on a cumulative or non-cumulative basis. If it states that it revolves on a cumulative basis, it means that any goods not shipped in one shipment period may be shipped in a later period instead. Allow me to point out that such an L/C thereby permits the seller to wait and ship the full amount of the contract in the final shipping period if they choose to. This is hardly ever what the buyer wants, so it is to be expected that a revolving L/C will be non-cumulative. This forces the supplier to limit the amount shipped in each and every shipping period to the revolving amount or less. Whether the goods are shipped or not, the L/C reduces by the amount of the revolution at the end of the shipping period. As opposed to an L/C that has an installment schedule, there is no requirement under a revolving L/C that any goods be shipped at all in a given shipping period in order for the L/C to continue to be valid for the next shipping period. The buyer has to have a "take-it-or-leave-it" attitude as regards whether the seller ships anything.
Personally, as a banker, I don't recall ever working with a customer where it seemed that it was appropriate to use a revolving L/C. On the other hand, I have often helped importers put together L/Cs that contained schedules for installment shipments. Such L/Cs are very clear as regards the amount they are for and how much is to be shipped when (though care must be taken to explain what is desired if the L/C allows for partial shipments within installments). If the seller fails to ship an installment, the L/C ceases to be available for any further shipments. This is most often what buyers actually want.
April 16, 2011