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Revolving Letters of Credit
(See Installment Letters of Credit). There are some similarities but some major differences between installment and revolving credits. The difference can represent significant risks for all parties involved, and in particular for the seller. For example, with an installment credit, should the beneficiary miss one of the installments, the credit is no longer available/valid for future payment against future installments/shipments.
The applicant and beneficiary may wish to have a Letter of Credit structured to satisfy a long-term contract requiring the constant supply of merchandise over a specific time period. This can be accomplished with a revolving Letter of Credit. A revolving L/C contains instructions which allow the beneficiary to draw for specified amounts over specified periods. The revolving credit:
- Uses the same letter of credit to cover numerous scheduled shipments over a long period without the necessity of issuing new credits or amending the existing credit,
- Restricts the amount available for each shipment, and
- Controls the frequency of shipments and amounts available.
Revolving credits are either "cumulative" or "non-cumulative." These classifications control the amounts available for drawing. For example, a credit might permit shipments up to $10,000 monthly for a twelve-month period. Depending on which classification is indicated, this would mean one of the following: Cumulative. If one monthly shipment is less than $10,000, the shortfall may be added to a subsequent month. For example, if this month the beneficiary ships only $8,000, next month the shipment could be $12, 000. Non-Cumulative. Any portion not used in one month cannot be added to the next. So, if the shipment this month is $8,000, the beneficiary still cannot ship more than $10,000 next month.
Edited by Michael Zininberg & Michael Dennis. Mr. Zininberg is a credit professional with experience monitoring, managing and collecting from both customers worldwide. He can be reached by email at mzininberg@gmail.com