Revolving Letter of Credit

A revolving letter of credit is a guaranteed payment arrangement with a bank that is used to facilitate repeat sales transactions in international trade. In instances where importers and exporters engage in repeat purchases of the same goods over the course of time, a revolving letter of credit establishes an open draw in favor of the exporter so the importer does not have to obtain a letter of credit for each individual transaction. 

 

The importer's bank, known as the issuing bank, guarantees payment for every order under the letter for a specified length of time, as long as the exporter provides the proof of shipping or other documentary evidence required. Single L/C covers multiple-shipments over a long period. Instead of arranging a new L/C for each separate shipment, the buyer establishes a L/C that revolves either in value or in time. L/Cs revolving in time are of two types: in the cumulative type, the sum unutilized in a period is carried over to be utilized in the next period; whereas in the non-cumulative type, it is not carried over.