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.
