Straight Credit

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Straight Credit

A letter of credit is a kind of straight credit. Banks may only pay direct credit at their counters, or a nominated drawee bank may make the payment if authorized to do so.

A bank may only pay the recipient specified in the letter of credit (not to an intermediary or negotiating bank).A straight credit beneficiary must produce paperwork to the paying bank or specified drawee bank on or before the expiry date. The phrase “straight credit” refers to payments given directly to the recipient.

Breaking Down Straight Credit

Straight credit differs from negotiable credit in that payment is restricted to the beneficiary alone.

In a straight credit, the paying bank is frequently—but not always—the same bank that granted the letter of credit. The paying/issuing bank guarantees payment to the seller under the letter of credit as the buyer’s bank. This follows the seller producing paperwork proving that products were transported or services were provided in compliance with a contract. Thus, the letter of credit replaces the buyer’s creditworthiness with that of the bank.

Straight Credit and Other Types of Letters of Credit

The straight credit procedure is similar to that of a regular letter of credit. In both circumstances, the buyer and seller agree to do business, but the seller may request a letter of credit to ensure payment. The buyer requests a letter of credit from their bank, listing the seller as the beneficiary. Once the bank has verified the buyer’s creditworthiness, it will issue a letter of credit and forward it to a correspondent bank in the seller’s country. The communication will request that the bank notify or confirm the credit. The letter of credit is sent to the seller by the correspondent bank (and confirms it if the issuing bank has asked it to do so).

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The seller then sends the products in line with the conditions of the contract and creates the shipping documentation precisely as stated in the letter of credit. Because this is a direct credit, the seller provides the shipping documentation to the paying bank or another bank with payment authorisation. The paying bank will review the papers to see whether they are in complete compliance with the provisions of the letter of credit, and if so, will pay the beneficiary (seller).

The paperwork are subsequently sent to the issuing bank by the paying bank, who requests repayment. The issuing bank verifies the papers to ensure that they are fully compliant with the credit conditions, debits the buyer’s account, and reimburses the paying bank. It then sends the shipping paperwork to the buyer, who uses these to acquire the items, bringing the trade transaction to a close.

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