Text 3 Revolving Credits

A revolving credit is a credit which provides for the amount of the credit to be renewed or reinstated, without the need to renew the letter of credit itself. A revolving credit can be revocable or irrevocable, it may revolve with respect to either:

(a) time, or

(b) amount (in total value of credit).

Where a credit revolves in relation to time, the amount of the credit might be, say, £20,000 per month for the duration of the credit. At the end of each month, the amount of the credit available is renewed to £20,000 etc regardless of whether the credit was used or not in the previous month.

A revolving credit of this type might be cumulative or non-cumulative. A cumulative revolving credit (which is not so common) allows any unused credit of a previous month to be carried forward to the next month. A non-cumulative revolving credit, on the other hand, provides for a maximum amount of credit each month.

For example, if an applicant asks for a revolving credit of £10,000 per month for six months, and the beneficiary uses only £8,000 of the credit in month 1;

(a) if the credit is cumulative, the amount of credit made available in month 2 would be £12,000, which is the monthly £10,000 plus £2,000 (ie. the under-utilisation in month 1);

(b) if the credit is non-cumulative, the amount of credit made available in month 2 would be £10,000.

In contrast to a reinstatement letter of credit, when a bank issues a revolving letter of credit, it (and its customer) takes on a liability for the full amount. For example, a cumulative revolving credit of £10,000 per month for 12 months will mean that the bank is taking on a liability of up to £120,000. In contrast, a reinstatement letter of credit puts a limit on the maximum liability of the bank and its customer.

It is usual to have revolving credits to revolve so that they are available for a certain amount in a specific month - ie to be non-cumulative and also irrevocable. (It is extremely rare to see a revocable letter of credit, revolving or otherwise.)

It is worth noting that a credit which provides for partial shipment of a single order by instalments, with specific quantities of goods to be shipped at regular intervals, is not a revolving credit, but a credit available by instalments.

Text 4 Documentary Credits as a Means of Finance

Documentary credits are useful in international trade, not only because they are a secure method of payment for exporters, but also because they can be arranged in such a way as to provide short-term finance for either:

(a) exporters; or

(b) importers;

through the use of term bills or pre-shipment finance. Letters of credit can be arranged in such a way as to enable the exporter to give his foreign buyer a period of credit, whilst at the same time receiving payment himself when he presents the documents in accordance with the terms of the credit.

Acceptance credits' is a term which might be used to describe documentary credits where the beneficiary draws term bills on the issuing bank or a named bank (eg. the advising bank). The bank then accepts the bills, and, as described earlier, returns them to the beneficiary who may then discount them to obtain immediate payment.

(Note: a rather different definition of acceptance credits, and one more usually understood by the term, was explained in chapter 8 as 'accommodation finance'. The term 'documentary acceptance credits' may therefore be used to distinguish this type of short-term financing.)

We have also seen, however, that the negotiation of bills also provides the exporter with immediate funds. Since the exporter does not have to settle with the issuing bank until a later date, the finance given to the exporter is also finance (credit) to the buyer, because the banks bridge the 'time gap' between payment to the exporter and payment by the buyer.