Familiarity with various concepts of letters of credit
Financing (long-term letter of credit)
In cases where the seller of the goods refuses to accept long-term letter of credit and the buyer is unable to open letter of credit due to lack of liquidity, the buyer usually asks a financial institution to enter into the transaction and money. Pay the transaction in cash to the seller.
This is usually a long-term facility. The contract for this type of credit, if there is an active credit line, is concluded between an Iranian and a foreign bank (lender) and under the supervision of the Central Bank. This is a long-term facility and the foreign bank up to ??? Allocates the amount of the firm to the applicant to pay for the opened documents. From the seller / beneficiary point of view, this type of credit is visual (cash).
Refinancing (short-term letter of credit)
The use of short-term interbank facilities (usually one year) is called refinancing. It is a kind of documentary credit opening in which the buyer / beneficiary receives the documents in cash from the broker bank at the time of the transaction according to the credit conditions and the buyer pays the documents according to the contract concluded with the bank at the time specified in the contract.
Granting facilities to foreign buyers or employers to purchase Iranian goods and services within the framework of a financing agreement is called buyer credit.
This type of facility is granted with the aim of providing the possibility of long-term sale of goods and services. The foreign buyer / employer tends to pay for the goods or services received on a long-term basis, while the Iranian contractor seller prefers to receive the money in cash. Here the bank can play a role as a financial intermediary. Pays the relevant amount to the Iranian seller / contractor in cash and receives it at the due date (s) from the foreign buyer / employer or his bank.
According to the Circular No. 1113/60 dated 31/6/1383 of the Central Bank, the use of short-term interbank credit lines for a maximum of one year to open documentary credits for the import of goods is called “refinancing”.
All importers of goods and services can open documentary credits using interbank credit lines.
The Iranian importer can buy the goods on a long-term basis and pay for the imported goods in installments. While the seller receives his goods in cash at the time of submission of shipping documents.