Legal Definitions - RL/C

A Revolving Letter of Credit (RL/C) is a financial instrument issued by a bank that guarantees payment to a seller (beneficiary) on behalf of a buyer (applicant), similar to a standard letter of credit. However, unlike a one-time letter of credit, an RL/C automatically replenishes or renews itself after each drawing or after a specified period, up to a predetermined maximum amount and over a defined timeframe. This makes it particularly useful for ongoing trade relationships involving multiple shipments or transactions, as it eliminates the need to apply for a new letter of credit for each individual payment or shipment.

• Example 1: International Raw Material Supply

  A US-based electronics manufacturer, "Circuit Innovations," regularly imports specialized microchips from a supplier in South Korea, "K-Tech Components." They have an agreement for monthly shipments over the next year, with each shipment valued at approximately $750,000.

  Instead of opening a new $750,000 letter of credit every month, Circuit Innovations arranges for a $750,000 revolving letter of credit with their bank. Each time K-Tech Components ships a batch of microchips and presents the required documents, Circuit Innovations' bank pays them $750,000. Once paid, the RL/C automatically replenishes to its original $750,000 limit, ready for the next month's shipment. This streamlines the payment process for both parties over their year-long contract, avoiding repeated administrative work for each transaction.

• Example 2: Seasonal Retail Sourcing

  "TrendSetter Apparel," a large clothing retail chain, sources various seasonal collections from a manufacturer in Vietnam, "Saigon Textiles," throughout the year. They anticipate placing several orders, each up to $1.5 million, for spring, summer, fall, and winter collections.

  TrendSetter Apparel establishes a $1.5 million revolving letter of credit with their bank in favor of Saigon Textiles. When Saigon Textiles ships the spring collection, they draw $1.5 million against the RL/C. The RL/C then resets to $1.5 million, allowing TrendSetter Apparel to place and pay for the summer collection, and subsequent collections, without needing to open a new letter of credit for each season's order. This facilitates their continuous purchasing relationship and ensures the manufacturer has payment assurance for multiple deliveries.

• Example 3: Long-Term Construction Project Payments

  "UrbanBuild Contractors" hires "Precision Steel Fabricators" to supply custom steel beams for a large commercial building project. The project spans 24 months, and payments to Precision Steel are scheduled quarterly based on progress milestones, with each payment expected to be around $1 million.

  UrbanBuild Contractors' bank issues a $1 million revolving letter of credit to Precision Steel Fabricators. As Precision Steel Fabricators completes each quarterly milestone and provides the agreed-upon documentation, they can draw $1 million from the RL/C. After each drawing, the RL/C's available balance automatically restores to $1 million, ensuring that funds are available for subsequent milestone payments throughout the 24-month project without the need for UrbanBuild to arrange new payment guarantees repeatedly.