Straight Credit

AAA

DEFINITION of 'Straight Credit'

A type of letter of credit. A straight credit can only be paid at the counters of the paying bank or a named drawee bank that has been authorized to make payment. Payment can only be made to the beneficiary named in the letter of credit, and not to an intermediary or negotiating bank. The beneficiary named in a straight credit must present documents at the paying bank or named drawee bank on or before the expiration date stipulated in the letter of credit. The term is derived from the fact that payment is made straight or directly to the beneficiary.

INVESTOPEDIA EXPLAINS 'Straight Credit'

A straight credit differs from a negotiable credit because payment in the latter can be made to a negotiating bank. A straight credit contains clauses such as “we engage with you” that all drafts drawn in compliance with the credit terms will be duly honored upon presentation, which basically highlight the restriction of payment to the beneficiary only.

The paying bank in a straight credit is often – but not always – also the bank that has issued the letter of credit. As the buyer’s bank, the paying/issuing bank assures payment to the seller under the letter of credit, once the seller presents documents that prove goods have been shipped or services supplied in accordance with a contract. The letter of credit thus substitutes the buyer’s credit worthiness with that of the bank.

The straight credit process works much like that for a standard letter of credit. The buyer and seller agree to transact business, but to guarantee payment by the buyer, the seller may require a letter of credit. The buyer applies to his or her bank for a letter of credit naming the seller as the beneficiary. Once the buyer’s credit standing has been verified, the bank will issue a letter of credit and transmit it to a correspondent bank located in the seller’s jurisdiction, asking this bank to advise or confirm the credit. The correspondent bank forwards the letter of credit to the seller (and confirms it if the issuing bank has asked it to do so).

The seller then ships the goods in accordance with the contract terms, and prepares the shipping documents exactly as stated in the letter of credit. Since this is a straight credit, the seller presents the shipping documents to the paying bank or other bank that has been authorized to make payment. The paying bank will check the documents to determine that they are fully in accordance with the terms of the letter of credit, and if they are, will pay the beneficiary (seller). The paying bank then transmits the documents to the issuing bank requesting reimbursement. The issuing bank examines the documents for full compliance with the credit terms, debits the buyer’s account and reimburses the paying bank. It then forwards the shipping documents to the buyer, who uses them to receive the goods, thus completing the trade transaction.

RELATED TERMS
  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Rotating Credit And Savings Association ...

    A group of individuals that fill the role of an informal financial ...
  3. Fictitious Credit

    An outstanding balance in a margin account that cannot be withdrawn ...
  4. Standby Line of Credit

    A sum of money, not to exceed a predetermined amount, that can ...
  5. Revocable Line Of Credit

    A source of credit provided to an individual or business by a ...
  6. Orphan Drug Credit

    A federal tax credit that provides an incentive for pharmaceutical ...
Related Articles
  1. Credit & Loans

    The Basics Of Lines Of Credit

    Lines of credit are potentially useful hybrids of credit cards and normal loans. Learn how a line of credit can help (and hurt) your finances, and how to find the best one to suit your needs. ...
  2. Credit & Loans

    How Your VantageScore Credit Report Is Calculated

    Deficiencies in the FICO credit report have led to the creation of a new credit scoring system - the Vantagescore. Find out what factors determine this credit score, and how the model can benefit ...
  3. Credit & Loans

    A Guide To Debt Settlement

    Find out how you can negotiate your way to a lower debt load by paying up front.
  4. Entrepreneurship

    Tax Credit For Plan Expenses Incurred By Small Businesses

    Determine whether your business is eligible to claim a tax credit for establishing a retirement plan.
  5. Savings

    Saver's Tax Credit: A Retirement Savings Incentive

    Here's another reason to put money toward your retirement nest egg.
  6. Taxes

    IRA Contributions: Deductions and Tax Credits

    We outline the incentives and help you take full advantage of the benefits.
  7. Credit & Loans

    The 5 Biggest Factors That Affect Your Credit

    Credit companies rely on these factors to determine whether to lend to you and at what rate.
  8. Retirement

    Personal Loans: To Lend Or Not To Lend?

    Attempting to help a loved one with a cash loan can put a strain on your relationship - and your bank account.
  9. Investing

    What's the difference between a bank guarantee and a letter of credit?

    A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce ...
  10. Savings

    What Canadian banks offer the best savings accounts?

    Learn about different savings accounts in Canada. Explore different interest rates and fees as well as accounts that are protected by the CDIC.

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center