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.
BREAKING DOWN '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.