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.

RELATED TERMS
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a ...
  2. Confirmed Letter Of Credit

    A second guarantee, in addition to a letter of credit, that commits ...
  3. Sight Letter Of Credit

    A letter of credit that is payable once it is presented along ...
  4. Transferable Letter Of Credit

    A letter of credit that permits the beneficiary of the letter ...
  5. Red Clause Letter Of Credit

    A specific type of letter of credit in which a buyer extends ...
  6. Assignment Of Proceeds

    A document transferring all or part of the proceeds from a letter ...
Related Articles
  1. Small Business

    Letter of Credit

    A letter of credit is a document from a bank promising to pay the holder a certain amount if the holder fulfills certain obligations. Sellers in commercial transactions often require buyers to ...
  2. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  3. Personal Finance

    Take the Right Steps to Build Excellent Credit

    There are several things you can do to protect and improve your credit score.
  4. Investing

    What's Trade Finance?

    Essentially, trade finance makes it possible and easy for exporters and importers to trade, and its expansion has accommodated a massive international trade growth.
  5. Investing

    Revolving Credit vs. Line of Credit

    Revolving credit and a line of credit are arrangements made between a lending institution and a business or individual.
  6. Personal Finance

    Credit Repair: How to Improve Your Credit Score

    There is no quick fix for a bad credit score but there are several strategies you can take to improve your credit rating and save money over the long term.
  7. Personal Finance

    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. ...
  8. Personal Finance

    Is Your Credit Score at 850? It Can Be!

    Use these tips to increase your credit score and your ability to get low interest rates on loans.
  9. Personal Finance

    How Your Credit Score Compares to the Average American's

    While only a small percentage of Americans have terrible credit scores, a whopping 30% have poor or bad credit, according to the Consumer Financial Protection Bureau.
  10. Investing

    Millennials: Prevent a Bad Credit Score

    Here are five ways to help prevent getting a bad credit score that could affect future loan, credit card or mortgage approvals.
RELATED FAQS
  1. When do I need a letter of credit?

    Learn more about the function of a letter of credit for both the buyer and the seller, and get some examples showing when ... Read Answer >>
  2. What is a bank's legal liability when issuing a letter of credit?

    Learn the responsibility of banks that issue letters of credit Letters of credits ensure payment on transactions between ... Read Answer >>
  3. When is it necessary to get a letter of credit?

    Capitalize on assets and negate risks by using a letter of credit. Letters of credit are often requested for buying, selling ... Read Answer >>
  4. What are the different types of letters of credit?

    Learn more about the different types of letters of credit that are used to facilitate exchanges between parties that might ... Read Answer >>
  5. When are you legally required to get a letter of credit?

    Learn how exporters or importers who deal in international trade use letters of credit to ensure that transactions are safe, ... Read Answer >>
  6. 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 ... Read Answer >>
Trading Center