Straight credit is a form of a letter of credit. Banks may only pay straight credit at their counters directly, or a named drawee bank may make the payment if it has the authorization to do so.
A bank may only make payment to the beneficiary named in the letter of credit (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.
The term straight credit reflects that payment is made straight or directly to the beneficiary.
Breaking Down Straight Credit
Straight credit differs from negotiable credit in that it restricts payment to the beneficiary only.
The paying bank in a straight credit is often – but not always – also the bank that issued the letter of credit. As the buyer’s bank, the paying/issuing bank assures payment to the seller under the letter of credit. This follows the seller’s presenting 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.
Straight Credit and Other Types of Letters of Credit
The straight credit process works much like that for a standard letter of credit. In both cases the buyer and seller agree to transact business, but to guarantee payment, 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 bank verifies the buyer’s credit standing, the institution will issue a letter of credit and transmit it to a correspondent bank, located in the seller’s jurisdiction. The transmission will ask the 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 the letter of credit states. Since this is a straight credit, the seller presents the shipping documents to the paying bank or another bank, which has the authorization to make the 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.