Fully Funded Documentary Letter of Credit (FFDLC) Overview

What Is an FFDLC?

An FFDLC is a documented letter of credit that serves as a written promise of payment provided by a buyer to a seller. It holds the buyer’s funds in a separate account, similar to escrow, until the terms of the agreement are fulfilled.

Understanding FFDLCs

Letters of credit are commonly used in commercial, international transactions to manage risks and obtain support through borrowed funds. They are documented by a bank acting as a third party in the transaction.

Sellers may have requirements for the financial institutions that issue the letters of credit. These letters serve as legal documents that can be contested if payment is not made according to the specified terms.

Letters of credit can be funded or unfunded.

An FFDLC is a fully funded letter of credit. The necessary funds are held in a separate account, acting as escrow. Buyers may deposit their own funds and obtain funding from a financial institution. Interest is usually paid on the borrowed funds once they are placed in the account.

FFDLC transactions often involve third parties who help facilitate the process and assist sellers in receiving payment.

Operational procedures, such as at sight provisions, may be included in the documentary collection of FFDLCs.

Overall, an FFDLC provides assurance to the seller that the buyer has the necessary funds, minimizing the risk of payment without shipment.

FFDLCs include comprehensive provisions, such as proof of shipment, bill of lading requirements, and conditions for reverting funds to the buyer.

Funded vs. Unfunded

Letters of credit can be funded or unfunded. A funded letter of credit sets aside cash in a separate account for payment. An unfunded letter of credit relies on the backing bank’s promise to pay, depending on the buyer’s available funds. Interest on borrowed funds for unfunded letters of credit begins upon transfer.

Key Takeaways

• FFDLCs provide assurance through funds held in escrow.
• They allow businesses to move funds to an escrow account for final payment.
• Letters of credit can be funded or unfunded.

Types of Letters of Credit

There are numerous types of letters of credit that can be funded or unfunded, including commercial/documentary, standby, secured, revocable, irrevocable, revolving, red clause, and green clause.

Financial Accounting for Letters of Credit

Companies need to consider accounting for letters of credit, which depends on whether they are funded or unfunded. Funded letters of credit may incur fees or interest. They may be reported as liabilities on the balance sheet if funds are transferred and accumulate interest. Unfunded letters of credit are not reported as liabilities until utilized for borrowed funds.

Funded and unfunded letters of credit are generally associated with a credit line, with large institutions having designated accounts for their letter of credit needs.