The LC is continuously replenished as it is taken by the beneficiary. It is generally used when exporters and importers have supply arrangements under which the exporters establish regular shipments and in response to which the importers must pay regularly. The revolving LCs impose a limit for each withdrawal done by the beneficiary. The two revolving LCs include non-cumulative (undrawn cash doesn’t roll over) and cumulative (undrawn cash moves to the next period).
A revolving letter of credit a unique because it is structured to revolve in time, covering multiple shipments for a long duration under a single LC or in value. When the revolvement is based on value, a fixed sum is replenished each time after it gets used by the beneficiary within the validity period. When it is based on time, a fixed amount can be withdrawn under LC within a specific time frame, as denoted in the documentary, until the credit expires. In a non-cumulative revolving LC, the beneficiary can withdraw the amount in any time frame, and the unused cash cannot be drawn subsequently. But in a cumulative revolving LC, the unused amounts can be carried over to the next shipment. Depending on the value, it becomes risky for issuing banks as even beneficiaries can make excessive presentations when the issuing bank fails to provide a maximum LC limit.