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htm Letter Of Credit

A letter of credit is the most commonly used form of secure payment. o It is a document issued by a financial institution at the buyer's request and instructions. o It spells out the terms under which the seller will be paid. Pay the seller a certain amount when it produces documents according to the instructons. o It acts as an escrow account. A letter of credit is the preferred method of payment in trade with areas outside of Western Europe, Canada, and the United States. o Because it offers independent assurance to the both exporter and buyer. A letter of credit is a critical document, so it is imperative that the seller issue clear guidelines to the buyer on how to open a letter of credit.

Letter Of Credit Origin

Were initially introduced by the merchant banking system in Europe. Originally it was a letter addressed by the buyer's bank to the seller's bank stating they would guarantee payment the seller in case of the buyer's default.

Parties To A Letter Of Credit

Depeding on the circumstances, various names used in a letter of credit may refer to the same party.

The Applicant opens the letter of credit. o The buyer, or customer, is the Applicant. o Sometimes the Applicant is called the account party. The Opening Bank issues the letter of credit. o The Opening Bank's credit replaces the buyer's credit. The Advising Bank is an agent of the Opening Bank. o Verifies the authenticity of the Opening Bank. The Confirming Bank is usually the Advising Bank, but it confirms that the credit exists. o It can negotiate the documents, and can accept the letter of credit the Opening Bank will not pay. The Paying Bank is also called the drawing bank. o The Paying Bank may act also the Advising Bank, or the Confirming Bank, or the Opening Bank. The Beneficiary is often the seller. o It is party to whom the credit is issued.

Letter Of Credit Types

There are several types of letters of credit. o The differences are found in the wording. Revocable versus Irrevocable o You should always insist and carefully check that a letter of credit is irrevocable. Once an irrevocable letter of credit is open it cannot be changed without the written consent of all parties including the beneficiary. A revocable letter of credit can be change or withdrawn without notifying the beneficiary. Confirmed versus Advised o Confirmed is preferred, as the Confirming Bank promises to pay. o Advised does not guarantee the creditworthiness of the Opening Bank. Straight versus Negotiation o A negotiation letter of credit can be presented to any bank. o A straight letter of credit can only be paid in the country of the Paying Bank.

Sight versus Usance o At sight means the Beneficiary is paid as soon as the Paying Bank has determined that all necessary documents are in order. o Usance time can be between 30 and 180 days after the bill of lading date. This is a form of delayed payment, and should be avoided. Once you have sent a pro forma invoice or an order acknowledgement to your buyer, you should request a letter of credit. o Details on what such a request should contain are available from banks that handle letters of credit. Here is a list of items that you should ask your buyer to provide when preparing a letter of credit. o That the letter of credit be confirmed, irrevocable, and at sight. o Suggest a Paying Bank that is convenient to you. o Quantity of items being shipped. o Value of items being shipped. o Specify the currency. o Specify the latest shipping and expiration date. o Specify the appropriate Incoterm. o State whether partial shipments are allowed. o Specify which documents that are required for payment. It is best to provide the buyer with a sample form for requesting a letter of credit.

Requesting A Letter Of Credit

Once you have sent a pro forma invoice or an order acknowledgement to your buyer, you should request a letter of credit. o Details on what such a request should contain are available from banks that handle letters of credit. Here is a list of items that you should ask your buyer to provide when preparing a letter of credit. o That the letter of credit be confirmed, irrevocable, and at sight. o Suggest a Paying Bank that is convenient to you. o Quantity of items being shipped. o Value of items being shipped. o Specify the currency. o Specify the latest shipping and expiration date. o Specify the appropriate Incoterm. o State whether partial shipments are allowed.

Specify which documents that are required for payment.

It is best to provide the buyer with a sample form for requesting a letter of credit.

Receiving A Letter Of Credit

Here is a partial list of questions you need to ask once you have received a letter of credit. o Is the letter of credit irrevocable? o Is the letter of credit at sight? o Do you trust the Paying Bank? o Can you convert the currency to your currency? o Are the value and quantities correct? o Are the shipping terms correct? o Can you provide the required documents? o Are the letter of credit fees as you had agreed? o Is the merchandise correctly described? o Is there sufficient time to meet the shipping date and expiration date? o Are the shipping terms correct? o Specify which documents that are required for payment. Do not ship the goods if you are unable or unwilling to meet all the conditions stated in the letter of credit. o Request an amendment to the letter of credit.

Presenting A Letter Of Credit

Once a letter of credit has been received, it needs to presented to the bank for payment along with other documents which may include: o Commercial invoice o Consular invoice o Insurance documents o Bill of lading o Certificate of origin o Packing list o Inspection certificates o Import permits

The bank will not pay if there are discrepancies and the documentation is not in order.

Common Mistakes Made With Letters Of Credit

Exporters make the following common mistakes, which cause them to lose the sale or not get paid. o Presenting documents late, after the letter of credit has expired. o Shipping their goods after the specified date. o Making a partial shipment when partial shipment is not allowed. o Not presenting the proper documents. o Not legalizing the documents. o Not obtaining completed bills of lading. o Not obtaining required insurance. o Submitting copies instead of originals. o Spelling mistakes. o Mathematical mistakes. In addition to creating payment problems, mistakes can also cause problems for the importer when clearing customs.

Sample Form For Requesting A Letter Of Credit

dated

, please ask your bank to open an irrevocable, at sight, commercial letter of credit according to the following terms and conditions. Beneficiary Name

Beneficiary Address Requested Advising Bank Name Requested Advising Bank Address

Telephone Fax Swift In the amount of US$

The letter of credit must be payable at the

counters of

or it must be negotiable and payable at the counters of a bank in . The letter of credit must be in the possession of the Advising

Bank and received by us Shipment will occur

days before the agreed upon shipment date. days after an acceptable letter of credit is in the possession

of the Advising Bank. Shipment terms are: Incoterms 2000 are permitted. Latest shipment date is Documentary requirements are: 1. Signed commercial invoice 2. Packing list 3. 4.

Partial shipments

. Latest expiration date is

originals and copies

copies

originals and

Documents are to be presented within will be paid by the Applicant.

days from the shipping date. All bank charges

Here is a partial list of questions you need to ask once you have received a letter of credit. o Is the letter of credit irrevocable? o Is the letter of credit at sight? o Do you trust the Paying Bank? o Can you convert the currency to your currency? o Are the value and quantities correct? o Are the shipping terms correct? o Can you provide the required documents? o Are the letter of credit fees as you had agreed? o Is the merchandise correctly described? o Is there sufficient time to meet the shipping date and expiration date? o Are the shipping terms correct? o Specify which documents that are required for payment. Do not ship the goods if you are unable or unwilling to meet all the conditions stated in the letter of credit. o Request an amendment to the letter of credit.