What is a Letter of
Credit?A
Letter of Credit is a payment term generally used for international
sales transactions. It is basically a mechanism, which allows
importers/buyers to offer secure terms of payment to
exporters/sellers in which a bank (or more than one bank) gets
involved. The technical term for Letter of credit is 'Documentary
Credit'. At the very outset one must understand is that Letters of
credit deal in documents, not goods. The idea in an international
trade transaction is to shift the risk. Thus a LC (as it is commonly
referred to) is a payment undertaking given by a bank to the seller
and is issued on behalf of the applicant i.e. the buyer.
The Buyer is the
Applicant and the Seller is the Beneficiary. The Bank that issues
the LC is referred to as the Issuing Bank which is generally in the
country of the Buyer. The Bank that Advises the LC to the Seller is
called the Advising Bank which is generally in the country of the
Seller.
The specified bank
makes the payment upon the successful presentation of the required
documents by the seller within the specified time frame. Note that
the Bank scrutinizes the 'documents' and not the 'goods' for making
payment. The process works both in favor of both the buyer and the
seller.
The Seller gets
assured that if documents are presented on time and in the way that
they have been requested on the LC, the payment will be made and
Buyer on the other hand is assured that the bank will thoroughly
examine these presented documents and ensure that they meet the
terms and conditions stipulated in the LC.
Typically the
documents requested in a Letter of Credit are the following:
-
Commercial invoice
-
Transport document such as a Bill of lading or Airway bill,
-
Insurance document;
-
Inspection Certificate
-
Certificate of Origin
The LC could be 'irrevocable' or 'revocable'. An irrevocable LC
cannot be changed unless both the buyer and seller agree. Whereas in
a revocable LC changes to the LC can be made without the consent of
the beneficiary. A 'sight' LC means that payment is made immediately
to the beneficiary/seller/exporter upon presentation of the correct
documents in the required time frame. A 'time' or 'date' LC will
specify when payment will be made at a future date and upon
presentation of the required documents.
INCOTERMS
Shipping terms
set the parameters for international shipments, specify points of
origin and destination, outline conditions under which title is
transferred from seller to buyer, and determine which party is
responsible for shipping costs. They also indicate which party
assumes the cost if merchandise is lost or damaged during transit.
To provide a common terminology for international shipping,
INCOTERMS (International Commercial Terms) have been developed under
the auspices of the International Chamber of Commerce. See their
website at
www.iccwbo.org
for the latest Incoterms2000.
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More
related information about Export Financing, LC
Information about types of letters of
credit
SITPRO's Letter of Credit Checklists
and Guide are designed to minimize unnecessary costs and
risk when trading on a letter of credit basis and are
aligned with the 1993 revision of the ICC Uniform
Customs and Practice for Documentary Credits (UCP500).
There are three checklists, which are all available in
web page and pdf versions: Exporters Importers Export
Sales Executives.
Explanations of major aspects of
letter of credit.
Thorough FAQ about letters of credit.
Provides Exporters, Importers,
Freight Forwarders, Trade Exchanges and Banks worldwide
with online Electronic Record (Documents) transaction
capabilities for Documentary and Standby Letters of
Credit, D/P and D/A Collections, Drafts, and Open
Accounts that comply with "eUCP 500."
Integrated suite of trade finance
products and services to banks and their corporate
clients. Bank Trade products are component-based and
designed to help streamline trade product processing and
numerous ancillary activities.
Trade Documentation Software Product
that enables the creation of letter of credit compliant
export documentation.
Service that fill out Letter of
Credit applications, submits them to banks and tracks
the payment process on the Internet.
Negotiation system that automates the
process for corporations to bid out their Standby
Letters of Credit and Bank Guarantees business to a
"network" of banks.
Multi-platform banking software for
all aspects of trade finance. Includes: automated
processing of Letters of Credit, Collections, Guarantees
and Clean Payments and other functions.
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