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Letters of Credit

Key Stages


Incoterms 2000

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Letters Of Credit Funding

Acceptance- The signing (usually across the face) by the drawee of a tenor or term Bill of Exchange (also known as a usance bill) which then binds the drawee to make payment of the bill at maturity.

Accepting Bank/Paying Bank - The bank nominated in the Documentary Letter of Credit to accept or pay drawings under that LC. It can be either the Issuing or the Advising Bank. The generally accepted term of 'Paying Bank' has been used to cover both payment and acceptance.

Advising Bank - The bank, usually in the Exporter's country, which advises the terms of the LC to the Exporter. (This need not be the Exporter's own bank.)

Assignment - A Beneficiary can (with the agreement of the Advising/Negotiating Bank) formally assign the proceeds of a Documentary Credit to a third party.

Avalisation - The addition of a banks guarantee/commitment to pay a usance/term Bill of Exchange in the event that the drawee defaults on payment of the bill at maturity.

Bill of Exchange (Draft) - An unconditional order in writing addressed by one person (the drawer) to another (the drawee), signed by the person giving it (the drawer) requiring the person to whom it is addressed, (the drawee, who when he signs becomes the acceptor), to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person or to the bearer (the payee).

Case of need - An agent or another person, usually in the country of the drawee, willing to act on behalf of the Drawer/Exporter.

Collecting Bank - Any intermediary bank other than the Remitting Bank involved in the Collection process. Typically there are only two banks involved in a Collection, the Remitting Bank (a bank in the Exporter's country, often the Exporter's bank) and the Presenting bank (a bank in the Importer's country, often the Importer's bank).

Complying presentation - In relation to a letter of credit, this means a presentation (see “Presentation” below) that is in accordance with the terms and conditions of the letter of credit, the applicable rules of UCP600 and international standard banking practice.

Confirming Bank - A bank that adds its 'confirmation' (or irrevocable undertaking to pay) to a Letter of Credit issued by another bank. Confirmation is normally added at the request of the Issuing Bank.

Consignee - The named party to whom the goods are sent. In practice most transport documents are consigned 'to order' which means the Importer can authorise someone else to collect the goods.

Consignor/shipper - The party despatching the goods.

Drawee- The party on whom the Bill of Exchange is drawn and who is required to accept and/or pay it.

Drawer - The party who draws up the Bill of Exchange (usually the supplier of the goods or services, ie. the Exporter).

Drawing - Presentation of documents, and where applicable, drafts for payment/acceptance under a Documentary Letter of Credit.

Due date/maturity - The date on which an accepted tenor/usance/term bill of exchange or a deferred payment under an LC becomes due for payment.

Endorsement - The legal transfer of title of a document by signature, usually, but not necessarily, on the reverse.

Honour - Honour means the discharge by a bank of its obligations under a letter of credit following its receipt of documents that comply with the terms of the letter of credit, UCP600 and standard international banking practice. This is done by paying at sight if the credit is available by sight payment, incurring a deferred payment undertaking and paying at maturity if the credit is available by deferred payment or accepting a bill of exchange drawn by the beneficiary and paying at maturity if the credit is available by acceptance.

Inspection - Discrepant documents are sent to the Issuing Bank to be held by them pending acceptance of the discrepancies.

Negotiating bank - A bank that under a Documentary Letter of Credit negotiates the Bill of Exchange and/or documents drawn by the Exporter payable at another bank.

Nominated bank - The bank with which the credit is available or any bank in the case of a credit available with any bank.

Opening bank/Issuing bank - The bank that opens or issues the LC on behalf of the Importer.

Presenting Bank - The bank that presents the documents to the drawee (usually the Importer) for payment/acceptance. This is usually the drawee/importer's bank.

Protest - A legal notation that the drawee has refused payment and can assist in legal proceedings to pursue the debt. It is not always available in the drawee's country, and in some cases has limited value.

Remitting Bank - The bank that acts on behalf of the drawer (normally the Exporter) under a Collection.

Sight Bill - A Bill of Exchange calling for payment as soon as it is presented to the drawee.

SWIFT - (Society for Worldwide Interbank Financial Telecommunications).  An inter-bank electronic message transmission system.

Tenor, term or usance bill - A Bill of Exchange calling for payment at a fixed or determinable future time.


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