| Key Stage 2. Importer instructs their bank, the Issuing Bank, to
open an LC in favour of the Exporter
At this stage the importer fills in the bank's Letter of Credit
application form with full details to replicate the contract agreed
with the Exporter. The importer must ensure the form avoids
ambiguity, fully reflects the commercial contract and is not so
complex as to make the transaction unworkable.
Example of an Irrevocable Import Letter of Credit application form
with explanatory notes.
Terms of Payment
Documentary credits may be made available in one of four ways.
This is where payment is made to the Exporter, upon
presentation of conforming documents. A sight Bill of Exchange, also
called a draft, is usually called for, though payment can be made
against documents alone.
A deferred payment does not require the presentation of a
draft. The Paying Bank is authorised to make payment at an agreed
future date against presentation of conforming documents. The future
date for payment is defined in the Letter of Credit usually as a
number of days after the date of despatch of goods or after the date
of presentation of the documents.
An Acceptance LC requires presentation of a draft drawn on the bank
nominated as Accepting Bank. If the terms of the LC are met, the
draft is then accepted by the bank and is payable at a determinable
future date. This will be detailed in the Letter of Credit as either
a fixed future date, or a specific number of days from the date of
despatch of goods, or from the date of presentation of the
With a Negotiable LC, the Issuing Bank must reimburse the
bank which negotiates drafts or documents drawn under its
documentary LC. The credit may be made freely negotiable with any
bank, or negotiation may be restricted to a bank nominated by the
issuing bank. Under this type of LC, the Exporter is responsible for
any negotiation interest unless the Importer specifically authorises
the Negotiating Bank to charge interest to their account.
Payment at the counters of the Issuing
In this case the conforming documents have to be received by
the Issuing Bank within the presentation period. Payment is only
then made to the Beneficiary or Advising Bank.
Special Types of letters of
Transferable Letters of Credit are used when the Exporter is
acting as an intermediary between the Importer and Exporter in a
commercial transaction. In this instance, all of the rights and
obligations of the LC are transferred from the intermediary to the
ultimate supplier. The intermediary has no liability.
The terms of the transferred LC must be the same as the original
except for the amount, unit price, expiry date, latest presentation
date and period of shipment. All of these may be reduced, or brought
The identities of the Importer and the ultimate supplier may need to
be withheld from each other. Careful drafting of the original and
transferred Letter of Credit is needed to ensure this occurs. (NB:
Barclays assumes no liability or responsibility for any disclosure).
In this instance, two LCs are established completely
independently of each other. The Importer establishes theirs in the
Exporter's favour. The Exporter can then arrange a second LC in
favour of the ultimate supplier of the goods or the supplier of raw
This type of LC should only become necessary where the underlying
contracts are on terms which do not match or where a Transferable LC
is unable to maintain secrecy on a particular aspect of the
Due to the greater risk involved with this type of LC, they are
If an Exporter makes regular shipments to a particular
Importer under a long term supply contract, it may be beneficial for
a series of shipments to be secured by a single documentary LC.
A Revolving LC can achieve this by the LC being reinstated for the
original amount after a given period, and allowing the value of the
LC to be drawn each time a shipment of goods is undertaken.
Be aware that as this is a continuing liability, it will have an
impact on banking facilities.
Advance Payments (or Red Clause)
An LC that contains a clause, which authorises the nominated
bank to advance a portion of the value of the LC to the Exporter
before shipping documents are presented. This enables the Exporter
to purchase raw materials or to pay other costs before receiving the
full payment, once conforming documents have been presented.
Advances are made at the risk of the Importer. Drawings under an LC
are made against a simple receipt from the Exporter that they will
refund the amount if they do not ship the goods as required. The
Importer's account is debited as soon as an advance has been made.
A Standby Letter of Credit is a type of trade debt guarantee
that is only drawn against in the event that the Importer defaults
in some way, eg. fails to pay for a consignment within an agreed
period. A standby LC includes an expiry date, but no latest shipment
date. Standby LCs will normally call for a statement of default from
the Exporter and also evidence of default. Barclays is happy to
discuss whether or not a Standby Letter of Credit is appropriate to
NB: For definitions of the regular types of Letters of Credit please
refer to the Documentary Letter of Credit page.