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Letters Of Credit Funding
Key Stage 2. Importer instructs their bank, the Issuing Bank, to open an LC in favour of the Exporter

Application Form

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.

Sight Payment
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.

Deferred Payment
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.

Acceptance
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 documents.

Negotiation
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 Bank
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 Credit

Transferable
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 forward.

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).

Back-to-Back
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 materials.

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 transaction.

Due to the greater risk involved with this type of LC, they are rarely issued.

Revolving
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.

Standby
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 your needs.

NB: For definitions of the regular types of Letters of Credit please refer to the Documentary Letter of Credit page.

 
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