what is letter of credit tell me in details?

Question

when goods are bought from foeign country irrecoverable letter of credit is issued

Answer 1

In a nut shell,L.C. is a bank gurantee obtained by buyers of goods for the seller of the goods. After the goods are delivered to the buyers the seller produces the documents to prove delivery of goods to the bank and collects the sale proceeds from the bank.

Answer 2

A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.

Answer 3

The detailed reply should have given you everything you need to know. In short, letter of credit is an instrument given by a banker on behalf of purchaser guranteeing payment of the amount mentioned in the letter, on submitting the documents listed in the letter of credit with the conditions of time frame mentioned, to a seller of goods/services.

Answer 4

When I buy from you I put money in my bank in fixed deposit, when you show me the export documents as proof, than my bank pays to your bank. Your bank can give you working capital with my letter of credit as guaranty.

Answer 5

I wonder that if the questioner at least has gone through Andrews ans , well let me disclose I have not .

Answer 6

www.encyclopediaofcredit.com

Letters of Credit The privilege of buying goods, services or borrowing money in return for a promise of future payment.

When a buyer wishes to acquire goods or services from a seller, the buyer can request his or her bank to issue a letter of credit A financing instrument issued by a bank in favor of an exporter that substitutes the bank's creditworthiness for that of the importer. (also called a documentary credit). A letter of credit is a written document issued by the buyer's (or importer's) bank and addressed to a seller (or exporter The person or company that sells or arranges to transport goods out of a country. ). It specifies the terms and conditions under which the seller, or "beneficiary The person or company due payment in the letter of credit. Usually the exporter (seller). ," will be paid for merchandise or services.


The letter of credit guarantees payment to the seller through the seller's bank when the seller, through his or her bank, presents certain documents to the buyer's bank. The letter of credit specifies where and what documents the seller must present, the amount of money A medium of exchange; coined or stamped currency. available, and the latest date for presenting the documents. The documents may vary, but their purpose is to assure that the goods have been "sold" and are on their way to the buyer.


They usually include the following:

Invoice Document which shows the terms of a sale. Includes a full description of the goods, sale price, charges, and discounts.

Bill of Lading (from the shipper Indemnity given by the beneficiary of a letter of credit to the negotiating bank to induce payment despite any discrepancies that may exist in the documents. Compensation paid for damage or loss sustained or anticipated. given by the beneficiary of a letter of credit to the negotiating bank to induce payment despite any discrepancies that may exist in the documents. )

Certificate of Origin

Insurance documents

Export Certificate

Transfer of Ownership
The letter of credit agrees to make payment in a specified manner if the seller complies with its terms and conditions in accordance with the International Chamber of Commerce rules governing letters of credit. These rules are known officially as The Uniform Customs National government authorities that control imports, inspect imports, and collect duties levied on both imports and exports and Practice for Documentary Credits (ICC The International Chamber of Commerce. Publishes rules governing the preparation and usage of letters of credit. (See also UCP 500.) Publication 500). The current version is referred to as "UCP 500 Uniform Customs and Practices for Documentary Credit of the International Chamber of Commerce, Publication 500. These are rules for managing letters of credit. " and went into effect January 1, 1994.


The letter of credit procedure The actual working steps that should be followed in the appropriate order to accomplish the desired credit result or decision. substitutes the creditworthiness of a bank for that of the buyer. It assures a seller that if he or she complies with the letter of credit, the bank will pay regardless of the wishes or financial ability of the buyer. In this manner, the seller is assured payment by an assumed reputable third-party financial institution.

Format

The format for a letter of credit has been specified within the Federal Register of the United States by the Department of the Treasury. It is related under the Comptroller of the Currency Interpretive Rulings, May 5, 1977, Section 7.7016, Letters of Credit as follows:

"A national bank may issue letters of credit permissible under the Uniform Commercial Code or the Uniform Customs and Practice for Documentary Credits to or on behalf of its customers. As a matter of sound banking practice, letters of credit should be issued in conformity with the following: (a) Each letter of credit should conspicuously entitled as such; (b) the bank's undertaking should contain a specified expiration date The last date upon which the presentation of documents may occur under a letter of credit under UCP rules. or be for a definite term; (c) the bank's undertaking should be limited in amount; (d) the bank's obligation to pay should arise only upon the presentation The beneficiary delivers the documents to the advising bank to negotiate on the seller's behalf. of a draft A negotiable instrument that calls for payment of money. The drawer (or seller) orders in writing for the drawee (or buyer) to pay a specific amount of money to the drawer on a certain date. Also called a bill of exchange. bill of exchange (See Draft.) . bill of exchang (See Draft.) e. or other documents as specified in the letter of credit, and the bank must not be called upon to determine questions of fact or law at issue between the account party Party for whom a letter of credit is opened. "Account party" and "applicant" are generally synonymous, but sometimes one party will agree with the issuing bank to make all payments under a letter of credit showing the name of another party (often two affiliated companies). Banks may refer to one of these parties as the applicant and the other as the account party, but there is no consistency among banks regarding which is which. and the beneficiary; (e) the bank's customer should have an unqualified obligation to reimburse the bank for payments made under the letter of credit."

The format stated above for United States Banks is generally followed throughout the world.


Types of Letters of Credit:


Merchandise/Commercial

The majority of letters of credit issued today are in payment for goods in shipment or current services performed. Payment is normally made against a set of documents consisting of commercial invoices, packing, weight, and shipping documents for goods shipped. Payment for services may be against invoices, vouchers, paid bills, or other records of work performed. Letters of credit of this nature are usually referred to as commercial or trade letters of credit.


Standby

Standby letters of credit function like a guarantee To assume liability for the debts or obligations of another in the event of a default. or a bond A promise under seal to pay money; an IOU or promissory not A legal and binding promise by a debtor (the promisor) to pay a certain sum of money to a creditor (the promisee) at a future date, usually with interest at a fixed rate. e issued as evidence of long-term indebtedness. . They are issued to support the payment of obligations based on money loaned or advanced, or upon the occurrence of nonoccurrence of another contingency. They are generally not to be drawn upon by the beneficiary unless a delinquency of some form takes place in a business transaction.

Standby letters of credit issued by United States Banks are subject to Federal Law specifically Regulation H (12 CFR 203). Under Section 208.8 (d) a standby letter of credit is defined as follows:

"Standby letters of credit include every letter of credit (or similar arrangement, however, named or designated) which represents an obligation to the beneficiary on the part of the issuer (1) to repay money borrowed by or advance to or for the account of the account party, (2) to make payment on account of any evidence Testimony of witnesses and facts presented to the court and jury by way of writings and exhibits, which impress the minds of the court and jury, to the extent that an allegation has been proven. of indebtedness undertaken by the account party, or (3) to make payment on account of any default by the account party in the performance of an obligation."

The International Standby Practices 1998 (ISP98) provides separate rules for standby letters of credit.


Irrevocable

An irrevocable letter of credit may not be repealed, annulled, revoked, recalled, canceled, amended, altered, or changed without the express approval of the beneficiary. It constitutes a definite undertaking of the issuing and confirming bank The seller can instruct the buyer to make provisions for a letter of credit to be confirmed. A confirming bank adds its own irrevocable undertaking to that of the issuing bank. , provided the beneficiary absolutely complies with the terms and conditions.


Revocable

A revocable letter of credit is the opposite of an irrevocable credit. It may be repealed, annulled, revoked, recalled, canceled, amended, altered, or changed without prior notice to or approval by the beneficiary. Consequently, the revocable letter of credit is seldom employed as security for business. All letters of credit are deemed irrevocable unless specifically designated otherwise in the credit.


Unconfirmed

An unconfirmed letter of credit means that it bears the undertaking of the issuing bank Also known as the opening bank. It issues its commitment to the seller in the form of a letter of credit. opening bank The account party's bank that issues or opens the credit. . It issues its commitment to the seller in the form of a letter of credit. opening ban The account party's bank that issues or opens the credit. k. It issues its commitment to the seller in the form of a letter of credit. alone. When the beneficiary meets the credit's terms and conditions, then the issuing bank is assuring payment of funds by itself to a beneficiary directly or through a collecting, drawee The person, company, or bank upon which a draft is drawn. , or negotiating bank. The beneficiary should therefore look to the creditworthiness of only the issuing bank and not an intermediary's bank.


Confirmed

A confirmed letter of credit is a credit where a second undertaking is added to the letter of credit by another bank. Therefore, the beneficiary may look additionally to the creditworthiness of the confirming bank for payment assurance. The issuing bank is primarily guaranteeing payment; however, if payment complications arise from the issuing bank, then the second guaranteeing bank (confirming bank) is responsible for making payment if the terms and conditions have been met.

The beneficiary who has requested a confirmed letter of credit should note who is doing the confirming, and whether it is actually a second financial institution. For example, if the issuing bank states: "We confirm this letter of credit," it is meaningless, as you cannot confirm your own instrument A right to the payment of money such as agency notes, commercial pape The unsecured promissory notes of large, financially sound corporations. r, T-Bills, certificates of deposit (CD's), banker's acceptances and repurchase agreements. . As such, there is only one guarantee for the credit. For all intents and purposes, beneficiaries usually present their documents to the confirming bank, and regard them as the primary source of payment.


Straight

Straight letters of credit are those credits where a beneficiary must present documents to a named drawee bank. Payment will only be made at that bank and the letter will expire for presentation of documents at their counters. Documents may not be negotiated by an intermediary bank or purchased for value. An interposing bank may not be a holder in due course One who has acquired possession of a negotiable instrument through proper negotiation for value, in good fait Honesty in fact in the conduct or transaction concerned. h, and without notice of any defenses to it. . The engagement to pay is made only (or straight) to the beneficiary of the letter of credit and does not extend to any other party.

Negotiable Quality belonging to a document to transfer ownership of money, goods, or other items of value specified in the document by endorsement and/or delivery of the document. endorsement Writing one's name upon paper for the purpose of transferring the title. and/or delivery of the document.

For a negotiable letter of credit, an intermediary bank may be employed between the beneficiary and the drawee or issuing bank for the purpose of taking documents in charge (negotiating them) within the expiration date of the letter of credit. Under a straight letter of credit, the letter of credit expires at the counters of the drawee or issuing bank. Under a negotiable type, the letter of credit may expire at the counters of a negotiating bank. In addition, the letter of credit engagement extends not only to the beneficiary (drawer The person, company, or bank that creates the draft and receives payment. ) but also to bona fide ("bone-a-fide") In good faith. holders. Consequently, a negotiating bank has the protection of a holder in due course.

Sight

Letters of credit may be payable at sight A term used in the body of drafts/bills of exchange indicating that payment is due upon presentation or demand. , which means that if the drafts and documents are in order, they are honored by making payment without delay. The only delays may result from collecting funds through a reimbursing bank In a letter of credit transaction, the bank with which the issuing bank maintains an account and which is authorized by the issuing bank to charge that account to pay claims received from the negotiating bank for documents that have been presented. .

Usance

If a letter of credit calls for usance (time) draft payments, then the draft is honored by accepting it for payment in the future. Thus, payment would be delayed until the maturity of the draft plus any delay in the transmittal of funds. However, special attention should be given to special instructions that might grant A term used in deeds for the transfer of the title to real propert Land with all its buildings and legal interests. y payment before maturity, such as discount charges for buyer's account.

Deferred Payment

A deferred payment letter of credit is one in which the beneficiary will present documents to a paying bank The bank named in the letter of credit to make payment to the seller or the negotiating bank upon presentation of the proper documentation. . If the paying bank finds the documents in order, the bank will acknowledge receipt and undertake to remit payment at a future date. This undertaking has the full commitment of the paying bank, similar to the acceptance When a drawee acknowledges in writing on the face of the draft that the buyer will pay the draft at maturity. (See also Draft, Drawee.) When a drawee acknowledges in writing on the face of the draft that the buyer will pay the draft at maturity. of a time draft. The only difference is that the advantage of a negotiable instrument is not present, and therefore the beneficiary cannot obtain payment prior to the future date (discounting is not possible). The buyer actually does not save any costs for a deferred payment Payment scheduled for a set period of time after shipment or presentation of shipping documents, as opposed to immediately or "at sight." credit. He or she is charged a deferred payment commission as opposed to an acceptance commission.

Deferred Documents

A deferred document is different from a deferred payment credit in two ways. First, deferred payment documents are presented right away for examination and approval, but under a deferred document credit, document presentation is delayed by the beneficiary for a specified period of time. Second, an undertaking to pay certification is transmitted to the beneficiary for his or her security under deferred payment. However, this does not take place with deferred documents. Thus, the beneficiary has only the contingent liability Potential obligation that will materialize only if certain events occur in the future (e.g., a parent guaranteeing the debts of a subsidiar A company, usually a corporation, that is controlled by a parent company. y). of payment if documents are in order. This is fine if documents are in order, but control of merchandise complications could arise if documents are rejected. Under deferred payment, if documents were rejected, the beneficiary could possibly have kept cargo from the buyer due to the current shipment. Conversely, under deferred documents, documents were presented after shipment and the cargo is lodged with the buyer.

Transferable

A transferable credit is a credit wherein the beneficiary may request the bank entitled to make negotiation The transfer of a negotiable instrument in such form that the transferee becomes a holder. , acceptance, or payment to convey his or her rights under the credit to another company. This may be a complete conveyance called a "transfer in the whole," or a conveyance within limitations called a "partial transfer." Transferable credits are used for a variety of reasons, such as: transferring control from a purchasing or selling agent to a third party vendor The seller of property or goods. , dividing up a letter of credit from a contractor to several suppliers, and providing the first beneficiary with the ability to offer letter of credit protection to a vendor without having to ask their bank to issue a brand new letter of credit.

The credit can be transferred only on the terms and conditions of the original credit with the exception of:

The amount of the credit

Any unit price stated therein

The expiry date (may be shortened but not extended)

The last date for presentation of documents in accordance with UCP 500, article 43

The period for shipment

Any of the above may be reduced or curtailed

The percentage for which insurance cover must be given may be increased in such a way as to provide the amount of cover stipulated in the original credit. For example, if the original credit were for $100,000 and it called for insurance for 110% of CIF Cost, insurance and freight. Shipping terms under which the seller pays all expenses involved in placing merchandise on board the carrier and prepays the freight and insures the goods to an agreed-upon destination. Shipping terms That part of a contract of sale that specifies who, between the buyer and the seller, is responsible for each aspect of shipping the goods. under which the seller pays all expenses involved in placing merchandise on board the carrier and prepays the freight and insures the goods to an agreed-upon destination. Shipping term That part of a contract of sale that specifies who, between the buyer and the seller, is responsible for each aspect of shipping the goods. s under which the seller pays all expenses involved in placing merchandise on board the carrier and prepays the freight and insures the goods to an agreed-upon destination. value, then the policy would have to be for $110,000. When the transfer was made (assume a transfer of $90,000) the transferring bank would stipulate that insurance should be in the amount of $110,000 and not 110% of the (reduced amount) invoice value. To do otherwise would run the risk Conditions in which the decision maker has to estimate the likelihood of certain outcomes. of the transferee The party to which the rights under a transferable letter of credit are transferred. submitting an insurance policy for $99,000 (110% of $90,000) which would thus cause the goods to be under-insured.

In addition, the name of the first beneficiary must be substituted for that of the applicant The party (generally buyer/importer) for whose account a letter of credit is established. . However if the name of the applicant is specifically required by the original credit to appear in any document other than the invoice, then such requirement must be fulfilled.

The major concern of first beneficiaries when using transferable letters of credit is that the transferee will learn the identity of the applicant (or vice-versa), and the next time the applicant will deal directly with the transferee, thus cutting out the middleman. While there are ways in which the documentation Financial and commercial documents such as drafts, commercial invoices, packing lists, bills of lading, insurance certificates, etc. In Letter of Credit transactions, banks deal with documents alone and are not involved in underlying sales agreements. commercial documents Documents, such as commercial invoices, certificates of origin, packing lists, bills of lading, etc., usually covering a merchandise transaction. such as drafts, commercial invoices, packing lists, bills of lading, insurance certificates, etc. In Letter of Credit transactions, banks deal with documents alone and are not involved in underlying sales agreements. commercial document Documents, such as commercial invoices, certificates of origin, packing lists, bills of lading, etc., usually covering a merchandise transaction. s such as drafts, commercial invoices, packing lists, bills of lading, insurance certificates, etc. In Letter of Credit transactions, banks deal with documents alone and are not involved in underlying sales agreements. may hide the identity of the transferee from the applicant, there is no guarantee that this information will not become apparent from other sources such as markings on packages. For these reasons, it is advisable for "middleman" beneficiaries to consider having an attorney draw up a document that requires the applicant to buy through them.

Combination Types

Letters of credit are made up of a combination of types. For example: (1) Unconfirmed, sight, irrevocable, negotiable letter of credit; (2) Confirmed, irrevocable, straight, sight letter of credit; (3) Irrevocable, straight, usance draft, unconfirmed letter of credit. Therefore, it is important for a buyer and seller to agree on the appropriate combination of types for the transaction, including any special clauses that are necessary.

Parties Individuals involved in a sales transaction. In domestic sales: seller and buyer. In international sales: exporter and importer. In shipping: shipper and consignee. In letters of credit: beneficiary (seller) and applicant (buyer). consignee An individual or company to whom cargo is shipped or consigned. . In letters of credit: beneficiary (seller) and applicant (buyer). consigne An individual or company to whom cargo is shipped or consigned. e. In letters of credit: beneficiary (seller) and applicant (buyer). to Letters of Credit:

The parties to a letter of credit are defined as follows:

Beneficiary - The seller of goods or services to whom the letter of credit is addressed. The party entitled to its benefits.


Applicant or Account Party - The buyer of goods or services who requested the letter of credit to be issued.


Issuing Bank - The primary fmancial institution that initiated and wrote the letter of credit extending their guarantee and liability to pay if the terms and conditions are fulfilled.


Advising Bank - The bank, usually in the beneficiary's country, whose primary job is to pass on the letter of credit to the beneficiary. The advising bank The bank that receives a letter of credit issued by the applicant's bank (the issuing bank) and forwards it to the beneficiary without assuming any responsibility or liability other than to verify the authenticity of the letter of credit. is principally a correspondent bank of the issuing bank which means that the two parties have exchanged authenticating procedures, and may have also established accounts with each other. An important part of passing on a letter of credit to a beneficiary is verifying its authenticity. When the advising bank The bank that receives a letter of credit issued by the applicant's bank (the issuing bank) and forwards it to the beneficiary without assuming any responsibility or liability other than to verify the authenticity of the letter of credit. authenticates the credit, they are saying it is a genuine instrument from the named issuing bank. They are not commenting on the creditworthiness of the bank or its country. This procedure gives the seller some protection against fraudulent instruments. That is why it is common practice to have letters of credit advised to a seller through a correspondent bank. The advising bank may receive the letter of credit by mail, telex, cable, or S.W.I.F.T.


Drawee Bank - The bank named in the credit as duly authorized to make payment. Drafts are drawn or documents are presented to this bank, unless otherwise specified.


Confirming Bank - A separate financial institution requested by the issuing bank to add their guarantee of payment or acceptance to the credit instrument. It is necessary for this bank to establish a credit line Credit that will be or has been granted up to a specific amount usually for a given period of time, as in the case of a bank line of credit. or facility for the issuing bank in order to agree with this request. The confirming bank is usually but not necessarily the advising or drawee bank. The beneficiary cannot request on its own for a bank to confirm a letter of credit. The request must come through the issuing bank. Therefore, a seller should ask the buyer to authorize the issuing bank to request confirmation The court order which makes the Plan of Reorganization binding in a Chapter 11, 12 or 13 bankruptcy case. Chapter 11 A process set forth by the Bankruptcy Code that allows a debtor to operate the business as a 'debtor in possession" with the protection of the "automatic stay." , 12 or 13 bankruptcy (See Insolvency.) case. bankruptc (See Insolvency Under the Balance Sheet definition of insolvent in the U.S. Bankruptcy Code, a debtor is insolvent when the value of a debtor's assets is exceeded by the debtor's liabilities. Balance Shee A financial statement listing the assets, liabilities and owner's equity of a business entity as of a specific date. t definition of insolvent in the U.S. Bankruptcy Code, a debto or business entity that owes money. r is insolvent when the value of a debtor or business entity that owes money. 's assets is exceeded by the debtor's liabilities. .) y case. .


Reimbursing Bank - Sometimes the issuing bank names a bank where it keeps funds in the currency of the letter of credit to pay drawee or negotiating banks on its behalf. This bank is known as a reimbursing bank, and is usually named under the special instructions portion of the letter of credit.


Negotiating Bank - A bank either nominated by the beneficiary under a freely negotiable letter of credit or designated as a restricted negotiating bank by the issuing bank. Allows more flexibility in making payment, and enables beneficiaries to present documents for payment to their local international bank.

Parts of the Letter of Credit:

A summary of some common "parts" or segments of letters of credit follows:

Legal Clauses

U.S. banks may issue letters of credit subject to the Uniform Commercial Code (UCC) United States statute A law passed by the legislative body of the state. covering the rights and obligations of the various parties involved in the purchase and sale of goods. as applicable by state, or subject to the International Chamber of Commerce Uniform Customs and Practices for Documentary Credits (UCP 500) currently in force. The UCC may be used for U.S. domestic credits and of those primarily of the standby type. However, international letters of credit should be subject to the UCP 500. Examples of these clauses are:

"This letter of credit is subject to the Uniform Customs and Practices for Documentary Credits, 1994 Revision, International Chamber of Commerce Publication No. 500."

"This letter of credit is subject to the Uniform Commercial Code of the State of Florida."
Legal opinions concur that there is usually no conflict between the UCC and UCP 500. The latter clause only expounds or details the general principles for letters of credit under the UCC. At times, if the beneficiary or the account party insist, both clauses may appear without conflict. In the event of a conflict, the UCC applies. Likewise, Standby letters of credit can be made subject to the rules of the International Standby Practices 1998 (ISP98) with the following clause:
"This undertaking is issued subject to the International Standby Practices 1998."

Engagement Clauses

Through the engagement clause, banks assume the obligation and the liability for payment or acceptance if the beneficiary meets the terms and conditions of the letter of credit. Engagement clauses have appeared as follows:

1. Straight Letters of Credit

The following clauses are used primarily with domestic, bond or standby letters of credit:

"All drafts drawn under and in conformity with the terms of this credit will be duly honored upon delivery of documents as specified if presented at this office on or before (expiration date of letter of credit)."

"We engage with you that all drafts drawn under and in compliance with the terms of this credit will be duly honored upon presentation" (plus expiration date clause).
The following clause is used in conjunction with export advices and must further specify whether the credit is confirmed or unconfirmed:
"The above mentioned correspondent engages with you that all drafts drawn under and in compliance with the terms of this advice will be duly honored upon presentation" (plus expiration date clause).


Expiration Date Clause:

"All drafts, with documents as specified must be presented at this office not later than (expiration date of letter of credit)."

2. Negotiable Letters of Credit

"We hereby agree with the drawers, endorsers and bonafide holders of drafts drawn under and in compliance with the terms of this credit that such drafts will be duly honored on presentation."

"We hereby agree with you and negotiating banks or bankers that drafts drawn in compliance with the terms of this credit shall be duly honored on due presentation to the drawee."

"The above correspondent engages with you and negotiating banks or bankers that drafts in compliance with the terms of this credit shall be duly honored on due presentation to the drawee."

"The above mentioned correspondent agrees with the drawers, endorsers, and bona fide holders of drafts drawn under and in compliance with the terms of this credit and such drafts will be duly honored upon presentation."
In order to make it clear to the beneficiary whether or not the letter of credit is negotiable, and when and where to present documents, additional information may be provided including the following:
a. Besides showing an expiry date, the credit can show a place of expiry. This aids the beneficiary in determining the where to present documents before the credit expires.

b. The credit specifies "Credit Available With." In the blank following, various options The giving of consideration to support an offeror's promise to hold an offer open for a stated or reasonable length of time. could appear as a name of a drawee bank or restricted negotiation bank or simply state any bank or unrestricted.

c. Following "Credit Available With" (named bank) will appear the word "by." This "by" reflects three options that may be designated by the bank: By Acceptance; By Payment and By Negotiation. Naturally, if it specifies "By Negotiation," the letter of credit is negotiable. If not, we could then presume a straight letter of credit.

Following the factors set forth under a, b, and c above, the following clause may appear:

"We hereby issue this documentary credit (See Letter of Credit.) in your favor" or
"We hereby notify this documentary credit in your favor" plus
"It is subject to the Uniform Customs and Practice for Documentary Credits, 1994 Revision. International Chamber of Commerce Publication No. 500. The number and date of the credit and the name of the issuing bank must be quoted on all drafts required. If the credit is available by negotiation, each presentation must be endorsed on the reverse of this letter of credit by the bank where the credit is available."

The standard negotiation clauses will appear in the letter of credit. Additional clauses must be added for restricting the negotiation. The following are samples of restricting clauses:

"Negotiations are to be made only at the counters of (named bank)."

"Negotiations under this letter of credit are restricted to (named bank)."

The following sample clauses apply to fees for negotiation:

"Negotiation fees are for your account."

"Negotiation fees are for the account of the beneficiary."

"Negotiation fees are for buyer's account."

"Negotiation fees are for the account party/applicant/buyer in this credit."

(When the letter of credit is silent about negotiation fees it is presumed that charges will be for the account of the issuing bank, and in turn for the account of the applicant.)

Clauses for Confirmed and Unconfirmed Letters of Credit

Unconfirmed:

"This letter is solely on advice of credit opened by the above mentioned correspondent and conveys no engagement by us."

Confirmed:

"We hereby confirm the above letter of credit and undertake that all drafts drawn and presented as above specified will be duly honored by us."

Food and Drug Clauses

1. Food and Drug Clause for Sight Drafts

"Drafts drawn under this credit are payable only after (named bank) is in possession of written notice from applicant that the merchandise specified by this credit has been inspected and approved by the relative United States Government Inspection Agency. Negotiating bank shall authorize release of documents to applicant against trust receipt A document signed by a buyer on the strength of which a bank releases merchandise for the purpose of manufacture or sale but retains title The exclusive rights, powers, privileges and immunities to property, real and personal, tangible and intangible. to the goods. for the purpose of such inspection."

2. Food and Drug Clause for Time Drafts

"Drafts drawn under this credit will be accepted only after (named bank) is in possession of written notice from applicant that the merchandise specified by this credit has been inspected and approved by the relevant United States Government Inspection Agency. Negotiating bank shall authorize release of documents to applicant against trust receipt for the purpose of such inspection."

3. Guarantee Clause in Lieu of Release of Documents on Trust Receipt

"Additional documents required: Guarantee issued by negotiating bank to reimburse buyers for full cost of merchandise plus expenses in event of rejection by relative United States Government Inspection Agency. This guarantee to be valid for 45 days after bill of lading Document signed by a transportation company ("carrier") to show receipt of goods for transportation from and to the points indicated. date."

Revolving Letter of Credit Clause

There are two types of clauses for revolving letters of credit:

Automatic Reinstatement Clause. "This is a revolving letter of credit and drawings hereunder will automatically reinstate the letter of credit amount of (insert amount of currency) with an aggregate limit (insert amount of currency)."

Without Automatic Concept. "This is a revolving letter of credit and drawings hereunder will become available to you again upon your receiving from us a letter of credit amendment Any change made to a letter of credit after it is issued. Any change made to a letter of credit after it is issued. to this effect."
Note: Care must be taken when using these clauses as they can be misleading to banks, beneficiaries and account parties.
First, the reason for an automatic type is that a seller wishes to be assured a commitment for ensuing shipments, whereas a buyer may not wish to tie up his or her credit line or is close to their credit line. For example: If an automatic revolving letter of credit is issued for ten shipments at $100,000 each, the aggregate limit which is an integral part of the clause would be $ 1,000.000. However, the buyer and sometimes banks look at the face amount of $100,000 and feel that this is the lien The right of one person to retain possession of the goods of another until the latter fulfills an obligation, such as the payment of a debt. to be applied against the credit line. This is a misconception. In reality the bank's liability is for $1,000,000, and the aggregate limit and must be reflected against the credit line. We suggest that instead of using the complicated accounting format of an automatic revolving credit, the letter of credit should be straightforward with a face amount of $1,000,000 issued specifying 10 shipments of $100,000 each. This way the credit line lien is not confused and additionally as each shipment is paid a proper balance is shown within the accounting system.

The second type, which is revolving by amendment, is no djfferent in reality than a normal letter of credit that is periodically amended as necessary by the buyer with the bank's agreement. The danger of labeling the letter of credit as revolving could mislead the seller. Pursuant to the example stated for automatic, the seller may think he or she has a commitment for ten shipments at $100,000 each. However, if it is not an automatic reinstatement but must be amended, the actual commitment is for only $100,000 with one shipment and the seller should not be led astray.

Advance or Red Clause

The designation "red clause" is often used when individuals are referring to an advance payment Funds given by the buyer of goods to the seller prior to shipment, often just a percentage of the value of the goods with the remainder paid after shipment. Funds given by the buyer of goods to the seller prior to shipment, often just a percentage of the value of the goods with the remainder paid after shipment. prior to shipment condition specified in a letter of credit. This condition could quite properly be called an "advance clause."

The history of "red clause" is that it was a custom for hundreds of years to write such a clause in red ink in the Far East. Also, the advances so made were recorded on the letter of credit in red ink as a deduction. Whatever the name that individuals choose to use is unimportant as long as the applicant has full faith and trust in the beneficiary to use the advanced money for the purposes intended and to execute and perform under the letter of credit. Any advances made by a negotiating bank are guaranteed to be reimbursed by the issuing bank. When shipments are made the amount of the advance is deducted from the proceeds. In the event of non-shipment the applicant remains responsible to the issuing bank for the advanced amount. Sometimes the issuing bank will require that, prior to the advance, the negotiating bank must issue a standby letter of credit in favor of the applicant. In the event of non-shipment, and a failure by the beneficiary to repay the advance, the applicant to the original credit will draw on the standby letter of credit.

These so called "red clauses" are not used today as frequently as in the past. The reasons are that buyers became increasingly hesitant and wary about releasing funds to a supplier prior to the product being shipped, plus the increased availability of working capital The net assets of an individual enterprise, partnershi A partnership is defined as "an association of two or more persons to carry on as co-owners of a business for profit." While no particular form of contract is necessary to create a partnership, a partnership contract usually provides what the partners' ri p, corporatio A corporation may be defined as a voluntary association of persons who are organized under state or federal law and recognized by the law as having a corporate name, and being entirely separate and distinct from the people who own it; having continuous li n, including not only the original investment, but the gains and profits from the business. loans made under Ex-im bank programs reduce the need for red clause advances. Additionally, the clauses tended to be confusing.

Examples:

"Banks or bankers to whom this credit may be presented are hereby authorized to advance to the beneficiary hereof such amount or amounts as may be required to the extent of (insert sum certain in money in U.S. dollars or equivalent in foreign currency as per currency of credit) of its equivalent at the current rate of exchange in the currency of the place at which such advance or advances may be made, to pay for the merchandise, upon the execution of a receipt by the beneficiary stating that the advances are to be used to pay for merchandise to be shipped in accordance with the terms of this credit and that the relative documents are to be handed to the banks or bankers making such advances when completed, at which time the advances (specify with or without interest Compensation for the use of money. or limit interest rate) are to be deducted from the proceeds of drafts drawn under this credit.

"We hereby guarantee the reimbursement of advances so made, and undertake and agree that in the event that such advances (specify with or without interest or limit interest rate) shall not be repaid to the bank or banker by the beneficiary of the said credit during the currency thereof we will repay them (specify with or without interest or limit interest rate ) to the date of such payment. However, in no event will we be liable for reimbursement of any sums exceeding the amount of this letter of credit, namely $XXXXX"

or

"The negotiating bank is hereby authorized to make advances to you to the extent (insert sum certain in money) or the unused balance of this credit, whichever is less against your receipt for the amount advanced which must state the advance is used to pay for the purchase and shipment of the merchandise for which this credit is opened and be accompanied by your written undertaking to deliver the documents in conformity with the credit terms to the negotiating bank on or before the latest date for negotiation. The advance with interest, is to be deducted from the proceeds of the drafts drawn under this credit. We hereby undertake the payment of such advances, with interest should they not be repaid to the negotiating bank by you on or before the latest date for negotiation."

The above clauses are designed to allow advances from banks other than the issuing or drawee bank. However, the clauses could be modified to have the advance payable by direct drawing under the credit by draft and written undertaking up to a certain amount with the undrawn balance available against shipping documents.

Expediting Documents Clause

It is essential to expedite documents through the banks to buyers in order to avoid merchandise delays and demurrage Additional charges incurred as a result of excessive delays in clearing cargo off a vessel, or wharf, or out of customs. . Carriers are transporting goods with increasing quickness and swift (Society for Worldwide Interbank Financial Telecommunication) A computer-based standardized message writing system that connects worldwide participating banks primarily for the purpose of communicating payment information. document transmittal is imperative. Accordingly, letters of credit have an embodied clause such as the one below:

"Documents to be presented within 'X' days after the date of issuance When the issuing bank (buyer's bank) establishes a Letter of Credit based upon the buyer's application and credit relationship. of the shipping documents, but within the validity of the credit."

The number of days required would be inserted by the buyer pursuant to carrier Any company that may transport goods for payment, such as an ocean vessel, aircraft, truck, train, or courier service. delivery speed and need for documents. These inserted days could be 5, 10, 15 or more.

Special Clauses

Letters of credit can be tailored to fit various buyer and seller shipment or transaction needs. Your banker should be consulted if you have a need for a special clause. When composing a clause ensure that it meets the following criteria.

It must be clear and to the point.

It should be easily translatable in other languages.

It must be workable and not impractical.

It must not be ambiguous or convey different meanings to different readers. If in doubt, test it on individuals, preferably a novice.

It should be pertinent to the letter of credit transaction

Letter of Credit Flowchart

1. The buyer fills out a letter of credit application (See Credit Application.) which satisfies the terms of the purchase agreement plus the requirements of customs law, shipment, and document coordination.

2. The bank issuing the letter of credit (usually the buyer's bank), rechecks the application to ensure that it is complete and workable. The letter of credit is then issued after the buyer's credit facilities are verified.

3. The issuing bank transmits the letter of credit to a correspondent bank by telex, S.W.I.F.T., or airmail and asks them to advise or confirm the instrument.

4. The correspondent bank receives the letter of credit, checks authenticity, records, and transmits the instrument to the seller or beneficiary, and adds their confirmation if requested. Upon receipt of the letter of credit, the seller should carefully review it to determine whether he or she can comply with its performance requirements and whether it is acceptable from a credit standpoint.

5. Upon determination that the letter of credit is acceptable, the seller should ship the goods precisely pursuant to its terms and conditions. The seller must prepare documents exactly as required and then present them to the proper paying bank. The proper paying bank may be any bank specified in the letter of credit to accept, pay, or negotiate. This may be the advising bank, confirming bank, issuing bank, or (on a freely negotiable credit) any bank that is willing to negotiate.

6. When the paying bank receives the documents, it will examine them to determine if they are in order pursuant to the letter of credit's terms and conditions. If in order, the bank may pay, accept, or negotiate as required by the letter of credit. The paying bank will transmit the documents to the issuing bank and request reimbursement. Reimbursement may come direct from the issuing bank or the issuing bank may have instructions added to the letter of credit to reimburse on another bank or to simply charge its account.

7. Upon receiving the documents, the issuing bank will examine them to ensure that they are in order as specified and then reimburse the negotiating bank. For time drafts, reimbursement is made at maturity of the Banker's Acceptance.

8. The issuing bank debits the buyer's account and releases the documents. For a time draft, the buyer's account will be debited at maturity.

9. The buyer exchanges the shipping documents Typically, a commercial invoice, bill of lading, insurance certificate, and consular invoice. insurance certificate A document issued by an insurance company covering a particular shipment of merchandise. , and consular invoice. insurance certificat A document issued by an insurance company covering a particular shipment of merchandise. e, and consular invoice. for the goods.

Letter of Credit Instructions*

The seller should provide the buyer with specific instructions about the terms and conditions that may or must be included in the letter of credit. These instructions should eliminate burdensome documentation requirements for the seller, as well as any other unnecessary impediments to the seller being paid under the letter of credit. In addition, the seller should make certain that the expiration date of the letter of credit permits sufficient time to correct, if necessary, any mistakes found when the documents are presented for payment. Given the high failure rate of initial presentations of letter of credit documents, having sufficient time to correct errors is critical for the seller.

The seller should reject a letter of credit that deviates from the written instructions provided by the seller to the buyer. The seller should insist that the buyer arrange for the letter of credit be amended before shipping the merchandise. The seller should never rely on verbal or written assurances that amendments are being made or have been made to the letter of credit. Until and unless the seller receives confirmation of the amendment through its bank, the order should not be released.