Letter of Credit Information
Letter of Credit (L/C) is one of the safest financial instruments available for an Exporter to ensure that they will get their payment(s) of a particular amount & in a specific currency within the specified time period. The Importer is also sure of the Exporter’s reliability to supply their required commodities, its quality, quantity and shipping, etc. as per the agreed terms between them.
The Letter of Credit is also known as ‘Documentary Letter of Credit’, ‘Import Letter of Credit’ or ‘Commercial Letter of Credit’. It is a written undertaking given by a bank (LC Provider) to the seller/exporter and a technique for financing International trade by which a buyer’s bank provides the irrevocable commitment, at the request and for the account of its client/importer to pay the exporter against the handing-over of various documents complying with the terms of the letter of credit and the nature of the goods stipulated in the pro-forma invoice or sales contract within a set time limit. These documents normally include commercial invoice, packing list, bill of lading or air waybill, certificate of origin, inspection certificate, etc.
To establish Letters of Credit (L/C) in favor of the seller/exporter – called as beneficiary, the buyer as the applicant of the LC pays the agreed cash margin including LC commission, processing fee & swift charges upfront to the LC issuing bank as provider.
The supplier or exporter may also obtain from their bank a credit-line or a packing-credit against the Letter of Credit to mobilize their export and their bank will collect the advance funds upon negotiation of the LC with the importer’s bank.
Currently, LC issuance is governed by International Chamber of Commerce latest version of UCP 600.
Why Importers & Exporters would opt for LCs as their Payment Term?
For Importers / Buyers:
– While using the Letter of Credit as a financial instrument, there is a possibility to structure the payment plan according to the importer’s interest.
– It is a surety that the payment will be made only upon the presentation of all the documents stipulated in the issued LC terms & conditions.
– It allows the importer to avoid or reduce pre-payment.
– The seller must fulfill all the requirements mentioned in the L/C i.e. shipment of the goods, its quantity, quality, adherence to delivery schedule, etc.
For Exporters / Suppliers:
– Payments are guaranteed, once all the documents are presented as predetermined in the issued LC terms & conditions.
– It reduces the production risk, especially in situations when a buyer modifies or revokes the order.
– The buyer cannot decline to pay or reject the goods, due to any complaints concerning the goods, but the importer can raise the objection(s)/complaint(s)/claim(s) about the delivered goods other than mentioned in the LC.
– The delivery schedule could be re-structured as per the Exporter’s convenience.
Parties Involved in the Letter of Credit
– Importer/Buyer as an applicant
– Exporter/Supplier as the beneficiary
– Issuing Bank
– Advising Bank or Correspondence Bank
– Supplier’s Bank or Beneficiary’s Bank
Steps in the Letter of Credit Process
– Importer & Exporter sign the pro-forma invoice or sales & purchase agreement with details of goods, specification, delivery-time period and price under FOB or CIF or CF with the payment instrument time period.
– Buyer applies to their bank for issuance of Letter of Credit. Their bank (LC provider bank) will evaluate buyer’s credit-worthiness and may or may not require cash margin as per their credit limits in the bank.
– Buyer’s bank issues LC either directly to the supplier’s bank or thru their correspondence bank to further advise the beneficiary’s bank via authenticated swift MT-700.
– Advising bank authenticate the received LC and advise with their covering letter to the supplier’s bank, i.e. beneficiary’s bank to further advise the beneficiary.
– Supplier has to review the received LC & check whether it complies with the signed pro-forma invoice or sales contract terms & conditions.
– Supplier then manufactures or arranges the merchandise for the shipment. Upon shipment of the goods, when they receive the Bill of Lading they prepare other documents as per LC terms & conditions and submits these documents to their bank to claim their payment.
– Supplier’s bank will evaluate the documents and will forward to the correspondence bank to claim the payment under LC on behalf of their client.
– The correspondence bank will forward the documents to the LC issuing bank.
– The LC issuing bank/LC provider bank will check the documents thoroughly and if all the documents are in accordance to the terms of credit, the bank will debit the buyer’s account and handover the original LC documents to release the goods from the port or airport.
– At the same time, the LC issuing bank will release the payment as per the supplier’s Bill of Exchange the full amount to their bank to effect the payment immediately.
Different Types of Letter of Credit
This type of credit could not be cancelled or revoked by the issuing bank once it is issued.
This type of LC is wherein the supplier has the right to make the credit available to one or more other beneficiaries. The Letters of Credit are made transferrable once the original supplier/beneficiary is a middle-party and does not possess/own any goods or commodities by themselves; but arrange to procure from other parties for further supplying to the buyer/importer.
Once the Letter of Credit has already been transferred to the second beneficiary, it cannot be retransferred to any other third party or beneficiary, upon request of the second beneficiary.
A confirmed letter of credit is used when the issuing bank may have doubtful credit-worthiness and the supplier needs a second-guarantee by another bank as an additional confirmation to honor compliance of the payment.
This type of Letter of Credit does not require other bank’s additional confirmation.
LC at Sight
It is a payment term of LC which covers the payment instantly by the issuing bank against the Bill of Exchange enclosed with the claimed credit documents presented by the supplier’s bank in compliance with the LC terms.
In the usance LC payment term, the buyer is allowed to pay the proceeds of the supplied goods after an agreed time period subject that all the documents comply with the terms of LC. For which the buyer’s bank will issue a maturity date confirmation of the payment against Bill of Exchange to the supplier’s bank to effect the payment to the supplier accordingly.
Back to Back LCs
Back-to-back Letters of Credit are issued for intermediary trade transactions. Middle companies are receiving Letters of Credit from their buyers and need to open a new LCs towards their suppliers to arrange the merchandise to conclude their trade deal. The middle traders’ bank establishes the required LC in favor of their supplier, against the master credit received at their bank account from their Ex-buyer.
Applicable Charges for Letter of Credit
All the charges applicable for issuance of Letters of Credit, including negotiation, reimbursements and other charges like courier etc. are borne by the buyer/applicant or as per the agreed terms and conditions between buyer & supplier and has to be specified in the issued Letter of Credit.
We are direct provider of Letter of Credit from Top European Banks on behalf of buyers/importers who don’t have any bank facilities or sufficient funds to import their required goods.
Letter of Credit Procedure
To obtain Letter of Credit from Bronze Wing Trading L.L.C. please follow the below procedure:
1. Buyer presents their trade deal requirement by submitting buy and sell agreement or proforma invoice.
2. BWT will do due diligence on the trade transaction between importer/buyer & exporter/supplier and informs the concerned party if the LC application is approved or not.
3. If approved, BWT will ask their client to submit further documents and payment being their LC charges.
4. Upon receipt of documents and LC charges, BWT will proceed right away and will establish the Letter of Credit from their bank account with European Bank via authenticated swift MT-700 to the supplier’s bank.
Letter of Credit Video