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CommercialCommercial LettersLetters ofof CreditCredit NACMNACM LearningLearning CenterCenter NancyNancy
CommercialCommercial LettersLetters ofof
CreditCredit
NACMNACM LearningLearning CenterCenter
NancyNancy WatsonWatson--PistolePistole CCECCE
CICPCICP
DefinitionDefinition AA letterletter ofof creditcredit isis aa writtenwritten undertakingundertaking byby aa bankbank
DefinitionDefinition
AA letterletter ofof creditcredit isis aa writtenwritten
undertakingundertaking byby aa bankbank (issuing(issuing
bank),bank), actingacting atat thethe requestrequest andand onon
thethe instructionsinstructions ofof itsits customercustomer
(applicant(applicant forfor thethe credit)credit)
RiskRisk SpectrumSpectrum SpectrumSpectrum ofof paymentspayments
RiskRisk SpectrumSpectrum
SpectrumSpectrum ofof paymentspayments
DocumentaryDocumentary LettersLetters ofof CreditCredit CommercialCommercial (documentary)(documentary) lettersletters
DocumentaryDocumentary LettersLetters ofof CreditCredit
CommercialCommercial (documentary)(documentary) lettersletters ofof creditcredit (LC)(LC) areare aa writtenwritten
undertakingundertaking byby aa bankbank (issuing(issuing bank)bank) actingacting atat thethe requesrequestt
andand onon thethe instructionsinstructions ofof itsits customercustomer (applicant(applicant forfor thethe
credit)credit) to:to:
MakeMake paymentpayment toto (the(the orderorder of)of) aa thirdthird partyparty (beneficiar(beneficiary)y)
AcceptAccept andand paypay billsbills ofof exchangeexchange (drafts)(drafts) drawndrawn byby thethe
beneficiarybeneficiary
AuthorizeAuthorize anotheranother bankbank toto effecteffect suchsuch paymentpayment oror toto papay,y,
acceptaccept oror negotiatenegotiate suchsuch billsbills ofof exchangeexchange (drafts)(drafts)
CreditCredit termsterms andand conditionsconditions mustmust bebe metmet beforebefore payment,payment,
negotiationnegotiation oror acceptanceacceptance cancan bebe mademade
MayMay includeinclude aa varietyvariety ofof documentsdocuments
Draft,Draft, billbill ofof lading,lading, commercialcommercial invoices,invoices, certificatcertificatee ofof
originorigin andand insuranceinsurance policiespolicies oror certificatescertificates
GenerallyGenerally governedgoverned byby thethe UniformUniform CustomsCustoms andand PracticePractice forfor
DocumentaryDocumentary CreditsCredits (UCP)(UCP)
ParticipantsParticipants UnderUnder aa LetterLetter ofof CreditCredit ApplicantApplicant oror accountaccount partyparty
ParticipantsParticipants UnderUnder aa LetterLetter ofof CreditCredit
ApplicantApplicant oror accountaccount partyparty
(buyer/importer)(buyer/importer)
BeneficiaryBeneficiary (seller/exporter)(seller/exporter)
IssuingIssuing BankBank (the(the importerimporter’’ss bank)bank)
AdvisingAdvising BankBank (usually(usually aa bankbank
locatedlocated inin thethe exporterexporter’’ss localelocale andand
throughthrough whichwhich thethe creditcredit hashas beenbeen
advised)advised)
IssuingIssuing BankBank TheThe issuingissuing bank,bank, uponupon instructioninstruction ofof thethe
IssuingIssuing BankBank
TheThe issuingissuing bank,bank, uponupon instructioninstruction ofof
thethe applicant,applicant, opensopens oror ““issuesissues”” thethe
letterletter ofof credit.credit.
AdvisingAdvising BankBank TheThe advisingadvising bankbank isis usuallyusually aa branchbranch oror
AdvisingAdvising BankBank
TheThe advisingadvising bankbank isis usuallyusually aa branchbranch
oror correspondentcorrespondent ofof thethe issuingissuing bank,bank,
locatedlocated inin thethe beneficiarybeneficiary’’ss locale.locale.
AdditionalAdditional BanksBanks OtherOther banksbanks maymay becomebecome involvedinvolved asas well,well, inin
AdditionalAdditional BanksBanks
OtherOther banksbanks maymay becomebecome involvedinvolved asas
well,well, inin orderorder toto facilitatefacilitate aa letterletter ofof
creditcredit transaction.transaction.
PayingPaying Bank/AcceptingBank/Accepting BankBank ThisThis isis thethe bankbank onon whichwhich thethe draftdraft isis
PayingPaying Bank/AcceptingBank/Accepting BankBank
ThisThis isis thethe bankbank onon whichwhich thethe draftdraft isis
drawn.drawn. ItIt cancan bebe thethe issuingissuing bank,bank,
thethe advisingadvising bank,bank, oror yetyet anotheranother
nominatednominated bank.bank.
NegotiatingNegotiating BankBank TheThe termterm ““negotiatingnegotiating bankbank”” appliesapplies toto aa
NegotiatingNegotiating BankBank
TheThe termterm ““negotiatingnegotiating bankbank”” appliesapplies toto
aa bank,bank, usuallyusually inin thethe localelocale ofof thethe
beneficiary,beneficiary, thatthat givesgives valuevalue forfor
draftsdrafts and/orand/or documentsdocuments underunder thethe
credit.credit.
ConfirmingConfirming BankBank TheThe termterm ““confirmingconfirming bankbank”” appliesapplies toto thethe
ConfirmingConfirming BankBank
TheThe termterm ““confirmingconfirming bankbank”” appliesapplies toto
thethe bank,bank, usuallyusually inin thethe localelocale ofof thethe
beneficiary,beneficiary, who,who, atat thethe requestrequest ofof
thethe issuingissuing bank,bank, maymay ““confirmconfirm”” oror
obligateobligate itselfitself toto thethe beneficiarybeneficiary toto
insureinsure payment/acceptancepayment/acceptance ofof aa draftdraft
underunder thethe letterletter ofof credit.credit.
StepsSteps inin LetterLetter ofof CreditCredit CycleCycle STEPSTEP 11 -- TheThe buyerbuyer agreesagrees toto
StepsSteps inin LetterLetter ofof CreditCredit CycleCycle
STEPSTEP 11 -- TheThe buyerbuyer agreesagrees toto purchasepurchase goodsgoods fromfrom thethe sellerseller usingusing aa lettletterer ofof creditcredit asas thethe
mechanismmechanism ofof payment.payment.
STEPSTEP 22 -- TheThe buyerbuyer appliesapplies toto hishis bankbank forfor aa letterletter ofof credicredit,t, signingsigning tthehe bank'sbank's letterletter ofof creditcredit
application/agreementapplication/agreement form.form.
STEPSTEP 33 -- AfterAfter approvingapproving thethe application,application, thethe issuingissuing bankbank iissuesssues thethe acactualtual letterletter ofof creditcredit
instrumentinstrument andand forwardsforwards itit toto thethe advisingadvising bankbank viavia aa SWIFTSWIFT messmessage.age.
STEPSTEP 44 -- TheThe advisingadvising bankbank authenticatesauthenticates thethe letterletter ofof credicreditt andand delivedeliversrs itit toto thethe beneficiarybeneficiary (the(the
seller).seller).
STEPSTEP 55 -- HavingHaving receivedreceived thethe issuingissuing bank'sbank's assuranceassurance ofof paypayment,ment, thethe bebeneficiaryneficiary (seller)(seller) shipsships
thethe merchandisemerchandise toto thethe applicantapplicant (buyer).(buyer).
STEPSTEP 66 -- TheThe beneficiarybeneficiary (seller)(seller) preparesprepares thethe documentsdocuments calcalledled forfor inin tthehe letterletter ofof creditcredit andand
presentspresents themthem toto thethe negotiatingnegotiating bank.bank. TheThe letterletter ooff creditcredit maymay specifyspecify aa negotiatingnegotiating bankbank oror itit
maymay saysay itit isis "available"available withwith anyany bank,"bank," givinggiving thethe beneficiarybeneficiary thethe freedomfreedom toto choose.choose.
STEPSTEP 77 -- TheThe negotiatingnegotiating bankbank examinesexamines thethe documentsdocuments and,and, ifif theythey complycomply,, obtainsobtains fundsfunds forfor
paymentpayment toto thethe beneficiarybeneficiary inin accordanceaccordance withwith thethe ttermserms ofof thethe lletteretter ofof credit.credit.
STEPSTEP 88 -- TheThe negotiatingnegotiating bankbank transferstransfers paymentpayment toto thethe benefbeneficiaryiciary (sell(seller)er) andand forwardsforwards thethe
documentsdocuments toto thethe issuingissuing bank.bank.
STEPSTEP 99 -- TheThe issuingissuing bankbank examinesexamines thethe documents.documents. IfIf itit agreagreeses withwith thethe negotiatingnegotiating bankbank thatthat thethe
documentsdocuments complycomply withwith thethe letterletter ofof credit,credit, thethe ississuinguing bankbank obtobtainsains paymentpayment fromfrom thethe applicantapplicant
(buyer)(buyer) inin accordanceaccordance withwith thethe termsterms ofof thethe applicaapplicant'snt's letterletter ooff creditcredit agreementagreement andand forwardsforwards thethe
documentsdocuments toto thethe applicant.applicant.
STEPSTEP 1010 -- TheThe applicantapplicant (buyer)(buyer) usesuses thethe documentsdocuments toto pickpick upup thethe merchanmerchandisedise fromfrom thethe carrier,carrier,
completingcompleting thethe letterletter ofof creditcredit cycle.cycle.
LetterLetter ofof CreditCredit CycleCycle
LetterLetter ofof CreditCredit CycleCycle
TypesTypes ofof LetterLetter ofof CreditCredit RevocableRevocable vs.vs. IrrevocableIrrevocable
TypesTypes ofof LetterLetter ofof CreditCredit
RevocableRevocable vs.vs. IrrevocableIrrevocable
RevocableRevocable--underunder thisthis typetype ofof credit,credit, thethe
issuingissuing bankbank isis allowedallowed thethe rightright toto cancelcancel
(revoke)(revoke) oror modifymodify thethe termsterms ofof thethe creditcredit
withoutwithout thethe consentconsent ofof thethe beneficiary.beneficiary.
IrrevocableIrrevocable--thisthis typetype constitutesconstitutes aa definitedefinite
undertakingundertaking byby thethe issuingissuing bankbank toto paypay oror
acceptaccept draftsdrafts drawndrawn underunder thethe letterletter ofof
creditcredit providedprovided thatthat thethe termsterms andand
conditionsconditions ofof thethe creditcredit areare compliedcomplied with.with.
TypesTypes ofof LetterLetter ofof CreditCredit UnconfirmedUnconfirmed vs.vs. ConfirmedConfirmed AnAn
TypesTypes ofof LetterLetter ofof CreditCredit
UnconfirmedUnconfirmed vs.vs. ConfirmedConfirmed
AnAn unconfirmedunconfirmed letterletter ofof creditcredit isis oneone
whichwhich hashas solelysolely beenbeen advisedadvised toto thethe
beneficiarybeneficiary byby thethe advisingadvising bankbank withoutwithout
addingadding itsits confirmation.confirmation.
AA letterletter ofof creditcredit isis ““confirmedconfirmed”” whenwhen thethe
secondsecond bank,bank, usuallyusually inin thethe localelocale ofof thethe
exporter,exporter, hashas addedadded itsits confirmationconfirmation
(obligation(obligation ofof assuranceassurance ofof payment)payment) toto
thatthat ofof thethe issuingissuing bank.bank.
TypesTypes ofof LetterLetter ofof CreditCredit StraightStraight vs.vs. NegotiationNegotiation TheThe termterm
TypesTypes ofof LetterLetter ofof CreditCredit
StraightStraight vs.vs. NegotiationNegotiation
TheThe termterm ‘‘straightstraight’’ isis usedused whenwhen thethe
obligationobligation ofof thethe issuingissuing bankbank toto
pay/acceptpay/accept drafts,drafts, oror toto incurincur aa deferreddeferred
paymentpayment obligationobligation extendsextends onlyonly toto thethe
beneficiarybeneficiary ofof thethe credit.credit.
NegotiationNegotiation isis usedused whenwhen thethe obligationobligation ofof
thethe issuingissuing bankbank toto pay/acceptpay/accept draftsdrafts oror
incurincur aa deferreddeferred paymentpayment obligationobligation
extendsextends notnot onlyonly toto thethe beneficiary,beneficiary, butbut
alsoalso toto thethe nominatingnominating bankbank inin thethe credit.credit.
TypesTypes ofof DraftsDrafts SightSight Draft:Draft: ifif aa letterletter ofof creditcredit requiresrequires thethe
TypesTypes ofof DraftsDrafts
SightSight Draft:Draft: ifif aa letterletter ofof creditcredit
requiresrequires thethe beneficiarybeneficiary toto drawdraw aa
draftdraft ““atat sightsight””,, itit isis expectedexpected thatthat
thethe beneficiarybeneficiary willwill receivereceive paymentpayment
asas soonsoon asas thethe documentsdocuments areare
presentedpresented andand thethe negotiatingnegotiating
(paying)(paying) bankbank hashas hadhad aa reasonablereasonable
timetime toto examineexamine thethe documentsdocuments toto
determinedetermine ifif theythey areare inin compliancecompliance
withwith thethe creditcredit terms.terms.
TypesTypes ofof DraftsDrafts TimeTime draftdraft (also(also referredreferred toto asas acceptanceacceptance draftdraft
TypesTypes ofof DraftsDrafts
TimeTime draftdraft (also(also referredreferred toto asas acceptanceacceptance
draftdraft oror usanceusance draft)draft) –– ifif aa letterletter ofof creditcredit
requiresrequires thethe beneficiarybeneficiary toto drawdraw aa timetime
draftdraft forfor acceptanceacceptance withwith paymentpayment atat
somesome determinabledeterminable futurefuture date,date, itit isis
expectedexpected thatthat thethe bankbank onon whichwhich thethe draftdraft
isis drawndrawn (drawee)(drawee) willwill acceptaccept thethe draftdraft asas
soonsoon asas thethe documentsdocuments complyingcomplying withwith thethe
creditcredit termsterms areare atat thethe nominatingnominating bankbank
andand suchsuch nominatednominated bankbank hashas hadhad aa
reasonablereasonable timetime toto examineexamine thosethose
documents.documents.
SpecialSpecial LetterLetter ofof CreditCredit ArrangementsArrangements TransferableTransferable CreditsCredits
SpecialSpecial LetterLetter ofof CreditCredit
ArrangementsArrangements
TransferableTransferable CreditsCredits
ExporterExporter maymay wishwish toto transfertransfer rightsrights underunder aa creditcredit toto anotheranother ppartyarty
OftenOften usedused whenwhen thethe exporterexporter isis notnot thethe suppliersupplier ofof merchandmerchandiseise butbut isis anan
intermediaryintermediary betweenbetween aa suppliersupplier andand anan importerimporter
AllowsAllows thethe beneficiarybeneficiary (the(the exporter)exporter) toto transfertransfer allall oror partpart ofof thethe rightsrights
underunder thethe creditcredit toto aa thirdthird partyparty (transferee)(transferee)
TheThe respectiverespective rightsrights areare passedpassed toto thethe transfereetransferee whowho mustmust compcomplyly withwith
thethe termsterms andand conditionsconditions ofof thethe transferredtransferred creditcredit inin ororderder toto rreceiveeceive
paymentpayment
ExporterExporter mustmust arrangearrange forfor thethe importerimporter toto havehave aa creditcredit oopenedpened eexpresslyxpressly
stipulatingstipulating thatthat itit isis ‘‘transferabletransferable’’
BeforeBefore transfertransfer cancan bebe made,made, exporterexporter mustmust sendsend aa writtenwritten requesrequestt toto thethe
transferringtransferring bankbank
TransferringTransferring bank,bank, whetherwhether itit hashas confirmedconfirmed thethe creditcredit oorr not,not, iiss underunder nono
obligationobligation toto effecteffect thethe transfertransfer exceptexcept toto thethe extentextent andand inin ththee mannermanner toto
whichwhich itit hashas expresslyexpressly consentedconsented andand untiluntil bankbank chargescharges forfor suchsuch transfertransfer
areare paidpaid
UCPUCP setssets forthforth thethe conditionsconditions underunder whichwhich creditscredits maymay bebe transfetransferredrred andand
specifiesspecifies thethe rightsrights andand obligationsobligations ofof thethe variousvarious parpartiesties
UCPUCP providesprovides thatthat aa creditcredit maymay bebe transferredtransferred onlyonly onconcee
SpecialSpecial LetterLetter ofof CreditCredit ArrangementsArrangements AssignmentAssignment ofof ProceedsProceeds
SpecialSpecial LetterLetter ofof CreditCredit
ArrangementsArrangements
AssignmentAssignment ofof ProceedsProceeds
AssignmentAssignment ofof proceedsproceeds shouldshould notnot bebe confusedconfused withwith ‘‘transferabletransferable’’ creditcredit
TheThe termsterms areare entirelyentirely differentdifferent
ForFor aa letterletter ofof creditcredit toto bebe transferable,transferable, itit mustmust clearlclearlyy statestate thatthat itit isis
‘‘transferabletransferable’’;; nono otherother terminologyterminology isis acceptableacceptable
HoweverHowever accordingaccording toto thethe UCP,UCP, ‘‘thethe factfact thatthat aa creditcredit isis notnot statedstated toto bebe
transferabletransferable doesdoes notnot affectaffect thethe beneficiarybeneficiary’’ss rightsrights toto assignassign anyany proceedsproceeds
whichwhich hehe maymay becomebecome entitledentitled toto underunder suchsuch credit,credit, inin accoaccordancerdance withwith
thethe provisionsprovisions ofof thethe applicableapplicable lawlaw’’
WithWith anan assignmentassignment ofof proceeds,proceeds, thethe beneficiarybeneficiary ofof aa lettletterer oror ccreditredit
assignsassigns allall oror partpart ofof thethe proceedsproceeds underunder aa creditcredit toto aa thirdthird papartyrty (the(the
assignee)assignee)
UnlikeUnlike aa transferredtransferred credit,credit, thethe beneficiarybeneficiary maintainsmaintains sosolele righrightsts toto thethe
creditcredit andand isis solelysolely responsibleresponsible forfor complyingcomplying withwith itsits termsterms anandd conditionsconditions
ForFor thethe assignee,assignee, assignmentassignment meansmeans onlyonly thatthat thethe payingpaying bank,bank, ononcece itit
receivesreceives noticenotice ofof thethe assignment,assignment, undertakesundertakes toto followfollow ththee assiassignmentgnment
instructions,instructions, ifif andand whenwhen paymentpayment isis mademade
AnAn assignmentassignment ofof proceedsproceeds doesdoes notnot provideprovide thethe assigneeassignee witwithh anyany rightsrights
underunder thethe credit.credit.
TheThe assigneeassignee isis dependentdependent uponupon thethe beneficiarybeneficiary forfor compliancompliancece
ArrangementArrangement isis moremore riskyrisky forfor thethe assigneeassignee thanthan aa transfertransferredred crcreditedit
SpecialSpecial LetterLetter ofof CreditCredit ArrangementsArrangements BackBack--toto--BackBack AnAn exporterexporter
SpecialSpecial LetterLetter ofof CreditCredit
ArrangementsArrangements
BackBack--toto--BackBack
AnAn exporterexporter may,may, asas inin thethe situationsituation describeddescribed undeunderr transferabltransferablee
credits,credits, bebe anan intermediaryintermediary betweenbetween aa suppliersupplier andand anan importerimporter
ExporterExporter mightmight askask thethe advisingadvising bankbank oror aa thirdthird banbankk toto issueissue aa
secondsecond letterletter ofof creditcredit inin favorfavor ofof thethe supplier,supplier, uusingsing asas collacollateralteral aa
letterletter ofof creditcredit issuedissued inin thethe exporterexporter’’ss favorfavor
BanksBanks areare reluctantreluctant toto enterenter intointo backback--toto--backback arrangementsarrangements
becausebecause ofof thethe associatedassociated risksrisks
AnticipatedAnticipated compliancecompliance andand eventualeventual paymentpayment underunder tthehe firstfirst
creditcredit shouldshould provideprovide somesome assuranceassurance ofof paymentpayment undunderer thethe
second,second, butbut performanceperformance underunder thethe firstfirst creditcredit maymay becomebecome
impossible,impossible, eithereither throughthrough actsacts ofof thethe partiesparties invoinvolved,lved,
governmentgovernment edict,edict, oror otherother causescauses
MostMost banksbanks willwill generallygenerally preferprefer theirtheir customerscustomers toto utilizeutilize trantransfersfer
oror assignmentassignment ofof proceedsproceeds arrangementsarrangements ratherrather thanthan backback--toto backback
lettersletters ofof creditcredit
SpecialSpecial LetterLetter ofof CreditCredit ArrangementsArrangements RedRed ClauseClause AA beneficiarybeneficiary
SpecialSpecial LetterLetter ofof CreditCredit
ArrangementsArrangements
RedRed ClauseClause
AA beneficiarybeneficiary maymay requirerequire financingfinancing inin
orderorder toto completecomplete tthehe
manufacturingmanufacturing ofof merchandisemerchandise oror toto purchasepurchase itemsitems toto fifillll aa partparticularicular
orderorder
AA RedRed clauseclause creditcredit helpshelps achieveachieve thisthis
NameName isis derivedderived fromfrom thethe historicalhistorical practicepractice ofof placingplacing aa notatinotationon inin thethe
creditcredit inin redred inkink toto identifyidentify thisthis optionoption
IssuingIssuing bankbank authorizesauthorizes thethe advisingadvising oror confirmingconfirming bbankank toto makemake aa cashcash
advanceadvance toto thethe beneficiarybeneficiary againstagainst thethe beneficiarybeneficiary’’ss writtenwritten undertakingundertaking toto
presentpresent documentsdocuments evidencingevidencing shipmentshipment inin compliancecompliance withwith tthehe crecreditdit
termterm
RedRed clauseclause permitspermits thethe exporterexporter toto obtainobtain anan advanceadvance onon papartrt oror allall ofof thethe
amountamount ofof thethe credit,credit, asas specifiedspecified inin thethe creditcredit
WhenWhen thethe letterletter ofof creditcredit isis drawndrawn under,under, thethe payingpaying oror nnegotiategotiatinging bankbank
deductsdeducts thethe amountamount ofof thethe advanceadvance andand anyany interestinterest duedue
ShouldShould thethe beneficiarybeneficiary failfail toto shipship oror meetmeet thethe creditcredit reqrequiremeuirements,nts, thethe
payingpaying oror negotiatingnegotiating bankbank lookslooks toto thethe issuingissuing bankbank toto obtainobtain
reimbursementreimbursement forfor thethe amountamount ofof thethe advanceadvance plusplus interestinterest
IssuingIssuing bankbank thenthen chargescharges thethe accountaccount ofof thethe importerimporter
SpecialSpecial LetterLetter ofof CreditCredit ArrangementsArrangements InstallmentInstallment CreditCredit
SpecialSpecial LetterLetter ofof CreditCredit
ArrangementsArrangements
InstallmentInstallment CreditCredit
InstallmentInstallment creditcredit –– applicantapplicant forfor aa letterletter ofof creditcredit maymay needneed toto bebe assurassureded ofof
receivingreceiving thethe merchandisemerchandise overover aa periodperiod ofof timetime inin certaincertain ggiveniven installmentsinstallments
WhenWhen aa bankbank issuesissues anan installmentinstallment creditcredit oror aa credicreditt stipulatingstipulating shipmentsshipments byby
installmentinstallment withinwithin givengiven periods,periods, thatthat creditcredit shoulshouldd clearlyclearly stastatete ‘‘shipmentsshipments mustmust bebe
effectedeffected inin thethe followingfollowing installmentsinstallments’’
FailureFailure toto meetmeet thethe conditionsconditions ofof anyany installmentinstallment causecausess thethe crecreditdit toto bebe nullnull andand voidvoid
forfor futurefuture drawingsdrawings
RevolvingRevolving creditcredit
ThereThere areare similaritiessimilarities andand majormajor differencesdifferences betweenbetween installmentinstallment andand revolvingrevolving
creditscredits withwith differencesdifferences representingrepresenting majormajor risksrisks forfor allall parpartietiess involvedinvolved
RevolvingRevolving lettersletters ofof creditcredit containcontain instructionsinstructions whiwhichch allowallow thethe beneficiarybeneficiary toto drawdraw forfor
specifiedspecified amountsamounts overover specifiedspecified periodsperiods
ItIt usesuses thethe samesame letterletter ofof creditcredit toto covercover numerousnumerous shipmentsshipments ovoverer aa longlong periodperiod
withoutwithout thethe necessitynecessity ofof issuingissuing newnew creditscredits oror amendingamending thethe eexixistingsting creditscredits
ItIt restrictsrestricts thethe amountamount availableavailable forfor eacheach shipmentshipment
ItIt controlscontrols thethe frequencyfrequency ofof shipmentsshipments andand amountsamounts availableavailable
RevolvingRevolving creditscredits areare eithereither ‘‘cumulativecumulative’’ oror ‘‘nonnon--cumulativecumulative’’ –– controllingcontrolling thethe amountamount
availableavailable forfor drawingdrawing
SpecialSpecial LetterLetter ofof CreditCredit ArrangementsArrangements DeferredDeferred PaymentPayment ExporterExporter
SpecialSpecial LetterLetter ofof CreditCredit
ArrangementsArrangements
DeferredDeferred PaymentPayment
ExporterExporter maymay bebe askedasked byby thethe buyerbuyer toto provideprovide financingfinancing ununderder aa letterletter ofof creditcredit forfor aa
termterm beyondbeyond sixsix monthsmonths
AA letterletter ofof creditcredit providingproviding forfor thethe drawingdrawing ofof aa timetime draftdraft forfor acceptanceacceptance byby thethe bankbank
(i.e.(i.e. bankerbanker’’ss acceptance)acceptance) mightmight notnot bebe appropriateappropriate becausebecause thethe acceptaacceptancence wowoulduld bebe
ineligibleineligible forfor discountdiscount
UnderUnder aa deferreddeferred paymentpayment credit,credit, afterafter shipmentshipment thethe eexporterxporter prepresentssents complyingcomplying
documentsdocuments toto thethe negotiating/payingnegotiating/paying bankbank
InsteadInstead ofof drawingdrawing aa draftdraft onon thethe bankbank oror applicantapplicant wwhenhen thethe docdocumentsuments areare
presented,presented, thethe exporterexporter authorizesauthorizes thethe bankbank toto relereleasease documentsdocuments againstagainst thethe bankbank’’ss
obligationobligation toto paypay onon aa futurefuture datedate asas specifiedspecified inin thethe creditcredit
TheThe issuing/confirmingissuing/confirming bankbank thereforetherefore makesmakes aa promisepromise ofof futurfuturee sightsight payment(spayment(s))
ForFor incurringincurring thethe liability,liability, thethe bankbank assessesassesses aa dedeferredferred paymenpaymentt commission,commission, usuallyusually
aa feefee proportionateproportionate toto itsits regularregular acceptanceacceptance commiscommission,sion, adjustadjusteded forfor thethe longerlonger
periodperiod
IfIf thethe beneficiarybeneficiary requiresrequires interiminterim financing,financing, itit maymay bebe ableable toto useuse thethe
issuing/confirmingissuing/confirming bankbank’’ss promisepromise ofof futurefuture paymentpayment toto obtainobtain creditcredit fromfrom itit’’ss bankbank
BeneficiaryBeneficiary cannotcannot discountdiscount anyany paperpaper forfor thisthis financinfinancing,g, becausbecausee aa deferreddeferred paymentpayment
creditcredit doesdoes notnot provideprovide forfor thethe creationcreation ofof aa negotianegotiableble instruminstrumentent whichwhich maymay bebe soldsold
inin thethe secondarysecondary marketmarket
ImportantImportant PointsPoints toto bebe CheckedChecked byby BeneficiaryBeneficiary UponUpon ReceiptReceipt ofof anan
ImportantImportant PointsPoints toto bebe CheckedChecked byby
BeneficiaryBeneficiary
UponUpon ReceiptReceipt ofof anan ExportExport LetterLetter ofof CreditCredit
WhetherWhether thethe creditcredit isis irrevocableirrevocable oror revocablerevocable
WhetherWhether thethe creditcredit isis confirmedconfirmed oror unconfirmedunconfirmed
WhenWhen thethe creditcredit expiresexpires (expiration(expiration datedate--bebe awareaware ofof thethe datedate format)format)
WhereWhere thethe creditcredit expiresexpires (at(at thethe seller'sseller's bankbank counterscounters oror ooffshffshoreore counters)counters)
CorrectnessCorrectness ofof beneficiary'sbeneficiary's (seller's)(seller's) titletitle andand addressaddress [c[checkheck L/C]L/C]
CorrectnessCorrectness ofof applicant'sapplicant's (buyer's)(buyer's) titletitle andand addressaddress [che[checkck L/L/C]C]
AmountAmount (consider(consider termsterms ofof salessales--possiblepossible additionaladditional charges)charges)
DoesDoes itit saysay "about""about" soso much,much, "up"up to"to" soso muchmuch -- ifif so,so, anan amountamount maymay varyvary aa
percentagepercentage moremore oror lessless
TenorTenor ofof draft(s)draft(s) [at[at sight,sight, 30,30, 6060 days]days]
LocationLocation ofof payingpaying bankbank (where(where creditcredit isis available;available; i.e.,i.e., LonLondondon,, NewNew York)York)
IsIs thethe creditcredit negotiable?negotiable?
DocumentsDocuments requiredrequired toto bebe presentedpresented byby thethe beneficiarybeneficiary
DescriptionDescription andand unitunit priceprice ofof merchandisemerchandise
PointPoint ofof shipmentshipment andand destinationdestination
StipulationsStipulations onon partialpartial shipmentsshipments andand transshipmentstransshipments
SpecialSpecial instructionsinstructions
ShippingShipping terms/termsterms/terms ofof salesale
WhetherWhether subjectsubject toto uniformuniform customscustoms andand practicepractice forfor documendocumentarytary creditscredits (U.C.P.(U.C.P.
600)600)
EffectiveEffective UseUse ofof LettersLetters ofof CreditCredit ToTo facilitatefacilitate thethe speed,speed,
EffectiveEffective UseUse ofof LettersLetters ofof CreditCredit
ToTo facilitatefacilitate thethe speed,speed, accuracyaccuracy andand easeease ofof
handling,handling, lettersletters ofof creditcredit documentsdocuments mustmust
conformconform inin allall aspectsaspects toto thethe termsterms andand
conditionsconditions ofof thethe credit.credit.
ThisThis
reviewreview
isis
notnot meantmeant toto covercover allall
situations;situations; eacheach creditcredit hashas
itsits ownown
peculiarities.peculiarities. ItIt isis importantimportant toto rememberremember
inin allall cases,cases, however,however, thatthat problemsproblems cancan
bebe avoidedavoided byby meetingmeeting thethe termsterms ofof thethe
creditcredit exactly.exactly.
AllAll DocumentsDocuments ProperlyProperly signedsigned SufficientSufficient numbernumber ofof originalsoriginals
AllAll DocumentsDocuments
ProperlyProperly signedsigned
SufficientSufficient
numbernumber
ofof
originalsoriginals
andand
copiescopies
providedprovided (one(one extraextra forfor bank)bank)
Marks,Marks, numbers,numbers, andand otherother informationinformation areare inin
accordanceaccordance withwith allall otherother documentsdocuments
CorrectionsCorrections areare properlyproperly authenticatedauthenticated
PresentationPresentation mustmust bebe onon oror beforebefore expirationexpiration datedate
ofof thethe creditcredit atat thethe givengiven locationlocation andand withinwithin thethe
presentmentpresentment periodperiod specifiedspecified withinwithin thethe creditcredit
CommercialCommercial InvoiceInvoice IssuedIssued byby beneficiary,beneficiary, unlessunless otherwiseotherwise
CommercialCommercial InvoiceInvoice
IssuedIssued byby beneficiary,beneficiary, unlessunless otherwiseotherwise statedstated inin ccreditredit
MadeMade outout toto thethe accountaccount party,party, unlessunless otherwiseotherwise stastatedted inin creditcredit
AmountAmount notnot inin excessexcess ofof thethe creditcredit amountamount oror availaavailableble balancebalance ooff
thethe creditcredit (i.e.(i.e. 10%+/10%+/--))
CoversCovers fullfull shipment,shipment, ifif partialpartial shipmentsshipments notnot permpermitteditted
QuantityQuantity shipped,shipped, weightweight andand measuresmeasures agreeagree withwith bibillslls ofof ladinglading
andand otherother documentsdocuments
DescriptionDescription ofof goodsgoods isis identicalidentical toto thatthat shownshown inin creditcredit
UnitUnit priceprice agreesagrees withwith creditcredit
Marks,Marks, numbersnumbers andand otherother informationinformation areare inin accordaaccordancence withwith
relatedrelated documentsdocuments
ShippingShipping termsterms agreeagree withwith creditcredit
Calculations,Calculations, extensionsextensions andand additionsadditions areare correctcorrect
DoesDoes notnot containcontain chargescharges oror otherother merchandisemerchandise notnot sspecifiedpecified inin
thethe creditcredit
DoesDoes notnot statestate "used,""used," "rebuilt,""rebuilt," oror "secondhand""secondhand" uunlessnless soso
authorizedauthorized inin creditcredit
Signed,Signed, certifiedcertified
CommercialCommercial InvoiceInvoice InsuranceInsurance documentsdocuments asas requiredrequired inin thethe
CommercialCommercial InvoiceInvoice
InsuranceInsurance
documentsdocuments asas requiredrequired inin thethe
creditcredit
havehave
toto
bebe
presented.presented. AnAn insuranceinsurance certificatecertificate isis notnot acceptabacceptablele whenwhen thethe
creditcredit requiresrequires anan insuranceinsurance policy.policy. Brokers'Brokers' covercover notesnotes areare nonott
acceptable,acceptable, unlessunless soso specifiedspecified inin thethe creditcredit
AmountAmount isis sufficient;sufficient; atat leastleast equalequal CIFCIF valuevalue ofof sshipmenthipment oror
greatergreater thanthan thethe draftdraft amountamount ofof thethe invoiceinvoice valuevalue
ProperlyProperly signedsigned andand countersignedcountersigned ifif requiredrequired
EndorsedEndorsed byby partyparty toto whomwhom lossloss isis payablepayable (sign(sign co.co. namename onon
backback ofof policypolicy oror certificate)certificate)
DateDate notnot
laterlater thanthan thatthat
ofof
billbill ofof ladinglading oror otherother shippingshipping
documentsdocuments
IssuedIssued inin thethe samesame currencycurrency asas credit,credit, unlessunless otherotherwisewise specifiespecifiedd
CorrectlyCorrectly showsshows scopescope ofof entireentire voyagevoyage inin complianccompliancee withwith termsterms
ofof creditcredit
Packing,Packing, shippingshipping marks,marks, etc.etc. agreeagree withwith informatioinformationn shownshown inin
otherother documentsdocuments
CoversCovers specificspecific risksrisks asas requiredrequired byby creditcredit (instit(instituteute clauseclause A,A, warwar
risksrisks andand strikestrike risks)risks)
CommonCommon DocumentationDocumentation DiscrepanciesDiscrepancies •• DraftsDrafts areare presentedpresented
CommonCommon DocumentationDocumentation
DiscrepanciesDiscrepancies
•• DraftsDrafts areare presentedpresented afterafter LetterLetter ofof CreditCredit hashas expexpiredired oror afterafter
timetime forfor shipmentshipment hashas expiredexpired
•• InvoiceInvoice valuevalue oror draftdraft exceedsexceeds amountamount availableavailable undunderer LetterLetter
ofof CreditCredit
•• ChargesCharges includedincluded inin invoiceinvoice areare notnot authorizedauthorized inin LLetteretter ofof
CreditCredit
•• AmountAmount ofof insuranceinsurance coveragecoverage isis inadequateinadequate oror covercoverageage doesdoes
notnot includeinclude risksrisks requiredrequired byby LetterLetter ofof CreditCredit
•• InsuranceInsurance documentdocument isis notnot endorsedendorsed and/orand/or countersicountersignedgned
•• DateDate ofof insuranceinsurance policypolicy oror certificatecertificate isis laterlater ththanan datedate onon bibillslls
ofof ladinglading
•• BillsBills ofof ladinglading areare notnot cleanclean--thatthat is,is, theythey bearbear notationsnotations thatthat
qualifyqualify goodgood orderorder andand conditioncondition ofof merchandisemerchandise oror itsits packingpacking
•• BillsBills ofof ladinglading areare notnot markedmarked "on"on board"board" whenwhen soso rrequiredequired byby
LetterLetter ofof CreditCredit
•• "On"On board"board" endorsementendorsement oror changeschanges onon billsbills ofof ladinladingg areare notnot
signedsigned byby carriercarrier oror itsits agentagent oror initiatedinitiated byby partpartyy whowho signedsigned
billsbills ofof ladinglading
•• "On"On board"board" endorsementendorsement isis notnot dateddated
CommonCommon DocumentationDocumentation DiscrepanciesDiscrepancies •• BillsBills ofof ladinglading areare notnot
CommonCommon DocumentationDocumentation
DiscrepanciesDiscrepancies
•• BillsBills ofof ladinglading areare notnot endorsedendorsed
•• BillsBills ofof ladinglading areare mademade outout "to"to order"order" (shipper's(shipper's order,order, blankblank
endorsed)endorsed) wherewhere LetterLetter ofof CreditCredit stipulatesstipulates "straig"straight"ht" (direct(direct ttoo
consignee)consignee) billsbills ofof ladinglading oror vicevice versa.versa. [In[In somesome countries,countries, "t"too
order"order" billsbills ofof ladinglading areare prohibitedprohibited andand heavyheavy penpenaltiesalties oror
additionaladditional dutiesduties areare assessedassessed forfor failurefailure toto shipship onon aa "straigh"straight"t"
billbill ofof lading.]lading.]
•• BillsBills ofof ladinglading dodo notnot indicateindicate "freight"freight prepaid"prepaid" oorr "freight"freight cocollect"llect"
asas stipulatedstipulated inin thethe LetterLetter ofof CreditCredit
•• BillsBills ofof ladinglading areare markedmarked "freight"freight prepaid"prepaid" andand frfreighteight chargescharges
areare notnot includedincluded inin invoiceinvoice
•• Descriptions,Descriptions, marksmarks andand numbersnumbers ofof merchandisemerchandise areare notnot thethe
samesame onon allall documentsdocuments presentedpresented oror areare notnot asas requirequiredred byby LetterLetter
ofof CreditCredit
•• NotNot allall documentsdocuments requiredrequired byby LetterLetter ofof CreditCredit areare presentedpresented
•• DocumentsDocuments areare "stale"stale dated"dated" thatthat is,is, notnot presentedpresented withinwithin aa
reasonablereasonable timetime afterafter issuanceissuance (i.e.(i.e. withinwithin thethe prepresentmentsentment
period)period)
•• InvoiceInvoice doesdoes notnot specifyspecify shipmentshipment termsterms (C&F,(C&F, CIF,CIF, FOB,FOB, etc.)etc.) asas
statedstated inin LetterLetter ofof CreditCredit
•• InvoiceInvoice isis notnot signedsigned asas LetterLetter ofof CreditCredit requiresrequires
ConsequencesConsequences DocumentsDocuments withwith DiscrepanciesDiscrepancies TheThe negotiatingnegotiating bankbank
ConsequencesConsequences
DocumentsDocuments withwith DiscrepanciesDiscrepancies
TheThe negotiatingnegotiating bankbank willwill notifynotify thethe beneficiarybeneficiary ththatat thethe documedocumentsnts presentedpresented
containcontain discrepancies.discrepancies. IfIf thethe beneficiarybeneficiary cannotcannot ccorrectorrect suchsuch ddocuments,ocuments,
withinwithin thethe limitslimits ofof thethe LetterLetter ofof Credit,Credit, thethe benebeneficiaryficiary willwill instructinstruct thethe
negotiatingnegotiating bankbank toto either:either:
1.1. TelexTelex thethe issuingissuing bankbank toto requestrequest approvalapproval fromfrom thethe applicantapplicant (c(customer)ustomer)
toto paypay withwith thethe mentionedmentioned discrepancies.discrepancies.
2.2. SendSend thethe documentsdocuments toto thethe issuingissuing bankbank onon aa collectcollectionion basisbasis
3.3. PostPost aa guaranteeguarantee inin favorfavor ofof thethe payingpaying bankbank toto secsecureure releaserelease ooff fundsfunds
EvenEven ifif thethe beneficiarybeneficiary cancan correctcorrect thethe documents,documents, paymentpayment willwill definitelydefinitely bebe
delayeddelayed andand additionaladditional chargescharges willwill bebe incurred.incurred.
WhenWhen documentsdocuments cannotcannot bebe correctedcorrected thethe resultingresulting coconsequencesnsequences arare:e:
1.1. Confirmation,Confirmation, ifif any,any, isis voided.voided.
2.2. IssuingIssuing bankbank isis underunder nono obligationobligation toto pay.pay.
RESULT:RESULT: YOUYOU HAVEHAVE LOSTLOST THETHE ASSURANCEASSURANCE OFOF
PAYMENTPAYMENT UNDERUNDER THETHE LETTERLETTER OFOF CREDITCREDIT
LettersLetters ofof CreditCredit andand thethe ExporterExporter Advantages:Advantages: AffordsAffords greatestgreatest
LettersLetters ofof CreditCredit andand thethe ExporterExporter
Advantages:Advantages:
AffordsAffords greatestgreatest protectionprotection againstagainst nonpaymentnonpayment (except(except fforor
cashcash inin advance)advance)
MinimalMinimal riskrisk ofof nonpaymentnonpayment
•• CommercialCommercial (issuing(issuing oror confirmingconfirming bank)bank) nownow responsresponsibleible forfor
payment;payment; notnot dependentdependent onon importerimporter’’ss abilityability toto paypay
•• AA bankbank cannotcannot refuserefuse paymentpayment forfor documentsdocuments thatthat areare inin orderorder
ifif itit hashas incurredincurred anan irrevocableirrevocable obligationobligation toto dodo soso
PromptPrompt andand convenientconvenient paymentpayment
•• GenerallyGenerally moremore soso thanthan collectioncollection fromfrom thethe importerimporter
AccessAccess toto financingfinancing
Disadvantages:Disadvantages:
ArrangingArranging LCLC -- greatergreater cost,cost, paperworkpaperwork forfor thethe importerimporter
Thus,Thus, exportersexporters whowho insistinsist onon lettersletters ofof creditcredit maymay llimitimit
theirtheir marketmarket reachreach andand havehave troubletrouble findingfinding buyersbuyers
LettersLetters ofof CreditCredit andand thethe ImporterImporter Advantages:Advantages: AvailabilityAvailability ofof
LettersLetters ofof CreditCredit andand thethe ImporterImporter
Advantages:Advantages:
AvailabilityAvailability ofof creditcredit andand financingfinancing
•• NoNo needneed forfor immediateimmediate paymentpayment onon aa sightsight timetime draftdraft
•• PossiblePossible toto obtainobtain acceptance,acceptance, otherother kindskinds ofof financifinancingng fromfrom thethe issuingissuing
bankbank
SecuritySecurity
•• AssuresAssures thatthat exporterexporter mustmust meetmeet allall LCLC termsterms andand conditconditionsions befobeforere
paymentpayment isis mademade
•• AssuresAssures thatthat documentsdocuments onon theirtheir faceface complycomply withwith creditcredit
•• ImporterImporter stillstill dependsdepends onon exporterexporter’’ss integrityintegrity sincesince thethe bankbank assumesassumes
nono responsibilityresponsibility forfor documentdocument accuracyaccuracy oror genuinenessgenuineness
Disadvantages:Disadvantages:
IncreasedIncreased costcost andand lessless convenienceconvenience
••
ImporterImporter mustmust makemake LCLC issuanceissuance arrangementsarrangements
•• LCLC’’ss usuallyusually costcost moremore moneymoney andand timetime thanthan collectionscollections
NoNo guaranteeguarantee ofof receivingreceiving properproper merchandisemerchandise
UCPUCP 600600 UCPUCP isis thethe acronymacronym forfor UniformUniform CustomsCustoms andand PracticePractice forfor
UCPUCP 600600
UCPUCP isis thethe acronymacronym forfor UniformUniform CustomsCustoms andand
PracticePractice forfor DocumentaryDocumentary CreditsCredits usedused byby letterletter
ofof creditcredit practitionerspractitioners worldwideworldwide
ItIt isis notnot aa lawlaw butbut ratherrather thethe mostmost successfulsuccessful
privateprivate rulesrules forfor tradetrade everever developeddeveloped
TheyThey werewere firstfirst issuedissued inin 19331933 whenwhen thethe ICC,ICC, toto
overcomeovercome conflictingconflicting lawslaws onon lettersletters ofof creditcredit inin
differentdifferent countries,countries, createdcreated thethe UCPUCP toto bringbring
uniformityuniformity toto thethe fieldfield
FirmlyFirmly establishedestablished afterafter 7777 years,years, thethe UCPUCP areare thethe
rulesrules usedused toto governgovern billionsbillions ofof dollarsdollars inin tradetrade
transactionstransactions eacheach yearyear
UCPUCP 600600 ForFor thethe recordrecord thethe lawslaws thatthat governgovern lettersletters ofof creditcredit
UCPUCP 600600
ForFor thethe recordrecord thethe lawslaws thatthat governgovern lettersletters ofof
creditcredit transactionstransactions inin thethe UnitedUnited StatesStates areare foundfound
inin ArticleArticle FiveFive ofof thethe UniformUniform CommercialCommercial CodeCode
TheseThese lawslaws areare notnot necessarilynecessarily recognizedrecognized outsideoutside
thethe UnitedUnited States,States, similarsimilar toto LCLC lawslaws establishedestablished
inin otherother countries,countries, andand thusthus thethe reasonreason forfor thethe
formationformation ofof thethe UCPUCP
WhileWhile thethe UCPUCP isis notnot law,law, ifif thethe letterletter ofof creditcredit
makesmakes itselfitself subjectsubject toto thethe UCP600UCP600 thatthat meansmeans
thisthis setset ofof rulesrules isis incorporatedincorporated intointo thethe LCLC andand
thethe partiesparties havehave agreedagreed toto bebe boundbound byby themthem
ThankThank You!You!
ThankThank You!You!