The letter of credit

The letter of credit is intended to ensure distance purchases not only within one country, but also in order to export goods to merchants located in other countries. Therefore, we must from the so-called primary as it is the existence of a contract of sale.

I dedicate to international trade and do it from the financial point of view and as a continuation of the topic already started upon financial instruments. Today we have talk about the formula used to make payments in the field of foreign trade: the letter of credit.

The letter of credit

Is a conditional payment order through which an issuing bank, on behalf of an originator. Undertakes to pay to the beneficiary, either directly or through a bank correspondent. Against the presentation of certain documents that certify the sale, shipping, quality, quantity, and other conditions of the goods or of the performed service, provide compliance with the terms and conditions.

Letters of credit or documentary credits are regulate by the International Chamber of Commerce. Through uniform rules on documentary credits and applications. This means of payment is offering a higher level of security the seller in international commercial operations. At the same time offering guarantees to the buyer.

To facilitate the understanding of the reader. Include the following graphic of the flow of the letter of credit:

Parties in the letter of credit.

For the purpose of studying the mechanism of letters of credit. There are some definitions that are important to make explicit.

• Originator: it means the part to request that the credit is issued.


• Beneficiary: it means the part in favor of issued credit.


• As presentation: means a presentation that complies with the terms and conditions of the loan. With the applicable provisions of the UCP 600 rules, and with the international standard banking practice.


• Confirmation: it means a firm commitment of the confirming bank. Which added to the issuing bank, to honor or negotiate as presentation.


• Confirming bank: means the Bank that adds its confirmation to a credit with the authorization or at the request of the issuing bank.


• Issuing bank: means the Bank that issues a credit at the request of an originator or on their own.


• Designated bank: means the Bank in which the credit is available or any bank in the case of a credit available with any bank.


• Bank warning: means the Bank notifying the credit at the request of the issuing bank.


• Credit: means any agreement, as you want it to name or describe. Which is irrevocable, and that constitutes a firm commitment to certain of the issuing bank to honor a compliant presentation.


• Honor: it means paying to view if the credit is available for payment to the view; make a commitment for deferred payment and pay at maturity. If the credit is available for deferred payment; accept a bill of Exchange ("turn") wage by the beneficiary and pay at maturity if the credit is available for acceptance.


• Negotiation: means purchase by the Bank appoint turns (delivered on a bank other than the designated bank) and/or documents under cover of a compliant presentation, anticipating or according to anticipate funds to the beneficiary on or before the banking business day in that the designated bank should be reimbursed.


• Presentation: it means both the delivery to the issuing bank or the appointed Bank of documents under cover of a documentary credit, own delivered documents.


• Presenter: means a beneficiary, Bank or other party carrying out a presentation.

Types of the letter of credit

The documentary credit in the operations of international trade may be:

• Not confirm (just warned);


• Confirmed;


• Transferable and non-transferable;


• Rotary;


• Back to back;


• Subsidiary; stand-by; with clause red and


• Green clause;


• Revocable and irrevocable.

Simply informed

When the Bank correspondent (or audible warning Bank in the country of the seller) does not assume responsibility for payment or acceptance. Responsibility for payment is take only by the issuing bank. The Bank only correspondent is oblige to hand over the letter of credit to the beneficiary.

Confirmed

When the issuing bank performs the opening of letter of credit and the audible warning and warning. Bank is commit, direct and main, pay. Thus assuming the same commitments against the vendor to the issuing bank.  Which has to pay the seller as well as the issuer. The Bank "confirming" and "warning" now the payment is made and charge to the issuing bank. This check documents again and pay to the conformer. The seller in this case commercial risk is even less, because there's a second forced Bank, therefore the risk of not charging is almost nil.

Transferable

When it is issue in favor of a beneficiary who is not who produces the goods. But an intermediary that has enter into a purchase agreement with a buyer. But It depends on a third party (the producer - exporter). To deliver the goods to your customer. Since this type of credit can be put total or partially at the disposal of another beneficiary. It is particularly suitable for the intermediary companies in international trade.

Back to back

When the beneficiary of the credit is not the producer of the goods and receive credit is not transferable. So the broker ask his bank to issue new credit document it first received credit-back. This way the recipient of the first credit, get in his country with the guarantee of the letter of credit. That the intermediary bank will open another letter of credit in favor of the producer of exported goods. Here are two credits other than the transferable credit difference.

Rotating or renewable

When once use, becomes to renew under the terms and original as many times as indicate in the credit. Without the need for a modification specific credit. The issuance of a new one. It is typically used when shipments of goods are made periodically for a prolonged period.

Stand-by

Credits which are used as collateral to the beneficiary. This type of credit guarantees that if the importer does not pay, will make it the issuing bank against presentation of documents showing the non-payment. They are issued with the idea that should not be used. It is actually a bank guarantee. They are subject to the UCP600, but they may also be subject to the ISP 984.

These letters of credit are instruments of guarantee that are used with the fundamental purposes of supporting payment of monetary obligations in a due date and support the occurrence or non-occurrence of an event and the compliance of obligations under a contract. They represent a commitment irrevocable, independent firm and document it.

Red clause

Credit is when the exporter benefits from the amount of total or partial credit, prior to the delivery of the goods. It is a form of financing to the exporter that gives its buyer, insofar as it authorizes the beneficiary (exporter) to receive advances on account of the claim against the commitment of this present papers designated in the letter of credit in time and form.

Green clause

Credit is when the exporter benefits from the amount of total or partial credit, prior to the delivery of the goods, but must be documented to justify the money received goes to the fulfillment of its obligations, for example presenting certificates of deposit of the goods in question.

Revocable or irrevocable

By default, the letter of credit is irrevocable, i.e. commitment issued and accepted by the parties may not be modified without the consent of all parties involved (banks, originator, beneficiary). By express indication can be issued a revocable nominee documentary credit, in which case may be modified provided that it has not been used, and will be firm obligations acquired, or course of performance.

Rules and uniform applications for appropriations documents, 2007 revision, publication No. 600 of the International Chamber of Commerce, are applicable to any documentary credit when the text of the credit expressly indicates that it is subject to these rules. They oblige all parties except in what credit modify or exclude express way.

Documentation

In accordance to the UCP 600, involved banks deal with documents and not with goods, therefore, must be very careful at the time of the issuance of the documents given the thorough examination that should make the Bank in the buyer's country.

Documentary credit must detail the issuing bank data, presentation of documentation, and expiration of the negotiating deadline.

When documents that are required are presented to the issuing bank or a confirming bank, and constitute a "compliant" presentation, the issuing or confirming bank must "honor" If the credit is available and according to the form of payment either to the view or cash, deferred, or through a designated bank, etc.

Managing amendments

Opening and any amendment of the letter of credit can notify the beneficiary through the detector Bank and is indicating this to notice that they have established to your satisfaction, the apparent authenticity of the credit or amendment, and that notification faithfully reflects the terms and conditions of the same. A credit may not modify or cancel without the consent of the bank issuing or confirming if any and the beneficiary.

Once the seller shipped the goods, has 21 days to send the documentation, but in no case after the expiration date of the documentary credit. Once the confirming bank receives these documents, these are examined in context to determine whether they constitute a presentation as, not being necessary that the data therein included are identical, but should not be conflicting each other. The deadline for determining the conformity or otherwise of documents is 5 working days’ maximum. Any document presented but not required in the LC, as well as also a condition contained in credit that does not detail the document which must show its compliance, will be not taken into account. The date of the documents may be prior to the issuance of the credit, but not later than its presentation.

Bank Communication

When the Bank determines that the submission of documents is not as there are what are called "discrepancies" and notify you the presenter to the effects raise or correct them. It may happen that documents are kept in the Bank waiting for instructions from the presenter; or that returned the documents; or that the Bank will act in accordance with instructions received from the presenter.

If the expiration date of the documentary credit or last day for presentation of documents for example, matches a day of strike in the Bank which must be submitted, the term depending on the case, will be extended to the first banking business day following.

Liability / Responsibility

With regard to cases of force mature, such as natural disasters, riots, disturbances, wars, strikes, etc., the Bank does not assume any liability or responsibility for the consequences resulting from the interruption of your activity.

Documents must be submitted at least with an original of each and in the number of copies indicated by credit, considered "original", to those who have apparently an original way, mark, stamp or label of the issuer, and except provisions to the contrary, that seems to have been written by hand by the issuer, on original letterhead of the issuer, or one who is original. These documents detailed in the documentary credit can be: commercial invoice, transport documents, Bill of lading and document of insurance among others.

Commercial invoice:

Must be issued by the beneficiary with the exception of credits transferred bless; on behalf of the payer, in the same currency of credit and not required to be signed. The description of the goods must be what appears in the credit, and the amount can be higher than allowed in credit, being the decision of the Bank which accepted, binding on all parties, provided that the Bank has not honored or negotiated for an amount exceeding the allowable credit.

Transport document

There are different specifications according to the means of transport used. In the case of multi modal transport, a transport document covering at least two modes of transport, and must indicate the name of the carrier and be signed by the carrier or agent appointed on behalf of the carrier, will be issued or by the Captain or agent appointed on behalf of the captain.

You must also indicate that the merchandise has been shipped, shipped on board or taken to load in the place established in the credit. The date of issuance of the transport document shall be deemed the date of dispatch, freight or lading on board, as well as the date of shipment.

Must indicate the place of dispatch, taking load or shipment to final destination appearing on credit. In the event that there is a transfer to another means of transport, you must indicate that the goods will be or which may be transshipped.

Banks will accept only a "clean" transport document. That is, one that does not contain any clause or notation that record form expresses. The defective State of the goods or the packaging.

A knowledge of shipping, which must contain the terms and conditions of carriage. Indicate the name of the carrier will be issue in the case of maritime transport. To be sign by the carrier or an agent designate by account of the carrier, or the captain or an agent on behalf of the captain. You must indicate that the merchandise has been ship on board a vessel name in the charging port establish in the loan through a text or an annotation "on-board" indicating the date that the merchandise has been shipped on board.

Bill of landing

The date of Bill of lading shall be deemed to be the date of shipment. Unless the Bill of lading contains an annotation "on-board" indicating the date of shipment, in which case the date stated on that annotation will be considered to be the date of shipment. You must also indicate shipment from the port of loading to the port of discharge stipulated in the credit.

Insurance document:

This one, such as an insurance policy for example, should be apparently issue and signed by an insurance company. An insurer or its agents or representatives. Any signature of a broker or agent must indicate that the agent or proxy has sign on behalf of the insurance company or the insurer.

When the insurance document indicates that it has been issue in more than one original. All the originals must be submit. The document date cannot be later than the date of shipment, unless the insurance document establishes. That the cover is effective from a date that is not later than the date of shipment.

The insurance document must indicate the insure amount and be express in the same currency of the credit. This insure amount must be at least 110% of the CIF or CIP of the merchandise value.

Should be that the risks are cover at least between the place of loading or embarkation. The place of discharge or final destination stipulate in the credit. The latter should indicate the type of insurance require and. Where appropriate, the additional risks to cover.