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Articles on Trade Credit

Documents requested in a letter of credit transaction.

Author: Puru Grover, M.B.A., LL.M. © Credit Guru Inc | CreditGuru.com

What are the Commonly Requested Documents in a Letter of Credit Transaction?

A Letter of Credit is also known as 'Documentary Credit'. Nestled in the word 'documentary' is the word 'document'. This is because, in a letter of credit transaction, documents are its driving force. The performance of the seller/exporter is tied to the documents requested in the letter of credit. What that means is that in a LC transaction, the payment from a bank to the seller/exporter is conditional upon the ability of the seller to generate the documents that are requested by the buyer/importer in the letter of credit. In order to pay the seller, once the bank receives the documents from the seller, the bank examines the submitted documents to see if they comply with the documentary credit terms that were set by the buyer and the governing rules of the LC.  The bank also checks the instructions to ensure that the documents submitted by the seller contain no errors.  Since these complying documents submitted by the seller to the bank are the trigger for the seller to get paid, it makes them the most important component of a letter of credit transaction in international trade.

What documents are generally requested in a letter of credit transaction?

It is evident that the buyer generally requests the documents from a seller in a LC transaction.

So think as a buyer/importer when looking for the logic behind the kind of documents that typically get requested in a LC (or documentary credit) transaction.

From a buyers' perspective, the buyer would absolutely need the following:

• Proof of value of goods being imported.
• Proof of Shipment.
• Proof of Packing.

Furthermore, the buyer may also want the following:

• Proof of Origin of goods. (same as bullet point number 9 given below)
• Proof that the products meet the desired quality
• Proof of Insurance.

Additionally, the buyer's country may have statutory requirements like:

• Phytosanitary or Health Certification of product that is being imported
• The buying country’s embassy-certified (or legalized) Invoice and/or documents
• Certification and declaration by the seller/exporter that goods in a particular export shipment are wholly obtained, produced, manufactured or processed in a particular country.

Moreover, the nominated bank that needs to pay the money to the beneficiary of the LC (i.e. seller/exporter) may want a:

• Financial negotiable instrument to be drawn-up by seller in order to make payment to the seller at sight or by acceptance of a draft.

So based on the above-listed 10 requirements respectively, let’s generate the document list:

• Commercial Invoice (Proof of Value)
• Bill of Lading (Proof of Shipment)
• Packing List (Proof of Packing)
• Certificate of Origin (Proof of Origin)
• Inspection Certificate (Proof of Quality)
• Insurance Certificate (Proof of Insurance)
• Health Certificate of Phytosanitary Certification
• Consular Invoice or Legalized Commercial Document(s)
• Certificate of Origin (same as #4 given above)
• Draft or Bill of Exchange (Negotiable Instrument to be given to the bank in order to get paid)

If you notice these documents that are requested in a LC, typically fall in to the following five categories:

• Commercial Documents
• Shipping and Transport Documents
• Insurance documents
• Official Documents required by Buyer/Importer’s country
• Financial Documents

The following is a brief explanation of the above listed documents:

• Commercial Invoice

In international trade, a Commercial Invoice is a very important document since it is the official bill of sale and a document based on which the importer pays the exporter. It is issued by the seller/exporter and should be on the beneficiary’s (exporter’s) letterhead that matches the beneficiary information on the L/C. A commercial Invoice includes a description of merchandise (with their Harmonized codes), price, terms and name and address of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit. Unless the letter of credit specifically states otherwise, a generic description of the merchandise is usually acceptable in the other accompanying documents. This is also a document that is used for custom clearance and payment of duties. It should have the correct currency designation and made out in the same currency as the letter of credit.  As per LC Rules UCP600 Article 18: Commercial Invoice "need not be signed” anymore.

• Transport Documents

Bill of Lading (Marine/Ocean/Port-to-Port)

Bill of Lading (B/L) is a contract between a seller and the carrier evidencing delivery of goods into the care and custody of the carrier. When authenticated it becomes a document of title. The B/L can be ‘straight’ or ‘negotiable. A straight B/L states that the goods are consigned to a specified person or entity and it is not negotiable free from. If the B/L is negotiable it can be made to the “order” of blank; bank; shipper; buyer; or seller.  The documents evidence control of goods. The B/L also serves as a receipt for the merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination. (Refer LC Rules UCP600 Article 20 UCP600)

A ‘Clean on Board’ B/L means that goods have been received on board by the carrier in apparent good condition and stowed ready for transport.

Other Transport Documents: Non-negotiable seawaybill; Charter party bill of lading; Multimodal transport document; Air transport document; Road, rail, or inland waterway transport document; Courier and post receipt. (Covered under LC rules UCP600 Articles 21 to 25)

• Packing List

A packing list is usually requested by the buyer from the seller to assist the buyer in identifying the contents of each package or container that is being exported. It must show the shipping marks and number of each package.

A typical Packing Slip contains the following information:

• Name, Address, Phone of Seller/Exporter (consignor)
• Name, Address, Phone of Buyer/Importer (consignee)
• Description of Goods being Exported
• Quantity (Number)
• Package Type
• Total Number of Packages with contents of each package
• Markings used on the Package
• Reference Commercial Invoice, Date and Buyer's Purchase Order, Delivery Term and Mode of Transport
• Carrier details with a reference to the transport document, vessel name and container number

Though a Packing List is not usually required to be signed, some countries and their customs authorities may want the packing slip to be signed and stamped.

The Packing List should not reveal any financial information (price/value etc.) about the shipment.

• Certificate of Origin (C/O or CoO)

A certificate of origin is a document that provides evidence of the country-of-origin of the imported goods. It is used in determining any preferential custom tariff, duty on goods and whether or not goods originate in a country against which the importing country has trade restrictions.  The certificate should be consistent with and identified with the other shipping documents by shipping marks and numbers, and must be signed by the appropriate authority. If this document is missing, the highest rates may be applied to each consignment, and Customs authority in the buyer’s country may not allow the goods to be imported. Unlike transport and insurance documents, Letter of credit rules (UCP600) do not cover certificate of origin under any specific articles.

• Inspection Certificate

An inspection certificate evidences that goods were inspected and details the result of the inspection. It is a preventative measure against possible fraud and a means of protecting the buyer against receiving substandard or unwanted goods. Inspection is generally carried out by a third party reputable firm which is independent. Clean Report of Findings (CRF) is a type of Inspection Certificate.

• Insurance Certificate

An Insurance Certificate is requested by the buyer/importer when the trade terms specified in the LC is either ‘Cost, Insurance & Freight’ (CIF) or ‘Cost & Insurance Paid to’ (CIP). As per these trade terms the seller contracts for insurance cover against the buyer's risk of loss or damage to the goods during carriage. The insurance document should cover the risk specified in the Documentary Credit.  It should be for the CIF or CIP value of the goods. Otherwise the insurance should be for a minimum of 110% of the amount for which payment, negotiation or acceptance is requested in the L/C. (LC Rules UCP 600 Article 28 covers Insurance)

• Health Certificate | Certificate of Free Sale | Certificate of Sanitation

Certain countries require that all imports of meat, poultry, fish, seafood, livestock, vegetables, fruits, etc. that are marked for human consumption are attested by the exporting country that they are free from pests and/or diseases; meet the standards and legislation for export and are fit for human consumption. The declaration that is given on a Health Certificate by the exporting country is a government to government affirmation and is generally issued by government-authorized agencies and departments. However, in a LC transaction if there is no mention of who should issue the Health Certificate then it leaves the door open for anyone to issue the certificate and that includes the seller.

The Health Certificate is also known by the following names: Certificate of Free Sale; Certificate of Sanitation and Free Sale; Certificate of Sanitation and Sanitary Certificate.

Phytosanitary Certificate: Similarly, a Phytosanitary Certificate is issued by the exporting country for plants and plant products that are being exported. The certificate is issued by the plant protection government body of the exporting country to the plant protection government body of the importing country certifying that the plants or plant products covered by the certificate have been inspected and are considered to be free from pests and that they conform to the existing phytosanitary requirements of the importing country.

• Consular or Customs Invoice

A consular or customs invoice is prepared by the seller on an official country-specific form. It may be required to be ‘visaed’ (officially stamped) and signed by a consular officer of the importing country that has an office/consulate in the exporting country. The value of goods required must agree with that shown on the commercial invoice.

• Certificate of Origin
• Bill of Exchange or Draft

A Bill of Exchange (or ‘Draft’) is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time a sum of certain money to or to the order of a specified person or bearer. {Read more about this in our Article on Bill of Exchange }

Avoiding Document Discrepancies

Upon receipt of a letter of credit advice from the advising bank the seller should immediately:

• Verify that the LC Type, its amount and the terms and conditions are as per the negotiated sales contract.
• Calculate that the expiry date, the latest shipment date and presentation of the document period is workable.
• Ascertain if the requested documents can be produced and submitted within the above-stated timelines stipulated in the LC
• Check that the documents that are requested in the LC is what was mutually agreed upon and that there are no non-documentary conditions in the LC
• See if Merchandise description in the LC is proper and can be stated correctly on all relevant document like Commercial Invoice and Shipping Document. 
• Ensure that all Names and Addresses (Beneficiary's and Applicant's) are stated correctly
• see if the LC seeks any 'special conditions' that the seller has to fulfil and that it can be accomplished.
• Make sure that the Shipping document shows the correct Consignee
• Make the Draft (Bill of Exchange) for the correct amount, correct tenor and is drawn upon the correct party.
• Make sure information stated on different documents is consistent and as per the LC requirements.
• See that the currency is properly designated in the Commercial Invoice.(USD, CAD etc.)
• Note if the Bill of Lading (Shipping document) requires to indicate whether freight is 'prepaid' or ; 'collect' i.e. payable at destination
• Note if the Bill of Lading (Shipping document) requires to mention the port of loading and port of discharge

The seller/exporter should note that the negotiating bank's (that bank that receives and examines the documents) ability to pay against documents submitted by the seller under a given LC, depends entirely on the strict compliance of these documents with the terms and conditions of the LC and the provisions contained in the rules for LCs which is UCP600.

An Opinion on Documents:

An opinion: The seller should negotiate with the buyer to include only the most essential documents in the LC transaction. (Perhaps just the first four in our list). For any other documents that the buyer requests the seller can deliver them directly to the buyer outside the LC arrangement.

This will hasten up payment considerably and reduce the chances of discrepancies which mostly sprout from documents that have to be submitted to the bank for payment, since they are made part of the LC transaction by the buyer.

Keep in mind that any document that is made a part of the LC transaction has to be submitted to the bank for scrutiny and payment. For this reason you want to keep the list of documents that form part of the LC transaction to a minimum.  

Author: Puru Grover M.B.A., LL.M. © Credit Guru Inc | CreditGuru.com

For this article please note:

A) That the following terms have been used interchangeably in this article:

• Documentary Credit = Letter of Credit = LC =  L/C
• Beneficiary = The Seller = The Exporter =The party that that derives payment from the letter of credit
• Applicant = The Buyer = The Importer = The party who arranges to open the Letter of Credit with their bank = The party who requests the documents from the seller.

B) In this article there is a reference to UCP600.

UCP stands for Uniform Customs and Practices for Documentary Credits (or UCP or UCPDC)

These are a globally accepted set of LC rules on the issuance and use of letters of credit that are put out by the International Chambers of Commerce (ICC). The current version of these rules is UCP600. (600 is the publication number)

You can find more information and buy a copy of these rules from the International Chambers of Commerce website iccwbo.org

This one-day seminar gives a comprehensive overview of LCs and their application in mitigating payment risk...

Credit Ratings form major credit agencies on different counties of the world to help you assess international risk...

This glossary is a basic guide to terms used in international trade transactions and letters of credit...

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Cover Letter for Sending Documents

Sample covering letter for submission of documents to banks, tax, revenue, registration etc. Sample cover letter for attached documents to university. Sample cover letter for sending attached documents by courier, or by hand to clients, companies, employee, students, and parents etc.

Cover Letter format to Send Documents

Dear manager,

I am writing to you because I am sending you some important documents, and because they are important they require a cover letter. The documents that I am sending you are related to getting started in the new company that you have started. The documents will help move things smoothly, and if anyone questions why who, or what then they will help.

The documents that are attached are the company contract with all signatures, council permission papers, all photo graphical identifications for all people involved such as passports, and driving licenses. I hope that you will keep them safe, and they will help you with what you need to do.

Yours sincerely,

Mr. Francis Walcott

Sample Cover Letter for Attached Documents

Alan Taylor House 1, Street 1, Manchester

This is with reference to your request for No Objection Certificate (NOC) dated 18 January, XXXX. We are pleased to inform you that nothing had come to our attention that causes us to belief that we are under constraint to issue NOC to your good self for your job purposes.

We are enclosing herewith NOC for your ready reference. In case of further query, please feel free to contact us. We hope that this would serve to your entire satisfaction. Thanking you, and with profound regards.

Very truly yours,

Simon Head Student Affairs Department

To majesty’s passport office,

I am writing this letter as a cover letter for me sending some very important documents by post. I am sending these documents to help support my application for my passport. You will find inside one months’ worth of bank statements with the proof of my financial status, and proof of address. Also inside you will find my original birth certificate, and national insurance number.

I do hope that this will be enough supporting documents to get me my passport. And if you need anything more please inform me as soon as possible so that I can send it out as well fast.

Mr. Jason Taylor

Dear Mr. Ahmed,

I am submitting herewith the following documents as asked by your company.

I am sending these documents for further progress in the fulfillment of the formalities required for the joining your company . All the documents asked by the company are attached along with this letter. You can let me know regarding any other formalities concerning the matter.

Your consideration of my application is clearly appreciated. Thanking you for your time.

Mahnoor Imran

Covering Letter for Documents Enclosed

Mr. Ijaz Farooq Meezan Bank Ltd Meezan House, C-25, Estate Avenue, S.I.T.E, Karachi

Dear Mr. Farooq Sahib,

As per our telephonic conversation, please find the enclosed copy of letter sent from our Welfare Organization for sponsorship of needy students. We will thank you for your support toward this noble cause.

Warm Regards,

Mahmood Ahmad

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Cover Letter for Document Submission Sample

At some point in the job application or admission application process, you may be asked to submit documents for the bank, company, school. These documents should be sent over in the same professional manner as your application letter, i.e., with a formal cover letter. In this guide, we'll introduce you to the uses of a cover letter for document submission and a sample of such a cover letter .

• # Cover Letter Sample for Document Submission to A Company
• # Cover Letter Sample for Document Submission to Schools
• # Sample Letter with Attached Documents
• # How to Edit Cover Letter for Document Submission Template
• # Tips for Writing Cover Letter for Document Submission

Covering Letter for Submission of Documents

This is a free cover letter template for submitting documents. Free Download and customize it according to the sample text below.

Supported formats

Cover letter for document submission sample to a company.

Below, you'll find a sample cover letter for document submission. To help you understand what a cover letter for document submission looks like, we've put together a short cover letter to show you the structure.

First Name Last Name Address Line 1 Address Line 2 Address Line 3 Postcode Phone Number Email

Contact Name Company Name Address Line 1 Address Line 2 Address Line 3 Postcode Phone Number Email Day/Month/Year

Dear Mr. Keys,

This letter contains an itemized list of the following documents; as asked for by your company:

• A photocopy of my driving license
• A paper document that proves my address (bank statement)
• A photocopy of the inside of my passport
• A photocopy of the front of my passport
• A photocopy of my NI card

I am sending these documents to you to ensure further progress in fulfilling the requirements for joining your company. All the documents asked for by the company are attached alongside this letter. Please let me know if you require any other documentation.

I greatly appreciate your consideration of my job application and wish to let you know that I am still seriously interested in further pursuing the application. Thank you for your time.

Kind regards, Your name

As you can see by our cover letter for document submission sample, these types of cover letters are notoriously short. It's not necessary to repeat your first cover letter or include anything from your CV with these types of cover letters. They are simple, factual, and used as a formality when contacting a company regarding a job application.

Cover Letter for Document Submission Sample to Schools

Here is a sample to write a covering letter for document submission to schools.

The Administration Department University Name Address Line 1 Address Line 2 Address Line 3 Postcode Day/Month/Year

Contact Name Department Name Address Line

Subject: Document submission letter

Respected Sir,

I am XX, a student of [School Name] with application number [Number]. I am writing this letter to send you the remaining documents which are required for the application process. At the time of admission, I was not able to submit my marksheets and transfer certificate as I was yet to receive it from my previous school. Now that I have received it, I would like you to accept it and update my record accordingly.

Thank you for considering my request for late submission once again. Please feel free to contact me in case of any discrepancy.

Sincerely, Your name Contact number email address

Attachments: Class 12th transfer certificate

Sample Letter with Attached Documents

The General Manager, Company Name, Address.

From Your name, Designation, Company name, Address.

Dear Sir/Madam,

Here we are submitting the marketing performance report. Please find the enclosed report along with this letter.

For any modifications, please let us know, we will try to revise the document.

Designation, Company name

How to Edit Cover Letter for Document Submission Template in PDF

After downloading the PDF cover letter template, you can edit it with a professional PDF editor, Wondershare PDFelement - PDF Editor . With this tool, you can change the texts, images, forms, signatures, etc., in the PDF documents and make your documents perfect for submission.

• Create high quality PDF cover letter without losing layout and formatting;
• Free PDF cover letter samples available;
• Convert Word, PPT, Excel, etc. to PDF or vice versa;
• Compress files for email attachments.

Step 1. Open the Cover Letter Template

Step 2. Click on "Edit" and Enter Your Text as You Like

Step 3. Complete and Save Your Cover Letter

What should you mention in a cover letter for document submission

In a cover letter for document submission, you'll need to mention several things. These cover letters are exact, so, likely, you won't write more than half a page.

• Start with your contact details and your name. Even if you're sending the documents by email, you should always include your name and contact details in a cover letter for requested documents, as this helps the employer figure out who's contacting them.
• State why you're contacting the company. There are hundreds of applicants for every job position, and though you may be onto the next stage, there will still be several other people sending similar documents. Tell the company who you are, what position you applied to, and ensure that you point out that they asked you to send more documentation across to them.
• An itemized list of documents. Whatever documents you're sending, no matter how many of them there are, write a shortlist in your cover letter to tell the company which documents you include in your email or letter.
• Express your excitement. Like a standard job cover letter, express your interest in the job position again, on a smaller scale to how you expressed your excitement the first time you contacted the company. This will let them know that you're still interested.

Other Tips to Remember

In addition to our cover letter for the document submission sample and our tips on what to mention in the cover letter, we have a few more hints to share with you:

• Make sure that you have the correct company details. It wouldn't do to send a cover letter for requested documents to the wrong email address, nor would it be good to address a non-existent manager at the company. To have gotten this far, you will have been conversing with somebody. At the very least, address that person.
• Never send original documents. Sending original documents is a nightmare, especially through the post. You're likely never to see them again. Postal systems at companies are messy at best, and your potential employer won't be expecting original documents from any of the applicants. Send photocopies or scan copies of the documents into your computer and email them across to the company.
• Always date the cover letter. This isn't necessary when sending the cover letter via email, but if you're posting your documentation, ensure that your cover letter is dated. This lets the company know when they were sent to arrive at the hiring manager late.
• Keep the letter short and professional. As mentioned, it's essentially a formality. You're simply covering all of your professional bases, so it's best to keep the letter short, tell them what you're attaching, and sign off soon after.

With these tips and our sample cover letter for document submission, we're positive you'll be able to contact the company with ease.

Posted by Elise Williams to Updated: 2024-04-18 13:58:49

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What Is a Letter of Credit?

How a letter of credit works, types of letters of credit, example of a letter of credit.

• Applying for a Letter of Credit
• Advantages and Disadvantages
• Letter of Credit FAQs

The Bottom Line

• Personal Finance

Letter of Credit: What It Is, Examples, and How One Is Used

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Jessica Olah / Investopedia

A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility (financial assistance that is essentially a loan).

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 to protect buyers and sellers.

Key Takeaways

• A letter of credit is a document sent from a bank or financial institution that guarantees that a seller will receive a buyer’s payment on time and for the full amount.
• Letters of credit are often used within the international trade industry.
• There are many different letters of credit, including one called a revolving letter of credit.
• Banks collect a fee for issuing a letter of credit.

Buyers of major purchases may need a letter of credit to assure the seller that the payment will be made. A bank issues a letter of credit to guarantee the payment to the seller, essentially assuming the responsibility of ensuring the seller is paid. A buyer must prove to the bank that they have enough assets or a sufficient line of credit to pay before the bank will guarantee the payment to the seller.

Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit.

Because a letter of credit is typically a negotiable instrument , the issuing bank pays the beneficiary or any bank nominated by the beneficiary. If a letter of credit is transferable , the beneficiary may assign another entity , such as a corporate parent or a third party, the right to draw.

The International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.

How Much a Letter of Credit Costs

Banks usually charge a fee for a letter of credit, which can be a percentage of the total credit they are backing. The cost of a letter of credit will vary by bank and the size of the letter of credit. For example, the bank may charge 0.75% of the amount that it's guaranteeing.

Fees can also depend on the type of letter. In an import-export situation, an unconfirmed letter of credit is less costly. A confirmed letter of credit may have higher fees attached based on the issuing bank's credit strength.

The types of letters of credit include a commercial letter of credit, a revolving letter of credit, a traveler’s letter of credit, a confirmed letter of credit, and a standby letter of credit. International trade will also sometimes use an unsecured—also called a red clause —letter of credit.

Commercial Letter of Credit

This is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

Revolving Letter of Credit

This kind of letter allows a customer to make any number of draws within a certain limit during a specific period. It can be useful if there are frequent merchandise shipments, for example, and you don't want to redraft or edit letters of credit each time.

Traveler’s Letter of Credit

For those going abroad, this letter will guarantee that issuing banks will honor drafts made at certain foreign banks.

Confirmed Letter of Credit

A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default . The issuing bank in international transactions typically requests this arrangement.

Standby Letter of Credit

A standby letter of credit provides payment if something does not occur, which is the opposite of how other types of letters of credit are structured. So, instead of facilitating a transaction with funding, a standby letter of credit is like an insurance contract. It protects and compensates one party (the beneficiary) if the other party named in the agreement fails to perform the stated duty or meets certain service level agreements outlined in the letter of credit.

Citibank offers letters of credit for buyers in Latin America, Africa, Eastern Europe, Asia, and the Middle East, who may have difficulty obtaining international credit on their own. Citibank’s letters of credit help exporters minimize the importer’s country risk and the issuing bank’s commercial credit risk.

Letters of credit are typically provided within two business days, guaranteeing payment by the confirming Citibank branch. This benefit is especially valuable when a client is located in a potentially unstable economic environment.

How to Apply for a Letter of Credit

Letters of Credit are best prepared by trained professionals, as mistakes in the detailed documents required can lead to payment delays and fees. Due to industry variations and types of letters of credit, each may be approached differently.

Here's an import-export example.

• The importer's bank credit must satisfy the exporter and their bank. The exporter and importer complete a sales agreement.
• Using the sales agreement's terms and conditions, the importer's bank drafts the letter of credit; this letter is sent to the exporter's bank. The exporter's bank reviews the letter of credit and sends it to the exporter after approval.
• The exporter ships the goods as the letter of credit describes. Any required documentation is submitted to the exporter's bank.
• The exporter's bank reviews documentation to ensure letter of credit terms and conditions were met. If approved, the exporter's bank submits documents to the importer's bank.
• The importer's bank sends payment to the exporter's bank. The importer can now claim the goods sent.

Advantages and Disadvantages of a Letter of Credit

Obtaining letters of credit may be necessary in certain situations. However, like anything else related to banking, trade, and business, there are some pros and cons to acknowledge.

Can create security and build mutual trust for buyers and sellers in trade transactions.

Makes it easier to define the specifics of when and how transactions are to be completed between involved parties.

Letters of credit can be personalized with terms that are tailored to the circumstances of each transaction.

Can make the transfer of funds more efficient and streamlined.

Buyers typically bear the costs of obtaining a letter of credit.

Letters of credit may not cover every detail of the transaction, potentially leaving room for error.

Establishing a letter of credit may be tedious or time-consuming for all parties involved.

The terms of a letter of credit may not account for unexpected changes in the political or economic landscape.

How Does a Letter of Credit Work?

Often, in international trade, a letter of credit is used to signify that a payment will be made to the seller on time and in full, as guaranteed by a bank or financial institution. After sending a letter of credit, the bank will charge a fee, typically a percentage of the letter of credit, in addition to requiring collateral from the buyer. Among the various types of letters of credit are a revolving letter of credit, a commercial letter of credit, and a confirmed letter of credit.

What Is an Example of a Letter of Credit?

Consider an exporter in an unstable economic climate, where credit may be more difficult to obtain. A bank could offer a buyer a letter of credit, available within two business days, in which the purchase would be guaranteed by the bank's branch. Because the bank and the exporter have an existing relationship, the bank is knowledgeable of the buyer's creditworthiness , assets, and financial status. 

What Is the Difference Between a Commercial Letter of Credit and a Revolving Letter of Credit?

As one of the most common forms of letters of credit, commercial letters of credit are when the bank makes payment directly to the beneficiary or seller. Revolving letters of credit, by contrast, can be used for multiple payments within a specific time frame. Typically, these are used for businesses that have an ongoing relationship, with the time limit of the arrangement usually spanning one year.

When Does Payment Occur With a Letter of Credit?

A letter of credit is like an escrow account in that payment to the beneficiary only happens when the other party performs a specific act or meets other performance criteria spelled out in the letter of credit agreement.

Letters of credit can play an important part in trade transactions. There are different types of letters of credit that may be used, depending on the circumstances. If you need a letter of credit for a business transaction, your current bank may be the best place to begin your search. However, you may need to expand the net to include larger banks if you maintain accounts at a smaller financial institution.

International Trade Administration. " What Is a Letter of Credit? "

International Chamber of Commerce. “ Global Rules .”

Export-Import Bank of the United States. " To Confirm or Not to Confirm (Letters of Credit) ."

Cornell Law School. " 12 CFR § 208.24 - Letters of credit and acceptances. "

USAID. " Letters of Credit and Trade Finance ," p.106.

FDIC. " Off-Balance Sheet Activities ," p.2

Columbia Bank. " Letters of Credit. "

Citi. “ International Trade .”

Citi. “ Products and Services .”

International Trade Administration. " Letter of Credit. "

International Trade Administration. " Trade Finance Guide ," Page 7.

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Buyer's Credit & Supplier's Credit

How to Prepare and Check Letter of Credit Documents

Purpose of Letter of credit (“LC”) is to give payment security to the beneficiary subject to documents presented under the LC complying with the requirements of the LC.

To check if documents are compliant, banks examine the required documents based on:

• The terms and conditions of the documentary credit.
• The applicable rules of UCP 600.
• The applicable content of ISBP 745.

A generic checklist is given below to assist parties involved in the transaction in preparing compliant documents. Kindly note the below checklist is only illustrative and not exhaustive.

Initial Scrutiny

• All documents called for in LC are submitted.
• All documents are submitted in the requisite number of copies.
• Documents are issued and signed by the persons specified/required to issue those documents.
• Documents, where necessary and stipulated, are dated. If they are dated, the dates should be consistent with the terms of LC.
• Documents, where necessary and stipulated, are manually signed.
• Material alterations/additions on documents are duly authenticated.
• The requisite and stipulated documents are originals or marked as originals and appear to be signed.
• All documents, on their face appear to be in compliance with the terms and conditions of the credit.
• Shipment is effected within the time stipulated. If it is an installment credit whether the requisite quantity is shipped within the stipulated time schedule and is as per the terms of the LC.
• Any partial shipment is effected? If so whether it was permissible under LC. If yes, ensure that the partial shipment effected is as per the terms of the LC.
• Documents are presented at the place of expiry stipulated in the LC.
• Documents are presented within the expiry date (validity) of the credit. If documents are presented to the nominated bank on an extended validity date in terms of provisions of Article 29(a) of UCP 600, the nominated bank should confirm on its covering schedule that the presentation at their counters was made within the time limits extended in accordance with Article 29(a) of UCP 600.

Bill of Exchange (Draft)

• It should bear a date.
• It should be drawn by the beneficiary or any other person authorized in this regard.
• It should be signed by the drawer or his authorized representative.
• It should be drawn unconditionally and should be free from any extraneous conditions and should contain the reference to LC.
• It should be drawn for a specified amount and should be consistent with the terms of the drawing permitted in the LC.
• It should be drawn payable to a specified payee as mentioned in LC and properly endorsed.
• It should be drawn payable for tenor specified in the LC.
• It must indicate that it is drawn under the subject LC.
• It should, unless otherwise specified, be drawn in the same currency of invoice/LC.
• It should be made out by the beneficiary or other authorized person(s) as stipulated in the LC.
• It should unless otherwise specified be made out in the name of the applicant.
• Description of goods specified must correspond with the description in the LC.
• The quantity of goods, unit prices, delivery terms etc. must correspond with the LC terms and be consistent with other relative documents.
• It should be drawn in the same currency of LC, unless otherwise specified.
• It should not include any charges which are not permitted by LC. As per the stipulations of LC, the gross value of invoice should not exceed the credit amount.
• It should show deduction towards agency commission payable etc. as applicable.
• Arithmetical calculations should be accurate, (compare unit price and quantity).
• The final amount of invoice or the percentage of drawing as permitted in LC should correspond with the draft amount.
• If partial shipments are effected, amount of drawings should correspond to proportionate quantities shipped (where only quantity is mentioned without unit prices etc.)
• Invoice being a ‘documents of contents’, the details stated therein must correspond/be consistent with details appearing on all other documents.
• It must confirm to facts like IEC No. and ITC(HS) classification No. etc. as stipulated in the LC.
• If invoice is issued for an amount in excess of the amount permitted by credit (when not specifically prohibited by terms of LC), the nominated bank or the issuing bank has the option to accept a commercial invoice issued for an amount in excess of amount permitted by the credit, and its decision will be binding upon all the parties, provided the bank in question has not honoured or negotiated for an amount in excess of that permitted by the credit as per Article 18(b) of UCP 600.

Bill of Lading

• Be issued by a named carrier or his authorized agent.
• Bear a distinct number.
• Indicate the place of issuance.
• Indicate the date of issuance.
• Be signed by the named carrier or his authorized agent.
• Indicate the name of consignor and his address.
• Indicate the name of consignee and his address.
• Indicate brief description of goods being carried/shipped.
• Indicate port of loading or taking charge (in case of Marine BL, it should indicate a definite port of loading and in other cases, it can be shown as an ‘intended’ port).
• Name of the vessel and voyage number.
• Be presented in full set of originals (full set comprises two or more originals, all of which are marked as ‘ORIGINALS’ and signed. The number of copies of originals issued is to be indicated on the BL itself). Similarly, transport documents marked as Original, Duplicate, Triplicate etc. are all to be treated as originals.
• Meet all other stipulations of the credit.
• Must indicate whether ‘Freight Prepaid’ or ‘Freight Payable’.
• Must bear the number of the LC.

A Bill of Lading should not (Unless Otherwise Specified by Terms of LC)

• Be a Charter party Bill of Lading.
• Indicate that the carrying vessel is propelled by sail only.
• Be issued by a freight forwarded (unless he himself acting as a carrier or his agent). However, if LC permits Freight Forwarder’s Receipt it can be accepted if issued by IATA approved agent.
• Must not indicate that the goods are or will be loaded on ‘deck’. A clause on a transport document stating that the goods may be loaded on deck is acceptable, Article 26(c) of UCP 600.
• Be a claused Bill of Lading.

Bill of Lading can (Unless Otherwise Prohibited or is Inconsistent with Other Terms of LC)

• Be a short form or blank backed BL if the LC permits.
• Indicate a place of taking charge is different from the port of loading and/or a place of final destination different from the port of discharge.
• Indicate that the goods are carried in Container(s) Trailer(s) / or ‘LASH’ barge(s), if LC permits.
• Indicate that the goods will be trans-shipped provided the same BL covers the entire carriage.
• Be a ‘Freight Payable’ BL.
• Evidence freight prepayment by a stamp or otherwise on BL to that effect like ‘Freight Prepaid’.
• Bear reference by stamp or otherwise to the costs additional to freight charges.
• Show clauses such as ‘shippers load and count’ or ‘said by shipper to contain’ etc. with reference to goods covered by the BL.
• Show shipper as a third party other than beneficiary.
• Be deemed as ‘Clean on Board’ if it is an onboard BL without any superimposed clauses or notations expressly declaring the defective condition of the goods and or the packaging.

Other aspects of BL

• An ‘OnBoard’ BL must indicate the name of the carrying vessel/voyage number.
• A transport document issued by a freight forwarder can be accepted provided freight forwarder has issued the same in his capacity as a carrier or his agent and all other requirements are met with and is issued by IATA approved agent.
• Received for shipment BL can be accepted, if affixed with ‘ON BOARD’ notation duly signed or initialed and dated by the carrier or his agent.
• If LC calls for a ‘Marine BL’ without specifying whether it should be ‘On Board; or ‘Received for shipment’, only ‘ON BOARD’ BL will be accepted.
• Date of issue of BL / ‘ON BOARD’ notation should be dated on or prior to the shipment date permitted under the LC.
• Shipping marks, gross/net weight etc. specified on BL must correspond to those specified in other documents.

Airway Bill or Airconsignment Note

• Must show flight number and date.
• Must show the name of the carrier.
• Must be issued by a named carrier or his authorized agent.
• Must indicate the place of issuance.
• Must indicate the date of issuance.
• Must be signed by a named carrier or his authorized agent (in case of HAWB (House Airway Bill) by the Air Cargo (Consolidator himself).
• Must indicate the name of the consignor and address.
• Must indicate the name of the consignee and address as per LC terms (and not that of the consignor or his order).
• The AWB submitted must be ‘ORIGINAL No. 3’ meant for shipper/consignor.
• Must indicate Airport of loading and discharge.
• Must give a brief description of the goods being carried and should not be inconsistent with other documents.
• Must comply with all other specific requirements of LC.
• Must indicate ‘notify parties’ as stipulated in the LC.
• Should not be claused (it should be clean AWB).
• Short form AWB or blank backed AWB.
• Can bear reference by stamps or otherwise to cost, any thing additional to freight charges.
• It can contain words like ‘said by shipper to contain’ or ‘shippers load and count’ etc.
• It can show the consignor as a third party other than beneficiary.
• It must show the shipping marks of packages, number of packages, gross weight, net weight etc. and they must be in accordance with other documents containing similar details.
• It must indicate whether freight is prepaid or payable at destination.
• In case of HAWB (whether specified) it must show the name of Airlines, Master Airway Bill number, the flight number, consolidator’s IATA registration number.
• It should be remembered that unless credit calls for flight date, even if flight date is shown on AWB, the date of issue of AWB is considered as date of shipment.

Insurance Document

• Must be issued only by Insurance Company or underwriters or their authorized agents.
• It should not be issued by brokers.
• It must be signed by the issuer.
• It must be dated.
• Date of issuance must be on or before the date of shipment or it must be evidenced by specific notation that the cover is effective from the date of shipment.
• The currency of insurance must be same as the currency of LC.
• Must indicate the name of the assured.
• Must indicate brief details of the goods insured.
• Must indicate the mode of conveyance (Air, Sea, Road etc.) the name of the vessel, voyage number etc.)
• Must indicate the nature of risks covered and should be those specified in the LC.
• Should be in a negotiable form.
• Unless otherwise specified, should be issued for an amount of 110% of CIF/CIP value of the goods. If such value is not determinable from the documents on their face, it should be for the minimum amount of negotiation requested for or the amount of invoice value whichever is greater.
• If issued in more than one originals, all originals must be submitted (no. of negotiable copies issued are indicated in the insurance policy/certificate).
• Should be endorsed in blank by the assured, if required as per terms of LC.
• Should indicate the port of shipment and destination or point of insurance coverage and point of termination of insurance coverage.
• Should not contain any clause affecting the interest of the assured/assignees.
• Must cover all additional risks as specified in the LC.
• The goods are on ‘Deck’, Deck shipment risks such as jettisoning or washing over board should be covered.
• If LC allows transshipment, such risk must be covered.
• Claims should be made payable in India or in the specific city specified in the LC.

Other Documents

A letter of credit may call for variety of other documents like Health Certificate, Pre-shipment Inspection Certificate, Packing List, Shipping Company’s Certificate, Beneficiary’s declarations / undertaking etc. Whenever such documents are called for under LC, the following aspects must be checked in the documents.

• Whether issued by the person or authority specified in the credit or authorized to issue. If no specific mention is made regarding issuer of the document, Bank can accept document issued by any person provided their data content is not inconsistent with any other stipulated document presented.
• Whether dated and signed by the person/authority concerned.
• Whether they relate to the goods/shipment covered by the documents or not.
• Whether the document certifies the facts required as per LC or not.
• Whether the document contains wordings or data content as specified in the LC or not.
• Whether the details mentioned in such certificates/documents are consistent with other documents called for.

Certificate of Origin

• It must be issued and signed by an independent authority such as a Chamber of Commerce etc. indicating the origin of goods, as per LC stipulations.
• The country of origin certified must be as per LC requirement and consistent with the declaration given by the beneficiary in the invoice/other documents.
• It must indicate the description of goods and should be consistent with other documents.
• Details appearing in the Certificate of Origin must be consistent with the details appearing in the other documents.

Road, Rail or Inland Waterway Transport Document

• Signed as required by UCP 600 article 24, noting that if an agent signs on behalf of a carrier, the agent must be named and indicate the capacity in which it is signing i.e., ABC Co. as agent for the carrier, XYZ Co.
• Appear to indicate the name of the carrier.
• Indicate the place of shipment and the place of destination stated in the documentary credit.
• Indicate receipt of the goods by signature, stamp or notation.
• Goods description does not conflict with the documentary credit.
• Indication of freight payment is in accordance with the requirements of the documentary credit.
• If the document does not state the number of originals, the number presented will be taken as the full set.
• Road transport documents must appear to be the original for consignor or shipper.
• Rail transport documents marked ‘duplicate’ will be accepted as originals.
• Rail or inland waterway transport documents do not need to be marked as original in order to be accepted as original.
• Data is not to conflict with that shown in any other document.
• Otherwise meets the requirements of article 24

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• Financial management

The letter of credit : the preferred method for international transactions

Documentary credit is the most widely used payment method in international trade. It is therefore particularly important for trade professionals. What is documentary credit? How does it work? Who are the main players involved in a documentary credit process? Discover the main advantages and drawbacks of documentary credit in this article.

Documentary Credit Defined

Documentary credit (or letter of credit) is a method of payment that facilitates and secures international transactions. In practical terms, a bank undertakes, on behalf of its client (the importer), to pay a beneficiary (the exporter) the price of goods or services within a specified time. In return, the exporter sends a remittance of previously agreed upon and approved documents proving the value and shipment of the goods or services.

Documentary credit is used for very high transaction amounts or when one party has doubts about the honesty or solvency of the other. This way, international transactions are secured and both the exporter and the importer have a guarantee .

Note that: The documentary credit system is a separate transaction from the sale of goods and the shipping contract.

Which companies use documentary credit?

The reliability of documentary credit and its use on an international scale has made it the most widely used B2B payment method in France. Created to secure international business transactions, it is especially designed for:

● Companies trading with so-called "at risk" countries or with new customers ;

● Companies exporting made-to-order products ;

● Companies that do not have credit insurance agreements to cover their export customers. Thus, documentary credit offers a high level of guarantees with participating banks. For the importer, it ensures that payment is only made if the seller fulfils its contractual obligations. For the exporter, it ensures that payment will be made on time.

Note that: The efficiency of the payment process depends both on the reliability of the banks and compliance with the official procedures. Before a documentary credit is opened, instructions must be clearly detailed and followed to the letter at each step in the process.

Who is involved in Documentary Credit?

Generally, four main players are involved in a documentary credit process: The importer (the purchasing customer), its bank (the issuing bank), the exporter (the seller) and its bank (the notifying bank). A fifth party may also sometimes be solicited: A confirming bank.

• The Instructing Party: As the purchasing customer, this party initiates the documentary credit process. It is also the importer’s responsibility to give instructions for the opening of the documentary credit.
• The Issuing Bank: This bank opens the documentary credit at the importer’s request. In the majority of cases, it is located in the buyer’s country and opens the documentary credit.
• The Notifying Bank (the seller’s bank): This bank communicates with the issuing bank (the buyer’s bank) and informs the beneficiary of the documentary credit process. It is usually located in the seller’s country but does not make any payment commitment to the seller. It may be the confirming bank if it confirms the documentary credit.
• The Seller (or exporter) is the final beneficiary of the payment (the payee). The documentary credit is opened in its favour.
• The Confirming Bank : Sometimes a third bank may intervene in the documentary credit process: the confirming bank. Solicited by the issuing bank, its role is to guarantee the beneficiary’s payment, i.e. to the seller. The exporter has the possibility of specifying this guarantee in the contract of sale to reassure the buyer. This way, if one of the parties is located in a country in which there are foreign exchange restrictions for example, the exporter will have more confidence in the transaction. By going through financial institutions as trusted third parties, the parties transfer the risk of potential disputes to neutral partners.

Advantages of Documentary Credit

In the context of international trade, documentary credit remains the safest procedure to guarantee smooth business transactions for both buyers and sellers.

An excellent payment method Quick, efficient and above all recognised worldwide, documentary credit can be used in nearly all international transactions . It is subject to the Uniform Customs and Practice for Documentary Credits (UCP) rules governed by the International Chamber of Commerce (ICC). This process is therefore both a means of covering certain risks for the seller and an advantageous financing method for the buyer.

Bank security by commitment A true guarantee of security, documentary credit offers the advantage of ensuring the buyer that it will only pay if the documents are compliant with the terms and conditions of the credit and the UCP . Conversely, the exporter benefits from a maximum payment guarantee for the sale of goods, especially in the case of a confirmed documentary credit.

Steps for Opening a Documentary Credit

The documentary credit process may put some companies off using it. But rest assured, by following the steps below you have every chance of the process going smoothly.

1. Signing of the contract between the Exporter and the Importer

A crucial step for opening a documentary credit is the signing of the contract, which initiates the process. The two parties agree to the terms and conditions of the transaction in a contract duly completed and signed. The contract contains:

● The goods;

● The shipping and carriage conditions;

● The delivery times;

● The documentation to be provided by the buyer;

● The type of payment (in this case, the documentary credit);

● The method of payment; the course of action in case of a dispute (non-payment, problems with goods, etc.).

It is highly advisable to consult international trade professionals to avoid certain pitfalls and set up a fair deal for all the parties involved. Documentary credit forms are available online. Be sure to fill out all of the required information: The omission of any important information could jeopardise the entire process.

At the same time, the two parties must contact their respective banks during this initial phase of the process and not after the signing of the contract. Corporate banks are often familiar with documentary credit and are able to give helpful advice to successfully carry out the transaction in legal, logistical and financial terms.

2. Request for the Opening of a Documentary Credit

The importer asks its bank to open a documentary credit of which the exporter is the beneficiary. Banks have a number of forms that the importer must complete and sign in order to formalize the request. In certain cases, a letter of request may suffice. Even though the documentary credit may make reference to the contract of sale, it is important to note that the bank is not bound by the terms and conditions of that contract. It must only follow the instructions given by the client in the request form and nothing else.

After receiving the request, the bank will do a thorough check of the client’s situation. Otherwise, it may ask the client to pay a deposit for the opening of the credit or grant them a payment term on their usual line of credit. One important point to note is that approval of a documentary credit is not automatic. The bank may consider the transaction to be too risky and reject the request.

3. Issuing of the Documentary Credit

The importer’s bank issues the documentary credit in compliance with the request received from its client. For cases of irrevocable credit, the bank can no longer withdraw as from this stage. It therefore undertakes to pay the beneficiary in exchange for the remittance of the documents listed in the documentary credit.

4. Notice of Confirmation or Rejection of the Documentary Credit

After receiving the documentary credit, the importer’s bank correspondent can add its confirmation . This proof of commitment from the issuing bank means that it will make the payment in the manner defined in the documentary credit. In other words, the exporter’s bank becomes the correspondent for the importer’s bank (with some exceptions).

Whether there is confirmation or not, the correspondent notifies the exporter that a documentary credit has been opened in its favour. It must send the exporter the original in printed paper format.

5. Shipping of Goods

The seller ships the goods as agreed in the contract. It receives from the carrier a certificate of acceptance and proof of shipment. The transaction may relate to goods such as:

● Consumer goods;

● Goods needed in the manufacturing of a finished product;

● Industrial machinery.

● The conditions and delivery times of shipment depend on the type of goods.

Consequently, it is important to clarify the responsibilities between the parties . The International Chamber of Commerce has therefore created the Incoterms. They are international rules that facilitate communication and clearly define responsibilities between the parties to the international transaction.

6. Remittance of Documents

Once the goods have been shipped, the exporter gathers all of the documents listed in the contract and gives them to its bank. These are particularly trade documents, technical documents, transport documents and financial documents. (See details below in the article). All of the documents set out in the request to open the credit must be given to the bank. Otherwise, the exporter risks not being paid due to non-compliance.

7. Sending of the Documents

Upon receiving the documents, the notifying bank checks that they are compliant . They must match the documents listed in the opening of the documentary credit. The notifying bank is not responsible for checking their authenticity. If it notices a missing document, it agrees to inform its client, the exporter. Once the documents are completed, the bank sends them to the importer’s bank by post.

8. Payment by the Issuing Bank

It is then for the issuing bank (the importer’s bank) to carry out a verification process. To transfer the funds, it must respect the payment deadlines defined in the terms and conditions. This can be a payment at sight, a deferred payment or a negotiated payment. (See below)

9. Payment to the Exporter by the Notifying Bank

The funds are made available to the exporter by its bank after it receives payment from the issuing bank. Whether the payment is at sight, deferred or by acceptance, the notifying bank will only pay the customer after receiving the funds.

10. Remittance of Documents

The importer’s bank sends the completed documents to its client. Once these documents are received, the client may take possession of the goods and obtain customs clearance.

11. Repayment by the Buyer

The final step in the documentary credit process, the payment made by the importer, varies depending on whether or not it is able to make immediate payment. The importer can immediately repay the sums transferred by its bank to the exporter.

However, in the majority of cases, the buyer has incurred too many expenses for the payment and customs clearance of the goods. It is therefore rarely capable of making repayment upon receiving the documents. In addition to the documentary credit, its bank generally offers a loan that it reimburses with the profit earned on the sale of its goods.

Required Documents

As the pillars of a documentary credit, banks require several documents that must comply with the terms and conditions of the credit. These include, in particular:

● Trade documents: invoice, packing list, certificate of origin;

● Technical documents: certificates of analysis, health or phytosanitary certificates issued by public authorities; monitoring, control and quality certificates issued by specialised companies;

● Shipping documents: bill of lading, air or sea waybill;

● Financial documents: IBAN, BIC, account history, payment method.

Different Types of Documentary Credit

There are a number of types of documentary credit. The main types of documentary credit are revocable and irrevocable, notified or confirmed.

Revocable Documentary Credit Revocable documentary credit can be modified or cancelled at any time by the importer without the exporter’s agreement. The importer’s bank also has the right to cancel its commitment before shipment of the goods. No formal legal relationship is established between the seller and the buyer’s bank. The higher the sums involved, the greater the risk for the exporter. This is because, in the event of cancellation or withdrawal of the customer or its bank, the exporter will be left with its volume of goods unshipped. This lack of guarantee partly explains why this type of documentary credit is almost never used.

Irrevocable Documentary Credit With irrevocable credit, the importer’s bank cannot modify or cancel its payment commitment unless the parties come to an agreement. In theory, it therefore makes a firm commitment to pay. As a result, the exporter considers the irrevocable documentary credit as an order confirmation . It can begin its production of the goods as it is sure to be paid by the importer’s bank provided that it fulfils its commitments.

Note that: The documentary credit is however, automatically irrevocable with the UCP 600 agreements (Uniform Customs and Practice).

Irrevocable and Confirmed Documentary Credit Irrevocable and confirmed documentary credit contains a guarantee from the various participating banks (issuing bank, notifying bank and confirming bank, if applicable). Payment can be made to the seller if the documentary credit terms and conditions are fulfilled.

In the event of a request for confirmation, this must be expressly mentioned by the importer . This confirming bank is an additional guarantee to confirm the conformity of the documents in the documentary credit process. Moreover, it is the bank that assumes the credit risk of the issuing bank in addition to the political or transfer risk of the importer's country. The confirming bank is usually the correspondent of the importer’s bank located in the exporter’s country. Without confirmation of the documentary credit, the notifying bank merely forwards it to the beneficiary without making its own commitment.

This type of documentary credit offers the seller optimal security by covering the business risks.

Irrevocable and Notified Documentary Credit Notifying a documentary credit means informing the beneficiary (the exporter) that it has been issued in its favour. This notification is given by a single bank called the notifying bank . This is usually the exporter's bank, located in the same country. When the documentary credit is notified, only the importer’s bank has committed to pay. The notifying bank credits the exporter’s account after receiving the funds from the importer’s bank.

With irrevocable and notified credit, the risk increases depending on the political or economic context in the country of export. In the event of force majeure (political unrest, economic or social crisis, etc.), the seller's bank does not guarantee the payment.

Find the full fact sheet on foreign exchange risk management:

Documentary Credit Terms

There are three main terms for issuing documentary credit: red clause credit, revolving credit, and back to back credit.

Red Clause Credit By opting for a red clause credit, the seller's bank can grant it an advance . It includes a special clause authorising the notifying or confirming bank to pay an advance to the beneficiary, in return for its undertaking to carry out the shipment and to then present the required documents. This clause, inserted into the request from the instructing party, specifies the authorised amount of the advance.

Revolving Credit With revolving credit, the terms of the documentary credit are automatically renewable . The amount is automatically renewed after each use by the beneficiary until its expiration. It is therefore possible to respect the frequency of deliveries without jeopardising the irrevocable commitment of the issuing bank on the contract. This is why the credit is said to be revolving in amount or in duration.

Back to Back Credit Finally, back to back credit allows third parties to benefit from the credit via a transfer . This can be important if a supplier uses an intermediary between the exporter and the importer. In this case, the initial beneficiary of the credit (the exporter) asks its bank to open a line of credit for its own supplier. This is referred to as a credit that is "backed" to the first one opened in its favour.

Documentary Credit Payment Times

Depending on the terms and conditions defined at the opening of the documentary credit, payment times may be longer or shorter.

Payable at Sight Payment at sight is a very simple process and can be done as soon as the documents have been validated.

Payment against Acceptance In the same way as a deferred payment, a documentary credit with payment against acceptance establishes a payment with a deadline. The exporter obtains an accepted bill from the notifying or confirming bank. Sometimes, this can come from the issuing bank. Thus, acceptance is a guarantee of payment on the due date.

Negotiation Negotiated payment terms may be:

● At sight;

● A time payment to any bank in the exporter's country (open negotiation);

● To a single bank again in the exporter's country (restricted negotiation). The negotiating bank may discount the documents by paying an advance to the exporter with a deduction of charges. For a notified credit, this advance is paid under usual reserve; for a confirmed credit, firm and final negotiation is called non-recourse.

Cost of Documentary Credit

The cost of documentary credit varies mainly with the level of guarantee. Therefore, revocable credit is less expensive than irrevocable and confirmed credit.

The costs of the documentary credit are calculated by the notifying bank (in other words, the exporter's bank) or the confirming bank. The main factor in costs relates to the risk involved: the riskier the transaction, the more expensive it will be. Costs of documentary credit vary between 0.5% and 3% per year.

Here are the different costs of a documentary credit in detail:

1. Fees charged by the issuing bank

● Front end fees: around 1% per year, most often payable quarterly;

● Usage fees: around 0.25% per quarter;

● Risk fees: around 0.25% per quarter;

● Instalment fees: around 0.08% per month, until the expiration.

2. Fees charged by the notifying bank

● Notification fees: 0.1% per year for documentary credit in amounts below about 1.2 million Euros;

● Confirmation fees: This amount varies with the degree of risk, generally around 0.2% per quarter;

● Document collection fees: 0.15%;

● Payment, acceptance and negotiation fees: about 0.15%. There are also fees charged for documentary credit management (Telex, modifications, etc.).

Note that: Fees are not necessarily borne by the exporter. In fact, the parties may decide beforehand whether the buyer or the seller will pay the costs of the transaction. It is customary for the buyer to pay the fees of the issuing bank in its country. The seller bears the fees of the second bank (notifying or confirming).

Negotiating a Documentary Credit

Documentary credit negotiation generally takes place during the business negotiations . This discussion, which is crucial to ensure compliance with the procedure, aims to define the principle and terms and conditions of the documentary credit as the means of payment (at sight, differed or negotiated). In all cases, the defined due date must be mentioned in a document. The negotiation serves to define the details of:

● The type of credit (revocable, notified or confirmed);

● The list of required documents;

● The incoterm used;

● Whether the seller or the buyer will pay the fees.

Note that: Documentary credit is independent of the contract of sale and the shipping contract.

Documentary Credit Limitations

Although advantageous in many ways, documentary credit still has a few drawbacks, starting with the tedious procedure . In order to comply with the clauses and meet the deadlines, it requires a thorough approach. The formalism should not be underrated in everyday business. Another point to which attention should be paid: the average cost is higher than other payment and collection methods. The cost is proportional to the risk and varies between 1% and 3%. It is usually less expensive to use credit insurance. Finally, always pay attention to the documents received. It is not uncommon to find differences between the information entered on the documents and the goods actually delivered (mistakes in the description of products, in the reading of documents or even fraud on the goods shipped).

As you can see, documentary credit can be a great help when it comes to securing international transactions.

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• A Letter of Credit is also known as Documentary Credit 
• A Letter of Credit is a primary means of payment in an international trade transaction 
• By default a Letter of Credit is irrevocable

Many of you would have come across the term Letter of Credit (L/C) ..

If you are a shipping line, you would have heard this term from various customers asking you to expedite the draft bill of lading for checking by the bank or for the release of the bill of lading to be expedited because the shipment is under L/C..

If you a freight forwarder or agent, you may have been put under pressure by the BCO to get all the documents required by the L/C sent to them in time..

If you are a BCO , you may have been told by your bank that the documents submitted do not match the requirements of the L/C and some of the documentation may need to be redone..

So what exactly is a Letter of Credit, what is the need for a letter of credit, who issues it and how does it work..

What is the need for a Letter of Credit and how does a Letter of Credit work..??

They may or may not know each other or may or may not be comfortable with each other as far as financial obligations and payments is concerned..

Because of the time it takes for cargoes shipped from foreign ports to reach their destination, importers have to find a way of guaranteeing payment to exporters before the goods are received..

As discussed in the Beginner’s Guide to Importing , there are several forms of payments each with its own element of risk..

A graphical representation of the element of risk in relation to the buyer and seller is shown below..

A Letter of Credit seems to be a popular method of payment transaction among sellers and buyers because these transactions go through a bank and that offers a level of comfort for both the buyer and the seller..

Letter of Credit

A Letter of Credit or Documentary Credit is a promise by a bank on behalf of the buyer (applicant/importer) to pay the seller (beneficiary/exporter) a specified sum in the agreed currency, provided that the seller submits the required documents by a predetermined deadline..

A Letter of Credit is governed by UCP600 (Uniform Customs and Practice) which is an international code of practice (voluntary set of rules) drawn up by the International Chamber of Commerce ..

It is essentially an instruction by the importer’s bank to the overseas bank of the seller outlining various aspects relating to the particular trade including payment of funds to the seller..

The buyer (Applicant) sets a list of terms and conditions under which he would like to buy and ship the cargo from the seller (Beneficiary)..

This list generally has

• description of the goods he wants to buy from the seller ;
• quantity of the goods ;
• technical description if any ;
• bills of lading ;
• commercial invoice ;
• packing list ;
• certificate of origin ;
• analysis reports ;
• other documents
• who the bill of lading must be consigned to – in the case of L/C, generally the issuing bank will be shown as the consignee and they will have control of the cargo until such time they receive the money from the buyer ;
• details of who must be notified of the arrival of the shipment ;
• the latest date of shipment ;
• sometimes the buyer also nominates and specifies on the L/C the shipping line that is to be used ;
• which port pairs to be used (POL/POD) are to be used ;
• what mode of transport is to be used

This L/C is then issued by the buyer’s bank (known as issuing bank) and is sent to the seller and his bank (known as the nominated bank).. There could also be a “confirming bank” requested by the seller.. The confirming bank performs a check that the issued L/C is valid and is usually a bank in the seller’s country..

This additional confirmation of the L/C means that the confirming bank guarantees payment even if the issuing bank fails to make it..

The seller then proceeds to prepare his goods and documents based on the L/C.. Once the shipment has been accomplished, the seller will provide the copies of all the documents as per the instructions on the L/C to his bank..

His bank checks the veracity and correctness of the submitted documents against the L/C specifications.. Remember though that banks do not actually verify if the cargo has been loaded on the vessel or not.. They only verify documents..

One of the main documents in this submission is the Bill of Lading as that is the Document of Title to the goods exchanged in return for the delivery of the goods.. Usually Bills of Lading involved in L/C transactions will be “Negotiable Bills of Lading”..

Once the bank is satisfied that the docs and shipment are in accordance with the L/C, they pay the seller the money that is due to him as per the price agreed between him and the buyer..

The nominated bank, then sends all the docs to the issuing bank who cross verifies the details against the L/C conditions and once they are satisfied with the conditions, they reimburse the receiving bank the money that they paid to the seller..

The issuing bank then advises the buyer that the shipment has been effected and that they are in possession of all the documents.. The buyer then arranges to pay the issuing bank the money that has been paid by them to the receiving bank..

Upon receipt of these funds, the issuing bank then endorses the bill of lading to the buyer so that the cargo can be released to the buyer..

So begins and ends the process of a Letter of Credit..

L/C Extension

If there is a requirement for an L/C to be extended for whatever reason, the seller has to contact the buyer who opened the L/C and they will have to in turn contact the issuing bank with valid reasons for the extension.. Based on this reason the L/C may or may not be extended..

Usual reasons for L/C extension requests could be :

• delay in the export material being ready
• delay in the carrying vessel – due to weather or issues from the shipping line’s side
• if there are any unprecedented customs stop on the export cargo
• non-availability of a suitable container
• cargo inspection certificates not ready
• non-availability of a vessel during the time frame required

Types of Letter of Credit

There are a few different types of letter of credit with different uses.. The most popular types are :

Irrevocable

• The instructions or terms on this type of L/C cannot be amended or cancelled without the agreement of the beneficiary and the confirming bank.. By default, a L/C is irrevocable even if it is not indicated anywhere, so take this as the default setting..
• This type of L/C can be amended or cancelled by the issuing bank at any time and therefore attention needs to be paid to this type of L/C.. Although this type is not covered in UCP600, this can be issued if such terms are incorporated into the credit and this could happen occasionally, possibly due to ignorance, but banks generally do not confirm a revocable documentary credit.. Let this be in the back of your mind..
• This is type of L/C involves a confirming bank.. The role of the confirming bank is to ensure (at the behest of the beneficiary) that the L/C issued by the issuing bank is valid and to ensure that the issuing bank has the ability to honour its financial undertaking and the country that the issuing bank is based in is not facing any financial risk..
• Cumulative (any sum not utilised can be carried forward to the next month) ;
• Non-cumulative (specific shipment each month) ; or
• Reinstated each time a shipment is made
• This type of credit is useful when there are repetitive shipments between the same parties regularly

Silent Confirmation

• Is when the advising bank adds a conditional guarantee of payment to the beneficiary without the knowledge of the issuing bank because in some cases the issuing bank may consider themselves creditworthy enough and do not see the need for a confirming bank..

Transferable

• In this type, the seller is allowed to transfer the credit either fully or partially to one or more parties provided the L/C clearly states that it is transferable..

Back to Back

• Some transactions require the use of middle-men or brokers in which case two different credits are issued because a transferable L/C may be unsuitable.. The two credits are a Master credit (to the broker) and a Back to Back credit (to the supplier)..

Standby letter of credit

• Is basically a credit assurance from a bank that a buyer is able to pay a seller.. But, this credit is considered to be a secondary credit covering only default and if there is non-performance.. Such credit is usually used to cover the risks that can occur in finalising a contract between a buyer and seller..
• Is a type of credit containing special Red Clauses (due to the colour of the ink used in writing this clause) which allows the beneficiary to access the credit even prior to the shipment of goods and/or presentation of documents.. A Clean Red Clause allows this access with the required documents but does not include the evidence of goods whereas a Documentary Red Clause allows this access against presentation of warehouse receipts along with the beneficiary’s undertaking to deliver the required documents upon shipment..

Green Clause

• Is a type of credit containing special Green Clauses (due to the colour of the ink used in writing this clause) which allows the beneficiary to access the credit even prior to the shipment of goods and/or presentation of documents.. Using the Green Clause, the beneficiary can get advance payment but by lodging the goods under storage in the name of the bank as security..

Letter of credit is basically an arrangement entered into between banks, on how the payments in an international commercial transaction can be settled while ensuring the security of both the parties involved..

A letter of credit is autonomous in nature which means, it has its own terms and conditions and is not reliant on the terms or performance of the sales contract or the contract of carriage..

Payments secured through Letter of Credits are based on documents only and not on the goods or services covered by sales or commercial contracts and the receipt of goods or payment is conditional upon the beneficiary’s compliance in the presentation of the required/listed documents..

This autonomy makes the Letter of Credit a primary means of payment in an international trade transaction where a documentary credit is involved..

Article republished with updates

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53 COMMENTS

Thanks for sharing! I have been browsing since earlier to see a letter of credit sample.

We are the supplier we received LC from the customer . in LC issuing bank and BL bank name is different . Now we have submitted LC to our bank. Our bank LC shipping documents couriered to issuing bank. Now I am getting confuse after courier the LC documents to issuing bank how seller knows buyer received LC documents or not.

Hi Sir, We are a broker/middle man for buyer. Buyer have open the LC to us and we have open LC to seller. This cargo is shipped from Malaysia port to Bangladesh port . Please guide us what are the procedure and shipping documentation we need to prepare on this 2 LC ? and this 2 LC only have one MBL with 2 HBL(1 HBL is for seller and other HLB is for buyer.

Hi, I want to know whether LCs with multiple POL and POD can be issued by Banks in respect of multiple consignments between the seller and buyer covering multiple cities in the same LC.

We have one customer with the following issue, hope you could help to advise. Export from Vietnam to Bangladesh: Buyer/Receiver takes long clearance time cause increasing fee on Demurrage & Detention fee. Is there any kind of L/C for this case, our customer wants to open L/C at sight for about 10 days of Demurrage & Detention fee. How does it work? Which documents are necessary for it? Thank you.

buyer can issue deferred payment LC, which will be valid for 90 days after sight and usance period will be 90 days. we can help you with third party lC from HK based banks.

As, per our banker the gap between LATEST DATE OF SHIPMENT AND LC EXPIRY DATE should not be more than 30 days. Whether this statement is correct and whether this is applicable for all LC.

Dear Sir, I found this site very useful and responsive with correct reply. We are exporting copper millberry to a Chinese from Belgium. Seller is from India and arranging the goods from Belgium and doing MTT. Chinese buyer is ready to open a DLCMT700.Payment is after the goods come to the destination Port and carrying out the SGS Inspection(Which is the requirement of Buyer for which he is only paying).Buyers Bank consider this destination Inspection report is part of export document and It has to be submitted to them with in 21 days of BL date. In 21 days cargo is in high sea so inspection is not possible. So they changed the condition of submitting the document after carrying out destination SGS inspection and sending the report through courier to the seller so that he can include it in the other documents. Now the issue is that Can the buyer release the goods from shipping line/custom for sgs inspection with copy of BL? Kindly advise a solution how to go about it. Thank you Sir

Hi, good day ! I wish to know if one LC can be issued to a supplier for a product to be delivered to two different consignees (different quantity) to same destination, ? In this case, should it be done by special additional clauses ? or any other ?

Can Customer cancel the LC before the Shipment ? Is there is any issue to beneficiary if customer cancelled the LC ?

Hi, I would like to know in a EXW Transferable LC whether I can request from the Main Applicant not to include Packing List, Insurance, Country of Origin, and Beneficiary’s Certificate as Terms & Conditions to the LC? Thanks.

is LC will effect clearance of goods? thank you

The topic is so good and educative ,Please continue Regards Dan

bill of lading of a cargo is stocked somewhere as a result of covid 19 problem and there is urgent need to release cargo at destination and the liner is requesting destination office to release a cargo that has TO ORDER OF AA LTD as consignee, What are the requirements for this kind of cargo release?

X is the buyer, Y is the seller , and the amount of the goods to be shipped is 1’000’000.0 USD , the last shipment date is for example after 1 month from the L/C issuance, and in case of irrevocable L/C and to avoid the Y delay the shipping the goods on time( usually they always ask additional 1 month extension to the last shipment date) or disregards the shipment ( for his own benefit) which will cause loss to X to go to another seller and additional time for manufacturing >>>can i request a delay damages (penalty) to be inserted in the L/c from my bank before the issuance of the L/C or any method to gurantee that at the end of the last shipment day a penalty to be applied to the seller Y

Hi one way to cover your loss in case of non shipment is that you can negotiate a performance bond or guarantee, usually its 2% of full invoice value, in most cases, if seller is ready to provide you this 2% PB/PG, then the possibility of default against non delivery is mostly zero.

Hello Everyone, Thank you very much for this edition.

I have a consignment to be shipped from Kolkata to Dhaka. The products were imported from USA. I have paid the customs duty and also added a few more products that we manufacture. This entire consignment (newly packed) needs to be shipped to Dhaka. Where should the country of origin certificate be from?

Hello. I am new in shipping business. I want to be verified on a certain issue. The buyer wants to issue DLC and the seller has never done the DLC. However, the seller wants the buyer to pay taxes. Is it possible for the buyer to pay taxes using the LC

I placed an order IN Malaysia (palm oil) and the trader is from India, so the LC was sent to my sellers bank in India, the India company is the Beneficiary in the LC, we will release the LC untill we get the docs BL, SGS inspection, Phytosanitary certificate etc.Now he says that he needs his company to be on the BL as the consignee and notify party. My banker says it’s not posible because then we won’t clear costums here,. I told him that my company has to on the bl as consignee and notify, he can be on the shipper bl space with shipper name as trader (“can he?). How can I solve This because he says that if his company name is not on the BL then the refinery will not pay him because they don’t accept LC, we made a SPA contract and he acepted the LC, now he say the refinery won’t take it and the funds will not be released if his company is not on the BL. He is asking me to guarantee fund via NOC or to change the LC for SBLC. What is your advise please.

Due to covid-19 can’t fulfill Presentation of Documents term within 15 days (presentation Period) as courier services operating schedule has changed due to Covid-19 situation and as such, there are no direct cargo flights and hence delay in presentation so, what need to do to avoid discrepancy?

Hi Mukund, this is an issue that affects many customers around the world.. However, shipping lines have come to the assistance of many customers in that they have allowed the issuance of original bills at various other locations convenient to the customer other than the POL.. For example if you are shipping from Mumbai to Australia and bank is based in London, then line might allow you to get the bill of lading issued in London to save on the time for the courier.. Alternatively, banks are also allowing some leniency in these cases.. You will have to discuss with your bank/buyer and come to a workable arrangment..

Just wanted to know if LC expired eg : Shipment is teaching on 16th July my LC expiring on 15 July still we can clear the cargo ? If yes how it works . 2) If LC expired till how many month we can extend the same. Or request the bank to extend for how many months.

Hi Rayan, the expiration of LC does not have any direct connection to your cargo clearance as the LC is required only between the shipper/consignee/banks.. The shipping line, customs, ports etc are not concerned with the LC.. However, any delay in the finalisation of the documents based on the LC could mean that you cannot get the original bill of lading for example and that would mean delay in getting release from the shipping line even if you have done customs clearance..

Extension period of LC will depend on your requirement and status of the shipment and reason for the delay in the first place.. It is very subjective and unique to the shipment..

Hi, I am Nagaraj and i wanted to know if a BL can be consigned to the actual importer (Consignee and notify party) even though the shipment is under LC? Thanks

Hi Nagaraj, the L/C will dictate who should be the consignee/notify on the bill of lading, so yes it is possible that it can be consigned to the actual importer..

I believe since UCP500, there is no longer a ‘revocable’ LC, all LC are irrevocable.

Hi Cheng, thanks for raising this point.. Although this type is not covered in UCP600, this can be issued if such terms are incorporated into the credit and this could happen occasionally, possibly due to ignorance, but the banks generally do not confirm a revocable documentary credit.. Have added this point to remind people that this possibility exists so they can keep it in the back of their minds..

Due to Covid-19, is this the risk to send the hard copy of LC documents to issuing bank at oversea country? How to deliver the hard copy of LC documents if buyer bank/issuing bank’s country have been lockdown? Any other solution? thanks.

Hi Liew, since COVID-19 affects everyone, all entities are cautious and am sure with discussions there are some arrangements made like electronic transmission etc..

Thank Sir, very clear info about letter of credit , but in case, if the buyer fail to pay money to issuing bank , what will happen , how the money will be recover from buyer , as the bank have documents (B/L) ,bank is the owner of good now , can they take possession or how it will work further.

Issuing Bank replaces importers creditworthiness wit its own and hence will pay to Beneficiary.

Problem arises only when Issuing bank goes insolvent.

Dr M R Aggarwal

This is very useful site.

We have delivered some items 6 moths before whereas customer’s willing to payment through LC as at present they don’t have any money. Is it valuable? What are the documents we have to submit the bank for release of payment as job is already completed? Your kind advise will be highly appreciated.

You may call / contact me. I will prepare Draft CONTRACT and DLC for your transaction that will be UCP600 proof, bank proof and your client proof .

None can win a legal case if you adopt my solution and they choose to tho court

Dr M R Aggarwal CDCS CTFC

So you delivered 6 months ago, your buyer has still not paid you and now they don’t have any money? If that is the case a documentary LC is not going to help you and I would be amazed if the buyer’s bank would agree to issue their LC for a customer who can’t pay them or provide adequate security. You need to be speaking with a lawyer familiar with international trade but from what you’ve said I guess you will just be throwing your money into a bottomless pit, only the lawyers will win.

Dear Mr. Manaadiar,

Thanks so much for walking us through, on how LC works in such a simple and straight forward style.

However, I just have some few points I’ll be pleased to get some clarifications on; 1. Does the nominated bank pays the seller with it’s own fund before turning back to get paid from the Issuing Bank, or vice versa, or it all depends on whichever one the parties pre-agreed on? 2. Does the issuing bank pays the nominated bank with it’s own fund before turning back to request payment from the applicant (the buyer), or vice versa or it all depends on whichever one the parties pre-agreed on?

Letter of Credit not received in our exporter bank, but cargo we sent at Nhava Sheva port. is it right?

“A” Consult Ltd ordered a consignment of used clothes and shoes from P Fashions Ltd on a c.i.f. basis. The goods were shipped on 2 May 2013, and the shipping documents were received on 15 May 2013. Although payment was due upon receipt of the shipping documents, “A” Consult Ltd decided to wait for the arrival of the goods before making payment to their bankers, “C” Bank of INDIA, on letters of credit that were opened for the purpose. The goods arrived at the PORT on 31 May 2013, and upon taking delivery “A” Consult Ltd discovered that more than 50% of the clothes and shoes were too old to be sold. They have therefore refused to pay “C” Bank while they pursue a claim against P Fashion Ltd. Advise “C” Bank on their rights.

is it possible that if the buyer trusts the seller, he asks for least documents as possible…

are there some documents which are to be submitted mandately irrespective of the relationship between the buyer and the seller……….

How can buyer protect its interest if Seller ask the Buyer to issue a non revocable LC?

How does payment term come into picture ? Let us say the payment terms between buyer and supplier are 90 days (from the date of bill processing by buyer). In that case , when will the bank pay the seller the money?

For LC mode of payment, the payment terms between Buyer and Seller, usually within 7 days, 14 days and 21 days (maximum). For 90 days, I suggest you arrange T/T

Good Day tell me how would I protect myself if the seller says he gaurantees goods of the correct qualirty on arrival, can and will he only be paid once I have checked this?

Hello Mark, what is your terms of sale with the seller..?? Have you done business with him before..??

very well explained and it is very clear. Thanks

Dear Hariesh, how does the issuing bank protects its interests. Consider a case, where the buyer doesnt turn up to receive his cargo, possibly due to a sharp fall in the price of commodity. of course bank can take custody of cargo but the value of goods is less than what bank has paid.

First, i think the buyer will pay the issuing bank together when they issuing the LC.

But, based on article above. The bank can always use his power to get the money back no matter what excuses the buyer gave.

Hi Manaadiar,

You aare really producing fantastic articles. Keep up the good work of educating people in this industry of ours. Once in shipping will remain in shipping. I would like you to comment of an FCA contract if you can. I would be happy if you could also elaborate on procedures or steps to take if i am say, of receiving and despatching a foreign vessel at port.

I have done diploma in shipping from india, but after marriage settle in singapore n busy with housework n kids almost 10yrs , i need to know some terms again like a revison n u have really provided it so well. as i m thinking to look for a job, but feel i lost confidence.

Hi Gail, thank you for your comments.. Am glad that i can be of assistance to anyone looking to enter the shipping industry..

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Lost paper bill of lading results in $2 million in costs – not for sensitive readers

Should the shipped on board date and bill of lading date be the same.., warehouse receipts gets its model law – uncitral/unidroit.

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Letters of Credit

By Sarah Springer |

June 21, 2021

What is a Letter of Credit?

A Letter of Credit (LC) is essentially a document from a bank guaranteeing that a buyer’s payment to a seller will be received on time, for the correct amount and in the correct currency. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. An LC is a payment term typically used for long-distance and international commercial transactions and is a key instrument used by importers, exporters, and banks in Trade Finance. It is a way of reducing the payment risks associated with moving goods globally. Using documentary letters of credit allows the seller to significantly reduce the risk of non-payment for delivered goods.

Key Learning Points

• A Letter of Credit is a document from a bank offering to guarantee that a buyer’s payment will be made on time, for the correct amount and in the correct currency
• If the buyer does not make the payment then the bank is liable for the outstanding amount still owing
• Essentially a bank is substituted as a source of payment and in return the bank collects a transaction fee and may also require collateral
• Letters of credit are the foundation of International Trade Finance by providing a secure mechanism for payments on import/export without tying up cash resources
• There are many different types of letters of credit including basic types (e.g. confirmed versus unconfirmed) and special types of Letters of Credit (e.g. Red Clause LC)
• Payment for the goods shipped can be remitted to the seller’s bank or a large, reputable bank
• Payment will only be made to the seller when the terms, conditions and required documentation of the Letter of credit are fully complied with

Letters of Credit Explained

Parties involved in an lc transaction.

The typical LC process

When the seller has doubts about the credit-worthiness of the buyer or wants to ensure prompt payment, the seller can insist on payment by an irrevocable Letter of Credit. If the bank issuing the LC is unknown to the seller or if the seller is uncertain about a foreign issuing banks ability to honor its obligation, the seller can, with the approval of the issuing bank, request its own bank or a large international bank, to assume the risk of the issuing bank by confirming the letter of credit. Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit, as well as collecting a fee for the service, typically a percentage of the amount covered by the LC. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.

Example: Key Roles of all LC Parties

Below is a table with the key terms typically used in arranging a letter of credit.

The Applicant, the importer, needs the Letter of Credit in order to buy the goods. The Beneficiary, i.e. the exporter, sells the goods. The issuing or opening bank acts as the importer’s bank and issues the LC. The advising bank advises the seller on the LC. The confirming bank, often a 3 rd party bank but sometimes also called advising bank typically confirms the LC. Depending on the situation the issuing bank, the advising bank or the confirming bank may pay the LC.

Selected Basic Types of Letters of Credit

Commercial letter of credit.

A commercial letter of credit is a direct payment method in which the issuing bank makes the payments to the beneficiary. It is the most simple of the various types of letters of credit.

Revolving Letter of Credit

A revolving letter of credit is a single letter of credit that covers multiple transactions over a long period of time. It is used for regular transactions of the same commodity between the same buyer and the seller.

Confirmed vs. Unconfirmed Letter of Credit

The confirmed letter of credit refers to an additional guarantee to the original letter of credit obtained by a borrower from a second bank. This second letter guarantees that the second bank will pay the seller if the first bank fails to do so. The issuing bank in international transactions typically requests this arrangement.

Irrevocable vs. Revocable Letter of Credit

An irrevocable letter of credit very simply means that it can not be canceled or modified without the consent of the beneficiary. A letter of credit is deemed to be an irrevocable credit. The concept of a Revocable Credit was withdrawn in 2007.

Selected Special Types of Letters of Credit

In addition to basic Letters of Credit there is a wide range of special types of Letters of Credit including Red Clause Letter of Credit, Transferable Letter of Credit, Back-to-Back Letter of Credit, Deferred Payment Letter of Credit, Standby Letters of Credit and many more. If you are interested in Trade Finance, try to find out the special characteristics of these LC’s and take our online course in Trade Finance!

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Introduction to Letters of Credit | 2024 Guide

Letters of credit | tfg ultimate guide to lcs.

Welcome to TFG’s Letters of Credit hub. Find out how we can help you access Letters of Credit to increase your imports and exports to guarantee the payment and delivery of goods. Or, discover the latest research, information and insights on Letters of Credit here.

Access Letters of Credit Learn about Letters of Credit

Diagram: Letter of Credit

The normal LC process flow can be diagrammatically represented as follows:

What is a Letter of Credit (LC)?

Letters of credit (also know as documentary credits) are payment instruments that constitute a definite undertaking of the issuer (“the issuing bank”) on the instruction of the buyer (“applicant”) to pay a certain specified amount to a seller (“the beneficiary”) at sight or on a future determinable date (“the maturity date”) provided that documents stipulated in the letter of credit/documentary credit are presented in compliance with the stated terms and conditions.

The issuing bank issues the documentary credit on behalf of its customer (“the applicant”) or on its own behalf.

These undertakings are known as “documentary credits”, as they specify the documents that must be presented in order for the credit to be honoured.

These are also known as “letters of credit” (LCs) as they were originally issued in a physical document form addressed to the beneficiary with the issuing bank’s undertaking to pay upon receipt of complying documents.

There are several critical features of documentary credits/letters of credit:

• Irrevocability : documentary credits constitute an irrevocable undertaking of the issuer to pay, meaning that, once issued, the credit cannot be revoked or changed by the issuing bank. A credit can only be amended or cancelled with the consent of the issuing bank, the beneficiary, and the confirming bank (if any).
• Documentary nature : documentary credits are documentary in nature and any payment undertakings contained in them are conditional upon receipt of documents as stated in the terms and conditions of the credit.
• Compliance : documentary credits are settled only when the documents presented by or on behalf of the beneficiary comply with the terms and conditions of the documentary credit. Therefore, to obtain payment under a documentary credit, the beneficiary must present documents which comply with each credit’s terms & conditions. If the documents contained do not comply (also known as discrepancies), an issuing bank may refuse to honour and is only obligated to pay if the non-complying documents are corrected and made compliant before the credit expires, or if the applicant waives the discrepancies and the issuing bank also agrees to waive any discrepancy(ies).
• Payment mechanism : documentary credits constitute a payment mechanism designed to facilitate the settlement of an underlying trade transaction whereby the applicant (the buyer) receives the goods or services, and the beneficiary (the seller) obtains payment via the credit which would then satisfy the applicant’s payment obligations against the underlying sales or other contract on which it may be based.
• Independence and autonomy : documentary credits constitute an independent undertaking of the issuing bank and the confirming bank (if any) separate from the underlying sale or other contract on which it may be based. The principle of autonomy is articulated within the ICC Uniform Customs and Practice for Documentary Credits 2007 Revision (“UCP 600”) and is upheld throughout the world.

The purpose of a documentary credit is to provide a mechanism or arrangement to facilitate the settlement of an international or domestic trade transaction by use of a bank undertaking.

It should be noted that banks only deal with documents and not with goods, services or performance to which the documents may relate.

The terms and conditions of a documentary credit form the basis upon which the applicant must reimburse an issuing bank when a complying presentation is made.

Documentary credits assure the beneficiary of payment as long as they present the requisite complying documents to the nominated bank, the confirming bank (if any), or the issuing bank.

Diagram: Letter of Credit Issuance & Settlement

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Letters of credit (lcs) – frequently asked questions.

Letters of Credit are issued and formatted under the guidelines of the Uniform Customs & Practice for Documentary Credits, or the  UCP600 , that is issued by the International Chamber of Commerce (ICC). Using one is fairly straightforward, both for businesses selling and those buying goods and services.

One of the parties, usually the importer, will contact a bank to serve as an intermediary and to guarantee to the seller that the goods will be paid for according to the agreement. All parties involved need to agree to the terms and sign the contract. This lowers the risk of doing business significantly, as Letters of Credit are legally binding documents that are acknowledged by 175 countries worldwide.

Check the documents carefully

Although the guidelines and the form of any LC are largely the same, the content is not. It is crucial that both the buyer and the seller inspect the documents carefully and check for errors and mistakes that may end up in delays, further costs, or deferred payment. Even a minor oversight can be quite costly in this regard, and it is advisable to use several sets of eyes to check the documents.

Letter of Credit terms include:

• Advising bank  – accepts and then notifies the beneficiary of the LC
• Confirming bank  – financial institution that agrees to honour and payment the LC to the beneficiary and receives payment from the advising bank
• Irrevocable  – A non-amendable LC, unless agreed by all parties
• Issuing bank / issuer – the party that issues the LC
• Presentation  – delivery of the LC documentation and any other required documents that are required by the beneficiary should payment be made / the LC honoured
• Revocable – a type of LC that can be withdrawn, amended or cancelled by the issuing party at any time
• Standby  – the most common LC type whereby agreement to pay is made under certain conditions

Letters of Credit are useful to any business that trades in large volumes, both domestically, and cross-border. They are important to ensure the cash flow of a company and lowers the risk of default due to non-payment from the end customer.

Additionally, a LC can benefit companies that structure their business around e-Commerce or services.

When deciding whether or not to request a LC, some considerations might include:

• The costs associated versus the risk of non-payment, as well as which party will incur these costs
• Legal requirements and expertise required
• Documentation needed (for proof of delivery, sending the goods across e.g. customs declaration and insurance documents)
• The supplier / customers creditworthiness

Overseas Business

International traders or wholesale producers of goods are the primary users of LC. These types of company need to be certain that they will not suffer losses from selling to overseas buyers that they are unfamiliar with.

In the unfortunate case that the recipient of the goods is unwilling or unable to pay the seller, the LC is activated, and under the terms of the agreement, the bank will be obliged to cover the missing payment. After the intermediary completes the payment, the bank will deal with the buyer according to the domestic law of the country where the buyer is located.

Online Business

Online,  e-commerce and service businesses often use LC for overseas contracts. For companies producing software, or other online services that demand the employment of significant resource, it is important to consider external finance to free up working capital.

Small and Medium Enterprises

Small or Medium Enterprises (SMEs) account for 99% of businesses. Letters of Credit can help alleviate some of the cash flow constraints stemming from delayed and long payment terms from end customers. Large international companies are often culprits for late payments to SMEs, which can often put small companies at financial strain, or even out of business.

Risk and trust are one of the major challenges when it comes to trade, be that domestic or international. The specificity and legal weight of LC are a big advantage, given that they are accepted and acknowledged by 175 countries, reduce the risk of doing business overseas, and provide transparent collaboration between unknown parties.

Finally, Letters of Credit provide better clarity on the transaction, as all of the goods or services supplied would be defined in detail. This provides additional comfort to the buyer as well as removing the possibility that the descriptions of the goods ordered are vastly different from what arrives.

Key advantages:

• Avoids potential disputes overseas
• Some form of guarantee to a seller / supplier that they will get paid
• Flexibility and variability across different types of LCs
• Secure payment method endorsed by most major markets
• Risk of non-payment is taken by the banks rather than the buyer
• Often required by national border / exchange control agencies

Using Letters of Credit can significantly advantage your business, regardless if you are a seller or buyer of goods and services. This trading tool is legally binding in almost all countries of the world, providing better transparency and creating trust in your business.

Using an LC, you can do business with any company or business around the world while being certain that all goods agreed upon will be received and that all payments will be fulfilled.

For any company, this secured access to the global market means lower prices and better services in a wider market. Additionally, it means that you can safely offer your goods and services to any buyer around the world, with little risk that the products you have provided will not be paid for.

There are different types of LCs depending on the kind of business or transaction that it is needed. In most cases, these secondary features are used to increase security and make the operation easier, faster, and more transparent.

While there is a definite time and place of each type of LC, business should be aware that certain additions and clauses stipulated might increase the bank’s fee, or add some features that can cause future problems for one of the parties involved.

• Irrevocable

An Irrevocable Letter of Credit allows the buyer to cancel or amend the LC, provided that other parties agree. This can be used to trade additional goods that were not a part of the original LC inside the same shipment or to allow the exporter of products extra time to fulfil their obligation.

A Confirmed Letter of Credit is used to further ensure the seller by adding more security. This addition stipulates that if the issuing bank from the buyer doesn’t pay the requested amount of money, the seller’s bank guarantees payment.

This article can be added if there is reduced trust in the buyer, or if the money requested is crucial to stable financial liquidity of the seller.

Most LCs will include this clause in the agreement, especially in international trade between partners that haven’t done business in the past.

• Transferable

A Transferable Letter of Credit is commonly used when there are intermediaries involved in the transaction, or when there are more than two parties included in the LC. In this case, the LC can be transferred to other entities, provided that the original beneficiary agrees.

This type is usually employed by the seller’s bank, especially when the seller is an SME, as a way to reduce the risk of the transaction to the bank, usually decreasing the price of the trade in the process.

• Letter of Credit at Sight

This article of the LC stipulates that all payments will be fulfilled as soon as there is documentation that the goods or services have been received by the buyer. This payment can be made by the buyer, or by the buyer’s issuing bank, giving the buyer some additional time to fulfil the debt.

Contrary to this type of LC, there is the Standby Letter of Credit that doesn’t have this clause, and that needs to be activated in the case that the buyer can’t fulfil the payment.

• Deferred or Usance Letter of Credit

A deferred or usance LC is used to allow deferred payment from the buyer for a specified time period. This slightly reduces the risk of unintentional non-payment and lowers the cost of an LC. Additionally, a Deferred Letter of Credit is more enticing for the buyer, making it more likely for them to accept buying goods or services.

A Red Clause Letter of Credit obligates the buyer’s issuing bank to provide partial payment to the seller prior to shipping products or providing the service. It is usually used to secure a certain supplier and to expedite the shipping process, but it often makes the LC significantly more expensive.

Find out more about the different types of LC in the next page of our LC guide, here .

There are several situations where a business is either unable to get access to a letter of credit, perhaps due to a low credit score, or, because the supplier or customer does not want to use an LC to finance the transaction. Given that open account trade cover 80% of cross-border trade, businesses with good commercial relationships often won’t use LCs. Alternatives to LCs are often used to finance small purchases, perhaps those under $100k, given that they are significantly cheaper and faster to set up.

Revolving Vendor Accounts

In cases where a business has a good trading history, as well as paying its vendors and suppliers in time, revolving vendor accounts can be used to extend payment terms. Using these tools, a business can order supplies, materials, and services in advance on credit. Once all the necessary materials are ordered, a business can forward them to end users or customers, paying the supplier before the credit is due.

This type of account can be problematic however, as the seller may refuse to ship goods and services to a business that hasn’t paid their previous charge. Finally, some sellers will reject to enter this agreement, especially if abroad, as the entire risk of debt collection falls on the seller.

Purchase Order Financing

In this case, a third party, either a commercial bank or another entity can finance the advances or outstanding payables on any goods and services paid, assuming the risk of the sale contract not being fulfilled. This type of financing is usually made for a relatively short time period and it is not as uniform as a Letter of Credit.

Due to the fact that all risk is on the third party, this type of credit is usually more expensive and not applicable to sales of common goods. Read our PO finance guide  here .

Invoice Factoring

This alternative to LC assumes that a third party, usually a commercial bank, will advance the seller for up to 80% of the total charge, assuming the risk of the customer or buyer paying the invoice in total once the goods arrive. Once the invoice is paid, the bank’s fee is withheld, and the rest of the funds are transferred to the seller’s account.

This tool is very useful to companies that suffer from diminished liquidity, but as the bank is taking more risk than when using a Letter of Credit, it is significantly more expensive than an LC. Trade Finance Global have put together a more extensive invoice factoring guide, which can be found  here .

The main disadvantage of using an LC compared to other methods is the relative cost of insurance, that may increase the overall cost of doing business. Letters of Credit should be used primarily on large shipments that may influence the liquidity and cash flow of the company, as well as when doing business with international buyers and sellers.

Additionally, an LC creates an issue for sellers, as the payment will be based on the documentation, and not the actual goods or services provided. Sellers need to be certain that the goods mentioned in the agreement are exactly as they are, with every minute detail included.

Finally, the disadvantage for the buyer is that the payment is connected to the documentation and not the actual provision of goods and services. Buyers need to ensure that all received products are exactly per specifications and have no flaws or damages before they create the necessary documentation that proves that they have received the goods.

A red clause letter of credit is a variation of the traditional LC that contains a unique clause allowing the bank to make advance payments to the exporter before the exporter presents any shipping documents.

Similar to a red clause LC, a green clause LC is a variation on the traditional LC that allows a nominating bank to make an advance payment to the exporter. Experts often consider green clause LCs to be an extension of red clause LCs.

The key differences between red and green clause letters of credit are: 1) Advance percentage: – With a red clause LC, the percentage of the total letter value available for an advance is generally around 20 – 25%. – In contrast, with a green letter of credit, the percentage is far greater, often closer to 75 – 80% of the total value of the letter.

2) Security: – Importers have much more security if using a green clause LC because of the stringent documentation requirements. If importing goods, the buyer is technically providing the advance against the documentation of title. – Using a red clause LC, the buyer can take an advance before the producer has even made the goods.

Find out more about red clause and green clause letters of credit here .

Key Standards

The ICC Uniform Customs and Practice for Documentary Credits (UCP 600) establishes the global standards for the utilisation of letters of credit in international trade. Additionally, the Swift network, particularly its Category 7—Documentary Credits standards, serves as the primary technical framework for handling LC, making Swift the central infrastructure for exchanging LCs and related messages. Typically, MT700 message is sent by the issuing bank to the advising bank to indicate the terms and conditions of a documentary credit which has been originated by the sender (issuing bank).

Legal Framework

LCs are subject to the ICC Uniform Customs & Practice for Documentary Credits (UCP 600). The legal requirements for using a LC can vary depending on the jurisdiction and the specific terms and conditions of the LC.

Sourced from ICC DSI

Download our free Letters of Credit guide by filling in the form below:

1 | Introduction to the Letter of Credit 2 | Types of Credit 3 | UCP 600 and the Letter of Credit 4 |  UCP 600 – Ultimate Guide 5 | Benefits of Letters of Credit 6 | Handling Document Discrepancies 7 | Restricted Letters of Credit 8 | Letters of Credit vs Bank Guarantees 9 | Standby Letters of Credit 10 | Sight Letters of Credit 11 | eUCP Explained 12 | URC 522 and eURC 13 | SWIFT Messaging Types 14 | Research 15 | BAFT & TFG Guide 16 | Parties Involved 17 | Letters of Credit Rules 18 | ISBP 821 19 | Financial Crime, Fraud and Sanctions 20 | Presentation of Documents 21 | Dispute Resolution 22 | Digitalisation and the Future

Get in touch with our Letters of Credit team

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Latest news, large language models in trade finance, itfa initiative tackles cross-border trade finance fraud, navigating trade-based financial crime: impact of ucp 600 and isbp 821e articles, surecomp advances digital trade with rapid ebl transactions on rivo platform, podcast| diversifying investment portfolios with trade finance: are we there yet, making an impact on global banking in 2024: iso 20022, cross-border payments and ai, pil becomes member of dcsa, furthering shipping digitalisation , ifc and dbs launch $500m facility to promote trade flows in emerging markets, international standby practices (isp98): 25 years later, baft and tfg launch a comprehensive letter of credit guide, generative ai and llms in trade finance: believe the hype (well, most of it), the role of ucp in standby letters of credit transactions, understanding letters of credit & the ucp 600 rules in nigeria, standby letters of credit (sblc): top tips and best practice for corporates, navigating commodity trade finance: a comprehensive guide for borrowers, 11 swift messaging types (mts), what they do, and how they are used in trade finance (mt700, mt707, mt710, mt700…), video | sustainability in mena: first abu dhabi bank’s approach to sustainable trade finance, trade finance global: a year in review – 2023 recap, citi announces collaboration with traydstream to streamline document services, kuvera resources v j.p. morgan chase: certainty of payment vs risks of breaching sanctions under letters of credit, three levels of iso 20022 usage: steps to harmonise trade finance transactions , 14 key trade documents and data elements for cross-border trade: inside the icc’s ktdde report, afreximbank’s programme to support lcs reaches 80% of africa’s banks, contour collapses: what does this mean for digital trade finance, bridging trade gaps: how adb’s trade finance programme mitigates commercial risk, lloyds bank introduces digital solution for direct guarantees and standby letters of credit, the future of digital trade finance: an in-depth q&a with surecomp, video | rethinking correspondent banking: the real implications of de-risking, breaking: icc and swift release first api standards for guarantees and standby letters of credit, enhancing uk trade: lloyds bank and ubs partner to expand access to export letters of credit.

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Trade Finance Global (TFG) assists companies with raising debt finance. While we can access many traditional forms of finance, we specialise in alternative finance and complex funding solutions related to international trade. We help companies to raise finance in ways that is sometimes out of reach for mainstream lenders.

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International letter of credit: what constitutes a discrepancy.

However, as anyone who has ever worked with a letter of credit knows, there is plenty of disagreement between all parties concerned. Banks, account parties, and beneficiaries can all disagree about what complies and what does not comply when the shipping documents are checked against the terms of the letter of credit.

Sometimes the UCP just doesn’t clarify a situation the way you think it should. After all there is a huge difference between the words “will” and “may.” For instance: “Banks will accept…” versus “Banks may accept….” One is definite and the other appears to be open to interpretation. It’s not surprising confusion results.

To help address some of this confusion, a task force of the International Chamber of Commerce Banking Commission created the International Standard Banking Practice (ISBP), which was published by the ICC in January 2003.

The International Standard Banking Practice

The ISBP is not intended to amend the UCP 500. Instead, it is a guide to how the rules should be applied in a day-to-day working environment. The ISBP is laid out in a similar manner to the UCP 500; it covers the application, general principals, drafts, invoices, shipping documents, insurance and certificates of origin. In total the ISBP contains 200 guiding principals.

In reading through the publication, I sometimes thought they included information so obvious it need not be said and other times I was surprised by their interpretations. In talking with other bankers, I’m finding that I’m not alone, although I don’t know that we all feel the same way about everything that has been written. I’ve also heard that some banks are slowly accepting the ISBP as their standard method of operating.

You may find banks adopting the ISBP on their import letters of credit but going a bit more slowly when handling their export documents for fear that the issuing bank hasn’t accepted the ISBP as their standard operating procedure. As more and more banks accept and embrace the ISBP, this double standard will vanish.

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The application and issuance of a letter of credit.

The first section of the ISBP concerns the application and issuance of the letter of credit. It addresses the importance of completing the application accurately. The first section stresses the fact that the underlying transaction and sales contract are a separate transaction from the letter of credit and that the letter of credit should not incorporate the sales contract.

The buyer and seller should agree what documents are going to be required in the letter of credit and who should be generating those documents before the application is ever submitted to the bank. If the application for a letter of credit that is presented to a bank for issuance is unclear or ambiguous, the issuing bank has the right to adjust the application in order to make the letter of credit workable.

While many banks already have a clause either on their application form or in their security agreement that gives them this right, now under ISBP all banks have the right to make adjustments to the application.

The applicant is also required to have a full understanding of the UCP 500 to avoid a conflict of terms within the letter of credit.

Additionally, banks should not issue a letter of credit that requires documents to be either issued or cosigned by the letter of credit applicant. The beneficiary should be able to read a letter of credit and feel that they can comply with the terms by either producing the documents themselves or by having an independent third party issue the documents.

Requiring an applicant to either issue or cosign documents basically turns the letter of credit process into a collection process where payment isn’t made until the buyer gives their approval. If this is acceptable to the seller, they should just use a collection method and pay collection bank fees instead of the more expensive letter of credit fees.

Finally, the first section of the ISBP points out that if everyone spent more time up front dealing with the underlying transaction, the letter of credit application, and how it is going to be issued, the parties will encounter fewer problems at the time of examination, which results in fewer discrepancies.

Believe it or not, this is something that everyone—including the banks—looks forward to.

General Principals of a Letter of Credit

Abbreviations.

As stated in the ISBP, the use of generally accepted abbreviations does not make a document discrepant. A couple of the examples offered are “LTD” instead of “Limited” or “Co” instead of “Company”. If the letter of credit uses the abbreviation and the documentation uses the complete word, no discrepancy should be called.

Further, if the letter of credit used the complete word but the documentation uses the abbreviation, again, no discrepancy should be called. I know that a number of banks require word-for-word and letter-for-letter agreement when comparing documentation against the letter of credit. A bit of leniency is now allowed, but be careful that this doesn’t lead to a totally relaxed attitude when preparing the documents.

The ISBP points out that slash marks (“/”) may have different meanings in different parts of the world and should be avoided. Instead use the word or words that are intended.

Certifications and Declarations

Let’s say that a certification or declaration is contained in another document as allowed by the letter of credit, and the document is signed and dated. If the party that is making the certification or declaration is the same party that issued the document, no further signature or dating is required.

Corrections and Alterations

In my thirty years of banking, I saw numerous documents that had been altered or corrected. Some of them were nicely done, others not so nicely done. With the introduction of the ISBP, certain standards have been implemented.

First, if a document that is issued by someone other than the beneficiary is corrected or altered, either the issuer of the document or a party designated by the issuer must authenticate the correction or alteration.

If a legalized or visaed document has been altered or corrected, the party that either legalized or visaed the document must authenticate the change. Corrections or alterations appearing in documents that the beneficiary has issued do not need to be authenticated except for any drafts that the letter of credit may require.

Documents that have different fonts or type styles or even handwriting on the document are not to be automatically considered a correction or alteration. I can imagine that this standard will generate a bit of discussion from time to time.

Something so simple as a date, or a time frame around the date, has been interrupted differently. The ISBP has eliminated some of that confusion.

Even if the letter of credit doesn’t specifically state that the draft, transport document, or insurance document needs to be dated, it should be dated. If it doesn’t include a date, a discrepancy can be called. You might want to date all documents required just to play it safe.

Documents such as a pre-shipment inspection certificate or analysis certification can be dated after the shipment date. I can see how in the past this could have been called a discrepancy. Obviously the inspection or analysis has to happen either before or on the date of shipment. The title of the document or a statement in the document should indicate this.

If the word “within” is used regarding a date, such as “within 12 days of the bill of lading date,” the date of the bill of lading is not included in the calculation. For example, if the bill of lading is dated November 15, then the time frame for whatever is being required to occur with 12 days is November 3 until November 27.

Finally, in order to avoid confusion and keep things as simple as possible, use the name of the month when identifying a specific date rather than using the number.

Documents Not Covered by the UCP Transport Articles

If you are a logistics expert, you probably know that not all documents used in the movement of goods have an underlying contract of carriage.

Documents such as delivery orders, forwarder’s certificate of receipt, and mate’s receipts are examples of documents that don’t incorporate a contract of carriage and, as a result, are not considered transport documents as defined by the UCP. Since these documents are considered additional documents instead of transport documents, any article in the UCP making reference to transport documents will not apply to them.

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For example, article 43 of the UCP 500 states that every credit that calls for a transport document should specify a timeframe from the shipment date for presentation of the documents. If no timeframe is stipulated, the period for presentation defaults to 21 days after the date of shipment or the expiration date, whichever occurs first.

If you are dealing with a letter of credit calling for a forwarder’s certificate of receipt and no transport document is required, you have until the expiration date to present document.

Expressions Not Defined in the UCP

Having worked with letters of credit for many years, there are phrases commonly used that many of us take for granted. We may have the mistaken idea that everyone defines these phrases the same way. Now the ISBP defines some of these phrases:

• “Shipping documents” include all documents required by the letter of credit, not just the transport documents. The only exception to this is the draft.
• “Stale documents acceptable” means documents presented beyond the 21 days after the date of shipment are acceptable provided they are presented before the expiration date of the credit.
• “Third party documents acceptable” means that all documents, with the exception of the draft, may be issued by a party other than the beneficiary of the credit.
• “Exporting country” is the country of the beneficiary, and/or the country of origin of the goods, and/or the country where the carrier took receipt of the goods, and/or the country from which shipment is made.
• Phrases such as “well known,” “prompt,” “immediately,” “as soon as possible” and similar expressions should not be used in letters of credit. If they are used, banks can ignore them.

Inconsistency in the Documents

Documents must not be inconsistent with each other. This doesn’t mean that documents have to be a mirrored image of one another; they just can’t be inconsistent.

For example, if the invoice describes the merchandise as “blue and yellow widgets as per purchase order 2310” and the packing list shows the merchandise as “blue and yellow widgets,” that is acceptable and no discrepancy should be called. However, if the packing list shows the merchandise as “blue and green widgets,” the documents are no longer consistent and a discrepancy will be called. Eliminate inconsistencies by using Shipping Solutions export documentation software to create your shipping forms. 

The Issuer of Documents

Sometimes a letter of credit may stipulate that a specific party is to issue a particular document. If this is the case, and the document appears on that party’s letterhead, or if the document appears to have been issued and/or signed by or on behalf of that party, the document is acceptable and no discrepancy will be called.

Documents issued by the beneficiary of the letter of credit should be issued in the language of the credit. If the letter of credit allows for documents to be issued in two or more languages, the nominated bank has the right when advising the credit to limit the number of acceptable languages as a condition of either its engagement in the credit or its confirmation of the credit.

Mathematical Calculations

When documents are presented, sometimes the invoice is several pages long, consisting of numerous mathematical extensions. For example, the number of units multiplied by the unit cost equals the value charged.

When an invoice includes these calculations, banks will only be obliged to check the total value against the credit and other required documents. This eliminates the time-consuming task of verifying each and every extension; it also limits the number of discrepancies called.

Misspellings or Typing Errors

If a word has been obviously misspelled or the letters in a word have been transposed, a discrepancy should not be called. Examples given include “mashine” instead of “machine” or “modle” instead of “model”. However, if the description included a part or purchase order number, and the numbers are transposed or typed incorrectly, a discrepancy will be called.

I would venture to guess that if the misspelling could be construed as possibly a different type of merchandise, a discrepancy would also be called. An example of this would be “adding machines” versus “adzing machines”, two entirely different types of merchandise with just one letter different.

Multiple Pages and Attachments

Pages that are bound together and are in numerical order or pages that contain cross references should be examined as one document. If a document contains more than one page, there has to be a way to determine just how many pages make up that document.

If the letter of credit requires a multiple-page document to be signed or endorsed, the signature or endorsement could be on any of the pages unless specifically required by the letter of credit. It is most common for a signature or endorsement to be either on the first or last page.

Originals and Copies

It seems that the more the words “originals” and “copies” are defined, the more discussion is generated. If a document is marked original or duplicate or first original, it should be considered an original document. Every document presented should include at least one original unless the credit specifically requires that copies of a document be presented.

The ISBP goes onto clarify where the credit requires:

• “Invoice”, “one invoice” or “invoice in one copy” that will be understood that one original invoice is to be presented .
• “Invoice in four copies” will mean one original invoice and the remaining number in copies.

Personally, I am a little surprised by this definition. I would have assumed that if the letter of credit were asking for either an invoice in one copy or invoice in four copies, that the credit was clearly asking for copies and no originals would be required. Apparently because the word invoice is mentioned before the number of copies required, it is requiring an original as well.

“One copy of invoice” is satisfied by the presentation of one copy of the invoice, but if an original is presented, that is also acceptable. If for whatever reason an original document is not acceptable, it must be clearly stated in the credit that original documents are prohibited.

Hopefully this will finally settle the discussion of just what an original is versus a copy.

Shipping Marks

Shipping marks help to identify the location of a specific box, crate or package that has been shipped. If the letter of credit identifies the shipping marks to be used, and the documents presented include those shipping marks but have additional detail, there should be no problem as long as the additional detail isn’t inconsistent with the credit terms.

It is also acceptable if the shipping marks contain details that wouldn’t typically be thought of as shipping marks such as “fragile, handle with care,” the net or gross weight, or a short description of the goods. If some of the documents show the excess information in the shipping marks while other documents don’t, banks should not consider the documents to be inconsistent.

Sometimes when goods have been containerized, the transport document will only show the container number while other documents will show a detailed listing of the shipping marks. When this happens, it is not considered inconsistent.

When a letter of credit is issued and it requires drafts, certificates and/or declarations but doesn’t mention that these documents need to be signed, they do. By their nature, a signature is required. Transport and insurance documents must also be signed in accordance with the UCP.

Just because a document has a place or a box for a signature, it doesn’t necessarily mean that the document must be signed. However, if the document makes a declaration such as “This document is not valid unless signed” or similar words, a signature is then required.

A signature does not have to be handwritten. Facsimile signatures, perforated signatures, chops, symbols, or any electronic means of authentication are considered acceptable. If a photocopy of a signed document is presented as a signed original document, banks will call a discrepancy. They will also call a discrepancy for any signed document sent through a fax machine without an original signature.

If a signature appears on a company’s letterhead, the signature will be accepted as a signature of that company, and the name of the company doesn’t need to appear next to the signature.

Title of Documents and Combined Documents

According to the ISBP, document titles may exactly match the document titles described in a letter of credit, have a similar title, or include no title at all.

The old school of thought was that every document had to be titled exactly as called for by the letter of credit. Now if the credit calls for a packing list, even an untitled document satisfies this requirement as long as it includes packing details.

What is now more important is the content of the document. If the content of the document appears to fulfill the purpose of the required document, it is now acceptable. I can see where this is going to lead to judgment calls by the bank and may create additional problems.

Documents required by the credit should be presented as separate documents. The example given by the ISBP is a packing list and a weight list. Two separate documents should be presented. However, it is also acceptable if two original copies of a combined packing and weight list are presented provided both documents contain both packing and weight information.

Bank Drafts

Tenor of the draft.

When a draft is presented with documents against a letter of credit, it is the formal demand for payment. The value of the draft stipulates the amount that the beneficiary expects to be paid. The tenor of the draft stipulates when that payment should be made. In all cases, the tenor should agree with the terms of the letter of credit.

Examples of acceptable tenors include “at sight,” “30 days after sight,” and “30 days after bill of lading date.” If the tenor includes a financing period, as in the last two examples, it must always be possible to determine the maturity date by looking at the draft itself.

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In the case of 30 days after sight, the date of acceptance will be shown on the draft once the draft has been accepted.

When the credit requires the tenor to be 30 days after the bill of lading date, the draft can show the tenor a number of different ways:

• “30 days after the bill of lading date, October 15, 2003”
• “30 days after October 15, 2003”
• “30 days after the bill of lading date” and somewhere on the draft it would indicate “bill of lading dated October 15, 2003”
• “30 days date” and the date on the draft would be October 15, 2003
• “November 15, 2003” which would be 30 days after the bill of lading date

The on board date of the bill of lading is always considered the date of the bill of lading. Sometimes the tenor is stated as X number of days either “from” or “after” an event, such as the bill of lading date. In either case, when determining the maturity date, the date mentioned is excluded in the calculation. For example, 30 days after or from January 1 would be January 31.

If a bill of lading has more than one on board notation, the earliest on board notation is used for the calculation for the maturity date. However, if more than one set of bills of lading are presented against a single draft, the on board date of the last bill of lading is used to calculate the maturity date.

Maturity Dates

If the draft shows a date as the tenor, the date shown has to have been calculated in accordance with the terms of the credit.

When the tenor of the draft is “X number of days sight” and the documents complied with the credit terms, or in the event of discrepant documents that have been waived, the calculation for the maturity date uses the date of receipt. In other words, if documents are received on September 1 and are determined to be in order on September 5, September 1 is the date used to calculate the maturity date.

In all the years I’ve spent dealing with letters of credit, I’ve never heard of using the date of receipt when calculating the maturity date. This is something that buyers should be aware of going forward, as it will shorten the timeframe for financing.

If the documents are non-compliant and the issuing bank refuses payment, but then eventually approves payment, the maturity date is determined from the date of approval. In all cases, the accepting bank must notify the presenter of the maturity date.

Banking Days, Grace Days, Delays in Remittance

On the maturity date, payment must be made in immediately available funds at the place where the draft is payable. If the maturity date falls on a day that the bank is closed, payment will be made on the next banking day.

There are no grace days or allowance for delays in the remittance of funds. Payment is due on the maturity date.

If the draft states the amount in both figures and words, these amounts must be the same, and the amount must agree with the commercial invoice.

How the Draft is Drawn

The draft is to be drawn by the beneficiary on the party stated in the letter of credit.

Drafts Drawn on the Applicant

As stipulated in the UCP500, letters of credit should not be issued requiring drafts to be drawn on the applicant.

All corrections or alterations made to a draft must appear to have been authenticated by the drawer, the party creating the draft. If corrections or alterations to the draft are not acceptable, the issuing bank should make this known in the letter of credit.

If a letter of credit (LC) merely requires an invoice, you might be surprised by the type of invoices that are acceptable to present. When the letter of credit requires a commercial invoice, a document titled invoice will meet the terms of the LC. In addition, tax, customs and consular invoices are all acceptable documents.

Provisional and pro-forma invoices are not acceptable unless specifically called for in the LC.

Name and Address

The old rule of thumb required that the name and address of the beneficiary and applicant on the invoice had to exactly match the LC. No deviation was acceptable.

Now the invoice needs to be issued by the beneficiary named in the LC and made out in the name of the applicant. If telex or fax numbers appear as part of the address for either party in the LC, they don’t need to be mentioned on the invoice. In fact, those numbers can differ from the LC.

Description of Goods and Other General Issues

In the past, most banks required that the merchandise description on the invoice be identical to the description shown on the LC; no deviation was allowed. Now the rules have been eased.

It is no longer necessary to have a mirror image of the description on the invoice. Details of the merchandise can appear in multiple areas of the invoice and, when pulled together, correspond to the letter of credit.

If the LC authorizes partial shipments, only what is actually shipped needs to appear on the invoice. It is also acceptable if the invoice displays all the merchandise on the LC but identifies what was shipped.

The invoice must clearly state the value of the goods as well as the currency and any unit price shown in the LC. If required by the LC, any discounts or deductions also must appear on the invoice. If the invoice shows a deduction for an advance payment, this is considered acceptable even if it’s not mentioned in the LC.

When the LC describes the goods and incorporates the trade term and the source of the trade term, such as “CIF Hong Kong Incoterms 2000,” this entire description must appear on the invoice. Costs related to the term must be included on the invoice and be within the value of the LC. Costs exceeding the LC value are unacceptable.

Most times the LC will require a signed commercial invoice. However, if the LC only requires a commercial invoice, the invoice does not have to be signed or dated.

If the invoice shows the merchandise quantity, weight and/or measurements, all the documents presented must be consistent with the invoice. In addition, the invoice cannot cover merchandise not described in the LC, such as samples.

Banks have always allowed a tolerance of plus or minus five percent for the quantity of the goods. However, the tolerance does not apply if the LC states that the quantity cannot be exceeded or reduced or if it states a number of units required. Under no circumstances can the value of the LC be exceeded.

In the case of prohibited partial shipments, the invoice value may contain a tolerance of minus five percent provided that the quantity is shipped in full. If the LC doesn’t state a quantity, the invoice will be considered shipped complete.

Installment shipments must follow the schedule outlined in the LC.

Ocean and Multimodal Transportation Documents

The ISBP covers ocean/marine, charter party, and multimodal transport documents separately. Due to a number of similarities, I’m going to combine my coverage of these three transport documents while highlighting differences each may have.

Application of UCP: Article 23 Ocean/Marine

Ocean and/or marine bills of lading for port-to-port shipments are covered by Article 23 of the UCP 500. The words ocean or marine do not have to appear on the transport document to make it acceptable, but it must indicate that a port-to-port shipment has been made.

Article 25 Charter Party

Charter party bills of lading for port-to-port shipments are covered by Article 25. As long as the transport document, such as a marine document, indicates it is subject to a charter party, it’s considered a charter party bill of lading.

Article 26 Multimodal (Combined Transport Document)

When at least two modes of transportation are used, and if the transport document shows that it covers the shipment from the place of loading to the final destination as called for in the letter of credit (LC), it is considered a multimodal bill of lading even if it isn’t titled as such.

Full Set of Originals

All transport documents need to show the number of original bills of lading issued. Documents marked “first original” or “duplicate” or “third original” are all considered original documents. Bills of lading do not have to be marked original to be acceptable.

Signing of Bills of Lading

All original bills of lading must be signed and the name of the carrier identified on ocean/marine and multimodal transport documents.

When an agent signs either an ocean/marine or multimodal bill of lading for the carrier, they need to be identified as an agent. The carrier or multimodal transport operator must then be identified either at the signature line or elsewhere on the face of the bill of lading.

If the master or captain signs the bill of lading, the signature must be identified as either the captain or master. The name of the captain or master isn’t required in addition to the signature. However, if an agent signs on behalf of the captain or master, they must be identified as an agent and the name of the captain or master must be identified.

If the credit states “Freight forwarder’s bill of lading acceptable” or “Freight forwarder’s multimodal transport document is acceptable,” that document can be signed by the freight forwarder. The name of the carrier and the multimodal transport operator does not need to be shown.

On-Board Notation

If a pre-printed shipped-on-board bill of lading or charter party bill of lading is issued, the date of issue will be considered the ship date unless there is an additional dated on-board notation. If that is the case, the dated on-board notation will be considered the ship date, even if this date is before the issuance date.

The same will apply to a multimodal transport document where the issuance date is considered the on-board date or the date of dispatch. If there is a separate dated notation, that will be considered the date of shipment.

When phrases such as “clean on board,” “shipped on board,” or “shipped in good order” are used, they are considered to have the same meaning as “shipped on board.”

Port of Loading and Discharge

The letter of credit will identify a port of loading. This port should appear on the ocean/marine bill of lading in the field designated for the port of loading. However, it may also be shown in the field identified as the place of receipt. If this is the case, two things must be clear:

• That the goods were moved from the place of receipt by vessel, and
• That the on-board notation shows that the goods were placed on board the vessel at the place of receipt.

The letter of credit will also identify a port of discharge. One would expect to find this information on the ocean/marine bill of lading in the field identified as the port of discharge. However, it is possible that it could be in the field identified as the place of final destination. If this is the case, two things again must be clear:

• That the goods will be transported to the place of final destination by the vessel, and
• That there is a notation that the port of discharge is shown as the place of final destination.

If the place of receipt on the ocean/marine bill of lading is shown as a container yard or container freight station and that same place is shown as the port of loading, it should be considered the same. As a result, the port of loading and the name of the vessel would not have to be part of the on-board notation.

It’s not uncommon for a letter of credit to identify either the port of loading and/or discharge in a geographical term, such as “Any USA West Coast Port.” If this is the case, the ocean/marine bill of lading and the multimodal transport document must show the actual port of loading and discharge and, of course, it must be within the geographical area.

If a charter party bill of lading is used, the port of loading must be shown just as on the ocean/marine bill of lading. However, the port of discharge may be shown as the geographical area.

Consignee, Order Party, Shipper and Endorsement, Notify Party

When the letter of credit requires either an ocean/marine, charter party, or a multimodal bill of lading and requires a straight consignment to a named party—for example, “consigned to ABC Company”—the consignment must not use language such as “to order” or “to the order of.” Conversely, if the letter of credit requires a consignment “to the order of” or “to order,” a straight consignment is not acceptable.

If the ocean/marine, charter party, or multimodal bill of lading is issued “to order” or “to order of the shipper,” the shipper must endorse the document. It is acceptable if the endorsement indicates that it is made for or on behalf of the shipper.

If the letter of credit doesn’t require a notify party to be designated on either the ocean/marine, charter party, or multimodal bill of lading, that field can be either left blank or completed any which way.

Transshipment and Partial Shipment

Transshipment occurs when goods are unloaded from one vessel or mode of transport and reloaded onto another. This would occur from the time the goods are put on board the vessel (otherwise known as the port of loading) to the final destination (or port of discharge) as required in the letter of credit.

On ocean shipments, if this movement of goods doesn’t happen between the port of loading and discharge, it is not considered a transshipment. With multimodal shipments, if the transport document covers the entire voyage and shows that a transshipment has occurred, this will be acceptable even if the letter of credit prohibits transshipments.

When partial shipments are prohibited and the letter of credit allows shipment from more than one port, it is acceptable if multiple sets of original bills of lading or transport documents are presented showing a variety of acceptable ports of loading. This is, of course, if the goods are shipped on the same vessel and the voyage ends at the same destination.

If multiple set of bills of lading or transport documents are presented and they have different shipment dates, the latest shipment date should be used for any presentation timeframe and for determining if the documents comply with the latest ship date allowed for in the letter of credit.

A bank will consider it a partial shipment if more than one vessel or other means of transport is used to move the goods, even if done on the same day for the same destination.

Clean Bills of Lading

A clean bill of lading or multimodal transport document is one that does not contain a notation to the effect that either the goods or the packaging are defective. The word “clean” does not actually have to appear on the bill of lading or transport document even if the letter of credit is calling for a “clean on board” document.

In addition, if the bill of lading or transport document contains the word “clean” but it is crossed out or deleted, this is still acceptable provided there is no other indication that the goods or packaging is defective.

Goods Description

The merchandise description on the bill of lading or transport document does not have to be exactly as stated in the letter of credit. The description can be more general as long as it is not inconsistent with the letter of credit.

Any and all changes made to a bill of lading or transport document must be authenticated by the carrier or their agent for bills of lading; the owner, captain, master or their agent for charter party bills of lading; and the carrier/master or their agents for multimodal documents.

Non-negotiable copies of these documents, which bear a correction or alteration, do not need to be authenticated.

Freight and Additional Costs

The letter of credit should require freight to be either prepaid or collect, and the bill of lading must reflect this. If the letter of credit states that no charges in addition to the freight are allowed, the bill of lading cannot show charges in addition to the freight that may or might be incurred. This includes costs with the loading or unloading of the goods.

Fees that could be charged as a result of a delay in unloading goods or delays after the good are unloaded such as a fee for the late return of the container are not considered an additional cost.

Goods Covered by More than One Bill of Lading or Multimodal Transport Document

Should a bill of lading or multimodal transport document indicate that the goods in the container are covered by more than one bill of lading or transport document, all bills of lading or transport documents related to that container must be presented for the container to be released to the consignee. This is only acceptable if all the bills of lading or transport documents are presented together under the same letter of credit.

Air Transport Documents

Air bills of lading are covered by Article 27 of the UCP 500. The term “air waybill” or “air consignment note” do not have to appear on the transport document, but it must indicate that an airport to airport shipment has been made.

Original Air Waybills

An original air waybill is one that states “original for consignor/shipper” on the face of the document. If the letter of credit (LC) should require a full set of originals, this also satisfies that requirement.

Signing of Air Waybills

The identity of the party signing the air waybill and the name of the carrier must be clearly stated. If the signor of the air waybill is an agent, it must be clearly stated that they are an agent, and the name of the carrier that they are signing on behalf of.

However, if the LC allows for either a house air waybill or freight forwarders air waybill, then the freight forwarder can sign the document and be identified as the freight forwarder and not the carrier or an agent for the carrier.

Goods Accepted for Carriage, Date of Shipment, and Requirement for an Actual Date of Dispatch

The air waybill always must show that the goods have been accepted for carriage.

If the LC requires the date of dispatch be shown on the air waybill, this information must appear someplace on the document. The date of dispatch is considered the date of shipment. Any information marked as “for carrier use only” is not to be used to determine the date of dispatch.

If the LC doesn’t require the date of dispatch to be shown on the air waybill, the date of issuance will be considered the date of dispatch. If the air waybill shows the flight date or flight number but is not required by the LC, that information will be disregarded.

Airports of Departure and Destination

The airport of departure and destination must appear on the air waybill as required by the LC. It is not a discrepancy if the IATA code for the airport is used instead of the full name of the airport.

If the LC allows for shipment to or from a geographical area or region, the actual airport used within that area or region must be shown on the air waybill.

Consignee, Order Party, and Notify Party

Air waybills are not documents of title. Therefore, even if the LC requires a “to order of” air waybill, an air waybill marked “consigned to” will be accepted. An air waybill should not be issued drawn “to order of.”

If the LC does not indicate a notify party, the air waybill does not need to show a notify party or, if it does, any notify party will be acceptable.

The UCP 500 defines transshipment as the unloading and reloading of merchandise from one airplane to another. This would occur during the course of carriage from the airport of departure to the airport of arrival. In addition, if the letter of credit prohibits transshipment, it is allowed if the entire voyage is covered by one airway bill.

When the LC prohibits partial shipments and multiple air waybills are presented covering shipment from one or more airports of departure, no discrepancy should be called provided they cover the shipment on the same plane and the same flight and will arrive at the same airport of arrival.

When more than one air waybill is presented, it may be possible multiple ship dates will appear. If this is the case, the latest date of shipment will be considered the actual shipment date and would be used for the calculation of any presentation time period.

When shipment occurs using more than one plane—even if the planes leave on the same day for the same destination—it will be considered a partial shipment.

Clean Air Transport Documents

If there is a notation on the air waybill that indicates the goods or the packaging are defective, a bank will call a discrepancy. If a notation doesn’t indicate any kind of defect, then a discrepancy won’t be called.

he ISBP gives this example: an air waybill with the statement “packaging may not be sufficient for the air journey” is acceptable; an air waybill with the statement “packing is not sufficient for the air journey” is not acceptable.

Even though the LC may require a clean air waybill, the word “clean” would not have to appear on the document. If the word “clean” did appear but then was crossed off or deleted in some manner, the air waybill would still be acceptable as long as there is not a notation indicating the goods or packaging are defective.

The merchandise description that appears on the air waybill doesn’t have to be exactly as stated in the LC. If the goods are described in more general terms but are not inconsistent with the LC, it is acceptable.

Should a correction or alteration appear on the air waybill, either the carrier or their agent must authenticate it.

If a copy of the air waybill is presented, the copy does not need to be signed by the carrier or their agent, and any correction or alteration doesn’t need authentication.

The LC will typically indicate that the air freight is to be either collect or prepaid, and the air waybill must reflect this.

If the credit stipulates that it does not allow any cost in addition to the freight charges, the air waybill must not show any additional charges. This includes any references that would indicate the cost of loading or unloading the merchandise. It is acceptable, however, if there is a clause stating that there could be a fee charged if there is a delay in unloading the goods.

If the air waybill has a place where freight charges, either prepaid or collect, may appear, it is acceptable if the LC requires freight prepaid for those charges to appear in the prepaid section of the air waybill. If the LC requires freight collect, it would be acceptable for those charges to appear in the collect section of the air waybill.

Other Transport Documents

Article 28 road, rail or inland waterway.

The requirements for road, rail or inland waterway bills of lading are very similar. If the credit requires one of these documents, the document that is presented will be accepted if the following conditions are met:

• The name of the carrier, or their agent, is shown on the document. Their signature, or other means of authentication, is displayed, and an indication that the goods have been received by the carrier or their agent for shipment.
• The date of shipment is in accordance with the terms of the letter of credit. This is determined by the date on the reception stamp. In the absence of a reception stamp, the issuance date of the document would be considered the shipment date.
• Lastly, the place of shipment and destination must comply with the terms of the letter of credit, as well as any other conditions the credit may specify.

Again, the UCP 500 defines transshipment as the unloading and reloading from one means of conveyance to another using a different mode of transport, during the course of carriage, from the place of shipment to the place of destination as required by the LC.

Let’s just imagine a letter of credit where transshipments are prohibited. Let’s continue to imagine a transport document, such as a rail document, is presented. That document clearly specifies that transshipment has or might take place, but that document also clearly specifies that it cover the entire shipment using the same mode of transport. This document would be considered acceptable.

Article 29 Courier and Post Receipts

An acceptable post receipt would be one that has been stamped and dated at the place of shipment required by the letter of credit. This date is considered the shipment date.

An acceptable courier receipt would be one that shows the name and signature of the courier service. If the credit specified a particular courier service, that service obviously would have to be used. The courier receipt must also be dated and this date is considered the shipment date.

Both of these documents would also have to comply with any other conditions specified in the letter of credit to be acceptable.

Article 30: Transport Documents Issued by Freight Forwarders

Before a bank will accept a transport document issued by a freight forwarder, the document must meet certain criteria.

First the transport document must show the forwarder as either the carrier or as a multimodal transport operator. In addition, the forwarder has to sign or authenticate the document as either the carrier or as the multimodal transport operator.

If, however, the document shows the actual name of the carrier or multimodal transport operator, the freight forwarder must sign or authenticate the document on behalf of the carrier or operator as their named agent.

Article 31: On Deck, Shipper’s Load and Count, Name of Consignor

Let’s start with “on deck” notations on the bill of lading when the goods are being shipped via ocean freight.

If the bill of lading indicates that the goods are loaded on deck or will be loaded on deck, the document is not acceptable. This is due to possible salt-water damage that may occur when the goods are loaded on deck as opposed to under deck. If you know that the only way to ship your product is on deck, make sure that the letter of credit allows for this.

If a clause appears on the bill of lading that the goods may be loaded on deck, it will be acceptable as long as there isn’t any indication that the goods actually are on deck.

The phrase “shipper’s load and count” is typically seen with containerized shipments, which make up the majority of shipments today. Since the carrier has no way to verify the contents of a sealed container, they make a notation on the bill of lading that it’s the “shipper’s load and count”, not theirs.

Years ago this was always considered a discrepancy, but today with the UCP 500, it is considered acceptable.

Who can be shown as the consignor of the goods? According to the UCP 500, the beneficiary does not have to be shown as the consignor. A third-party consignor is acceptable. This is particularly helpful in the case of transferable letters of credit, which I will discuss in a future article.

Article 32: Clean Transport Documents

I’ve been asked if a clean transport document is one that isn’t smudged or dirty. Actually a clean transport document has nothing to do with either smudges or dirt. It has to do with a notation that may appear on the transport document showing that the goods or packaging may have been compromised.

When a carrier receives the goods, they will make a notation to that affect on the transport document if they notice that the goods may have been damaged. If this type of clause appears on the transport document, it is considered an unclean document and is discrepant.

Insurance Documents

Issuers of insurance documents.

When a letter of credit requires an insurance document, banks will expect to receive a document issued by an insurance company or their agent. When reading both the letter of credit and the insurance document, it may be required that all originals be countersigned.

An insurance broker may issue an insurance document using their stationery. However, the insurance document has to be signed by the insurance company or their agent. In many cases the insurance broker will be acting as the agent for the insurance company.

Risks to Be Covered

Any and all risks mentioned in the letter of credit must be covered on the insurance document. Most letters of credit are very clear about the types of risks that need to be covered, and there can be no exceptions.

I think one area that has caused some confusion is the “all risks” clause. By its very nature, one would think that all risks would cover all risks, but in fact it doesn’t. For instance, the all risks clause does not cover strikes, riots and civil commotions.

If the letter of credit calls for all risks coverage, any notation on the insurance document mentioning all risks coverage will be accepted. Also, if there is a notation on the insurance document that it covers Institute Cargo Clauses (A), the condition for all risks coverage has been met.

It has been my experience that just one insurance document is typically presented covering the entire shipment value or the value stipulated in the letter of credit. However, it is possible that multiple insurance documents can be presented for one shipment. This can be done provided that each document clearly indicates what the individual value of cover actually is and that coverage is independent and not tied to any other insurance document.

In addition, joint liability must be stated on all multiple insurance documents, or the insurer covering the highest value must declare that it will bear 100% of the risk.

The insurance document must show coverage, at a minimum, from the port of shipment to the port of delivery as stipulated in the letter of credit.

When reading the letter of credit, more than likely it will not mention anything relating to the date of the insurance document. However, if you are familiar with the UCP 500, you already know that the insurance document must be dated on or before the on-board notation or the date of dispatch. The only exception to this is if the insurance document stipulates that coverage began on or before the on board date or the date of dispatch.

If an expiration date appears on the insurance document, it must clearly stipulate that it relates to the latest date that goods can be loaded on board or the latest date that the goods can be taken in charge, and that it has nothing to do with the timeframe for making a claim against the insurance in the event it would be necessary to do so.

Insurance—Currency and Amount

The insurance document must be in the same currency as the letter of credit. The value of the insurance coverage, at a minimum, must be as stated in the letter of credit. If no minimum coverage is mentioned in the credit, it automatically is assumed to be 110 percent of either the CIF or CIP invoice value. The UCP 500 does not address a maximum value for insurance coverage.

If the letter of credit stipulates that the insurance is to be “irrespective of percentage,” then the insurance document cannot contain any indication that it is subject to a deductible or a franchise.

Sometimes a letter of credit may be issued for only a portion of the value of the goods. This might happen when a second method of payment is being used. For example, 20 percent of the value of the shipment is handled on open account with the balance of 80 percent covered by the letter of credit.

Sometimes the invoice may show a discount or a prepayment deductible. In all cases the insurance coverage must be based on the full value of the goods and not the value of the letter of credit.

Certificate of Origin

Sometimes when dealing with a letter of credit, the best rule of thumb you can use is to present documents to the bank as called for in the letter of credit. A classic example of this is with the certificate of origin. Should a letter of credit require a certificate of origin, that requirement is satisfied when a document is presented that certifies the origin of the merchandise and is signed and dated.

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To take this one step further, if the letter of credit stipulates that a document must be issued by a particular party, then that party must issue the document. This certainly holds true for the certificate of origin.

However, and this is where it can get a little complicated, if the credit requires that the beneficiary issue the certificate of origin but the document is actually issued by a chamber of commerce, it may still be acceptable. If the document identifies the beneficiary, it’s then an acceptable document.

So far we have indicated that a document that certifies the origin of the merchandise, is signed, dated and issued by the party as required by the letter of credit is acceptable. Does anything else need to be in place? There should be a brief description of the merchandise. The description can be in general terms as long as it’s not inconsistent with the letter of credit.

Finally, when preparing documents to present to the bank under a letter of credit, only include information on those documents as required by either the letter of credit or the UCP 500. If you keep your documents simple, you may eliminate the potential for discrepancies.

Final Words

This concludes my interpretation of the ISBP. I would strongly advise you to obtain a copy of the International Standard Banking Practice (ISBP) for the Examination of Documents under Documentary Credits , issued by the International Chamber of Commerce (ICC) , for your reference and to draw your own conclusions.

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About the Author: Chris Lidberg

Ms. Chris Lidberg was an independent consultant in the area of international banking and Letters of Credit. Ms. Lidberg had more than 25 years of international banking experience, most recently as Vice President at U.S. Bank where she was part of the International Trade Services Division. She was responsible for selling the bank's international products to both customers and prospects, and conducting Letter of Credit seminars.

During her 25 years in banking, 15 of those years were spent in the Letter of Credit area, holding various supervisory positions, later to manage the Letter of Credit department. MS. Lidberg went on to become the manager of International Operations where she was responsible for managing not only Letters of Credit, but also International Collections, Money Transfers, Cash Letters, Investigations and all Telex and SWIFT activities for the bank.

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06 January 2023

LC at Sight | Meaning & Complete process

A letter of credit (LC) is a financial document wherein banks act as an intermediary between a buyer and a seller to ensure the fulfillment of the transaction. The buyer asks his bank to issue a letter of credit to the seller or the beneficiary. The seller’s bank verifies the LC before he ships the goods. The seller ships the products and furnishes the necessary documents to the bank, upon which the bank pays the seller the full amount mentioned in LC.

There is a significant gap between the seller furnishing the documents to the bank and the bank processing the payment. This is because these documents are sent to the buyer’s bank and verified again. The buyer pays his bank within a grace period of 30, 60, or 90 days, based on the terms and conditions mentioned in the LC.

As the seller has to wait for 30-90 days to receive its payment, such transactions increase the risk for the business. However, with the help of LC at sight or Sight LC, he can avoid the payment default risk.

• What is the meaning of LC at sight?

A sight letter of credit is a document which stands as a proof of payment in return of the goods or services to be released for the transportation by the seller. Once the goods or services reach the buyer, the buyer has to pay the financial institution that provided the Sight LC.

The process of submitting and verifying the documents is known as the sighting process, after verification the document is called the Sight LC . The banks or financial institutions generally take between 5 to 10 business days to process these documents.

• How does a Sight LC work?

Here is a step by step process of how sight letter of credit works:

A buyer who needs certain goods contacts a supplier and gets a quote for the requirement, and confirms the deal.

The buyer then goes to his bank, generally, one that has already extended him a line of credit , and asks the bank to issue a sight LC towards the supplier.

After having looked at the creditworthiness of the buyer, the bank issues a sight LC and sends it to a bank in the supplier’s country.

The supplier’s bank then informs the buyer and sends them the LC along with all the terms and conditions of the trade.

Once the supplier is happy with the LC, he ships the products and submits the shipping documents to the supplier’s bank.

The bank processes the documents and sends them to the buyer’s bank.

The buyer is alerted by the bank that the documents have arrived, and he needs to make the full payment to collect the documents. The buyer will need these documents to get the delivery of the product.

The buyer inspects the documents and pays for the LC, after which the buyer’s bank sends the payment to the seller’s bank. The seller is paid for the amount, generally much before the goods reach the buyer.

• LC at sight - Payment Terms

When a bank issues a sight LC, it acts as a guarantor of payment to the beneficiary. The seller has to furnish all the shipping documents mentioned under the terms and conditions in the LC to receive the payment. Once you submit all the documents and the issuing bank verifies the same, the bank releases the funds. The buyer immediately makes the full payment to the bank upon the receipt of documents.

In case the supplier is not able to provide the documents, the bank is not liable to release the payment. Furthermore, if there are any discrepancies found in the paperwork, the issuing bank can deduct a small fine from the total payment.

By now you'd have come to the realization that trade finance is a complicated subject that exporters/importers have to deal with on a regular basis simply due to the complexities involved with international trade.

At Drip Capital, we understand the plight that most importers are faced with and our competitive exporters finance products & buyer's credit products are best suited to facilitate hassle-free international transactions so you can focus on scaling your business.

In 4 short years, we've helped 2,000 + traders by disbursing more than $1 Billion of affordable credit with hassle-free documentation.

• Usance LC - Payment Terms

In the case of Usance LCs, also known as deferred payment LCs, the buyer is given a grace period of 30, 60, 90, or 120 days after receiving the documents to make the payment. This is known as LC 30 days, LC 60 days, LC 90 days, and LC 120 days.

• Difference between Sight LC and Usance LC

A usance letter of credit is a type of LC wherein the buyer is allowed to make the payment after the delivery, within a stipulated grace period. Unlike with sight LCs, the buyer doesn’t have to make payment immediately to receive the documents. Usance LCs generally provide a buffer of 30, 60, 90, or 120 days to make the payment. A usance LC is also known as a deferred payment LC, or a term LC.

• What is the meaning of Usance LC ?

A Usance or a Deferred Letter of Credit; means that even after the buyer has received the goods or services the buyer gets a grace period to do the payment to the financial institution or the bank i.e 30, 60, 90 or more days as per agreed during the process.

• An Example explaining Sight LC

A cold drink company called A in the US wants to buy one million bottles for their product. They identify a manufacturing company B in Singapore and contact them with their requirements. The manufacturer gives them the total cost and upon agreement, asks the buyer to make an advance payment as security before beginning production. However, the buyer does not want to take the risk of paying in advance and then not receiving the goods.

In such a scenario, both parties agree to hedge the risk via the ‘sight letter of credit’ payment method . The parties agree to all the terms and conditions under which the trade is to take place. Company A goes to his bank, which is a well-known financial institution in the US and asks them to issue a sight LC to the supplier -- company B in Singapore. The LC should contain all the agreed-upon terms and conditions.

The buyer’s bank issues the sight LC and sends it to the supplier bank in Singapore. Then the bank sends the LC to the supplier, who further examines the document and starts the production process. Once the production is complete, the supplier ships it and submits the shipping documents like the bill of lading and packing bill to the bank in Singapore for examination. The bank checks the documents for any discrepancies and forwards them to the buyer’s bank in the US.

The buyer’s bank checks the documents, and once they are satisfied, it asks the buyer to pay the LC amount at sight to collect the document. Since the bank has issued a sight LC, the buyer, i.e. company A, cannot collect the documents without paying the LC amount upfront. Without it, the buyer cannot receive the goods shipped by the supplier. Once the buyer pays the amount and collects the documents, the bank sends the money to the nominated bank in Singapore. The bank in Singapore eventually transfers the money to the beneficiary.

• Sight LC - Format

FAQs on Sight LC

1. what is lc margin.

When a bank issues an LC, it asks for collateral that is worth some fraction of the actual LC amount. This percentage is known as LC margin.

2. Is LC at sight safe?

A sight LC is one of the safest modes of transactions as the issuing bank and the confirming bank both act as a guarantor to honor the agreement.

3. How are the LC opening charges calculated?

Opening charges are generally 0.125% of the total value of the LC. They are levied from the date of issuance until the LC expires or is paid for.

4. Can sight LC be discounted?

Sight letters of credit should not require any discount mechanism as issuing banks or confirming banks must honor at sight credits as soon as they determine that the beneficiary’s presentation is complying.

5. What is the maturity date for Sight LC?

Sight LC matures on the date on which the documents are submitted to the bank by the beneficiary.

6. Can sight LC be negotiated?

Yes, both- sight, as well as usance LCs, can be negotiated.

7. What is the limit of LC at sight?

Sight LCs are cleared by the bank within 5 to 10 working days.

8. Can sight LC be confirmed?

Sight LCs are confirmed both by the issuing bank (buyer’s bank) and confirming bank (seller’s bank). Both the banks have to honour or negotiate the LC, once they receive the documents.

Siddhi Parekh

Finance manager at drip capital.

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Letter of Credit (LC), LC documents, LC fees Structure, LC Parties, LC Process, and LC Types Explanations

• What is a Letter of Credit (LC)

Letter of Credit is a Written Document issued by the Importer Bank on behalf of Importer Assures the seller will received his funds upon fulfillment of terms of the Trade A agreement. A guiding principle of an LC is that the issuing bank will make the payment based solely on the documents presented, and they are not required to physically ensure the shipping of the goods. If the documents presented are in accord with the terms and conditions of the LC, the bank has no reason to deny the payment

Letter of Credit Documents

Letter of credit (lc) types, letter of credit (lc) parties.

• Commercial Invoice
• Packing List
• Shipping Bill of Lading
• Airway bill
• Certificate of Origin
• Insurance Certificate
• Certificate of inspection

Opening Charges, commitment fees, upfront fees, retirement charges, advise fees, confirming bank fees, bank charges, etc., Cost will be 0.25% to 2% of LC value.

Trade Agree between buyer and seller and use of LC >>> Buyer applies to Issuing bank to issue an LC in favor of the seller >>> Issuing bank sent LC to the advising bank >>> Advising bank verifies the authenticity of the LC and forward it to the seller >>> Seller Verify  LC and Initiate the goods shipping process >>> After the goods are shipped, seller presents LC documents to Advising bank >>> Advising bank send LC documents to Issuing bank and the amount is paid, accepted >>> Issuing bank verify documents and obtain payment from Buyer >>> Issuing bank send documents to buyer   >>> Buyer use these documents to get possession of the shipped goods.

Bank Guarantee (BG): BG is an Assurance given bank for a non-performing activity, if any activity fails, BG pays dues. BG involves three parties: Applicant, Beneficiary, and the Banker. LC is a commitment document. It Guarantees payment to the seller. Involve four parties: Buyer, Seller, issuing bank & advising bank.

• Revocable LC : LC can be Modified or revoked or canceled by Issuing Bank ‘or’ Buyer without any notice. The concept of a Revocable Credit was withdrawn in 2007.
• Irrevocable LC : LC Cannot be revoked or modified or canceled without the consent of issuing bank, seller, and confirming bank.
• Confirmed – Irrevocable LC: An arrangement where another Bank or Financial institution adds its Guarantee to the LC. It is used when sellers do not trust the Buyer’s bank or issuing bank.
• Unconfirmed – Irrevocable LC: No Added Guarantee as above. It involves only the Seller, Buyer, issuing bank, and Buyer bank.
• LC at Sight : Requires the advising bank or seller bank to make payment at sight, on-demand, or upon presentation of documents
• Usance LC ‘or’ Deferred Payment LC: This type of LC wherein the buyer is allowed to make the payment after the delivery, within a stipulated grace period.
• Back to Back L C: When a transaction takes place between a buyer and a seller keeping an intermediary in the loop. A broker or trader acts as an intermediary between the seller and the buyer. Instead of issuing an LC to the Seller, the buyer issues it to the intermediary. The intermediary then submits the primary LC as collateral at a bank and asks it to issue another LC to be given to the end seller in exchange for the shipment. The second LC that is issued keeping the primary LC as collateral is known as a ‘back-to-back letter of credit.
• Transferable LC : Used when there is a Middleman involved. The first beneficiary requests the bank to transfer the entire/part payment to the second beneficiary. First Beneficiary is Middleman.
• Un-transferable LC : Used when there is no Middleman involved. LC cannot be used to pay any other party.
• Standby LC (SBLC) : Similar to Bank Guarantee. The seller can obtain payment from the bank even in the case the buyer fails to perform as per the agreement.
• Free Negotiable LC : This LC is not restricted to any Bank for negotiation or it can be negotiated in any bank
• Revolving L C: Single LC that covers Multiple transactions over a long period. It is used for Regular transactions of the same commodity between the same buyer & same seller.
• Red Clause LC : Seller is paid an Advance before the goods are shipped. LC acts as an aid to the seller for his working capital requirements for the Purchase of Raw materials, Packing, and processing of goods.
• Green Clause LC: Same as above (13) additions to Raw materials, packing and processing cost but also for the cost incurred for Pre-shipment, warehousing, and insurance.

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• Cover Letter Templates for Sending Documents

These examples show how a cover letter can be used when sending important documents for various purposes, such as applying for a job, admission to a university, legal cases, or scholarships. A cover letter helps to introduce and explain the purpose of the attached documents, as well as provide additional information and express gratitude for the recipient's time and consideration. A well-written cover letter can enhance the overall impression of the sender and increase the likelihood of a positive response.

Here are four examples of a cover letter for sending documents:

Cover Letter for Sending Documents to a University:

Dear Sir/Madam,

I am writing to send my documents for admission to the Bachelor's program in Computer Science at XYZ University. Please find attached my transcripts, recommendation letters, and statement of purpose.

I would be grateful if you could let me know the next steps in the admission process. If you require any additional information, please do not hesitate to contact me.

Thank you for your time and consideration.

[Your Name]

Cover Letter for Sending Documents to a Company:

Dear [Hiring Manager],

I am writing to apply for the position of Marketing Manager at ABC Company. Please find attached my resume, cover letter, and references.

I believe my skills and experience are a good fit for this role, and I am excited about the opportunity to contribute to your team. If you require any additional information, please do not hesitate to contact me.

Cover Letter for Sending Documents for Legal Purposes:

I am writing to send the required documents for my legal case with [Case Number]. Please find attached the requested documents, including my identification card, medical records, and police reports.

If you require any additional information or documents, please let me know. I appreciate your time and effort in this matter.

Cover Letter for Sending Documents for a Scholarship:

Dear Scholarship Committee,

I am writing to apply for the [Scholarship Name] Scholarship. Please find attached my transcripts, recommendation letters, and essay.

I am passionate about pursuing higher education in [Field of Study], and this scholarship would greatly assist me in achieving my academic goals. If you require any additional information or documents, please do not hesitate to contact me.

We are delighted to extend our professional proofreading and writing services to cater to all your business and professional requirements, absolutely free of charge at Englishtemplates.com . Should you need any email, letter, or application templates, please do not hesitate to reach out to us at englishtemplates.com. Kindly leave a comment stating your request, and we will ensure to provide the necessary template at the earliest.

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• Request Letter For Stationery Items
• Request Letter to Refund Payment
• Sample Request Letter for Supply of Goods

22+ Letter of Credit – Format, Email Ideas, Templates, Writing Steps

• Letter Format
• January 23, 2024
• Request Letters , Application Letters , Credit Letters , Legal Letters

Letter of Credit Format: A Letter of Credit (LC) is a financial instrument that is widely used in international trade to facilitate transactions between buyers and sellers who are in different countries. An LC acts as a guarantee from a bank or financial institution to pay the seller a specific amount of money once certain conditions is met . These conditions are usually specified in the Credit Letter format, which is a standard template that is used by banks and other financial institutions to create LCs .

Also Check:

• Warranty Letter Format
• Address Change Letter to Bank Format

credit letter Format Writing Steps

Content in this article

The credit letter format typically includes several key elements that are designed to provide a clear and concise description of the terms and conditions of the LC. These elements include:

• The name and address of the issuing bank: This is the bank that is issuing the LC and is responsible for making the payment to the seller once the conditions of the LC have been met.
• The name and address of the beneficiary: This is the seller who will receive the payment from the issuing bank once the conditions of the LC have been met.
• The amount of the LC: This is the specific amount of money that the issuing bank is guaranteeing to pay to the seller.
• The currency of the LC: This is the currency in which the payment will be made. It is usually specified in the currency of the seller’s country.
• The expiry date of the LC: This is the date by which the seller must present the necessary documents to the issuing bank in order to receive payment.
• The documents required to be presented by the seller: This includes a list of all the documents that the seller must present to the issuing bank in order to receive payment. These documents typically include a commercial invoice, a bill of lading, and a certificate of origin.
• The conditions that must be met in order for the payment to be made: This includes a description of the specific conditions that the seller must meet in order to receive payment. For example, the seller may be required to ship the goods by a certain date or to provide proof of shipment.

Once the LC has been issued, the seller can use it as a guarantee to obtain financing from their bank. This is because the LC represents a promise of payment from a reputable financial institution, which makes it a valuable asset that can be used as collateral.

Letter of Credit – Sample Format

Below is a sample format for a Letter of Credit:

[Your Name] [Your Company Name] [Your Company Address] [City, State, Zip Code] [Date]

[Beneficiary’s Name] [Beneficiary’s Company Name] [Beneficiary’s Company Address] [City, State, Zip Code]

Subject: Letter of Credit

Dear [Beneficiary’s Name],

We are pleased to inform you that we have established an Irrevocable Letter of Credit in your favor, as per the terms and conditions specified below:

• Letter of Credit Number: [LC Number]
• Issuing Bank: [Your Bank Name]
• Beneficiary: [Beneficiary’s Company Name]
• Expiry Date: [Expiry Date]
• Amount: [Currency and Amount]

Terms and Conditions:

• [Specify the required documents, such as invoice, bill of lading, packing list, etc.]
• Shipment Terms: [Specify the agreed-upon shipment terms, such as CIF, FOB, etc.]
• Partial Shipments/Transshipments: [Specify whether partial shipments or transshipments are allowed]
• Presentation Period: Documents must be presented within [Number] days from the date of shipment.

Confirmation: This Letter of Credit is [confirmed/unconfirmed]. If confirmed, [Confirming Bank’s Name] will honor and pay the documents in accordance with the terms and conditions specified herein.

This Letter of Credit is irrevocable and cannot be amended or cancelled without the agreement of all parties involved.

Please ensure that all documents are presented in strict compliance with the terms and conditions outlined in this Letter of Credit.

If you have any questions or require further clarification, please do not hesitate to contact us.

Thank you for your cooperation.

[Your Name] [Your Position] [Your Contact Information]

Note: This is a general template, and the specific terms and conditions may vary based on the nature of the transaction and the agreement between the parties involved. It’s advisable to consult with financial and legal experts when drafting or using Letters of Credit.

Letter of Credit example

Here’s an example of Letter of Credit:

[Your Company Letterhead] [Date]

[Recipient Name] [Recipient Address] [City, State ZIP Code]

Dear [Recipient Name],

We are writing this letter to inform you that your company has been approved for a credit line of [credit amount] with our organization. We are pleased to extend this credit facility to you and look forward to a mutually beneficial business relationship.

To make use of this credit facility, please complete and sign the enclosed credit application form. This form will provide us with the necessary information to set up your account and process your credit requests.

Please note that all credit applications are subject to our credit approval process, and we reserve the right to revoke this credit facility at any time should we deem it necessary.

If you have any questions or concerns regarding your credit line, please do not hesitate to contact us at [phone number] or [email address]. We look forward to doing business with you.

[Your Name] [Your Title] [Your Company Name]

Letter of Credit Example

credit letter for Telecommunication Services

Below is a credit letter for Telecommunication Services. Please note that specific details and terms may vary based on the agreement between the parties involved. It’s advisable to consult with legal and financial experts when drafting or using Letters of Credit.

[Your Company Name] [Your Company Address] [City, State, Zip Code] [Date]

[Issuing Bank Name] [Issuing Bank Address] [City, State, Zip Code]

Subject: Irrevocable Letter of Credit for Telecommunication Services

Dear [Issuing Bank Name],

We are pleased to inform you that we have entered into a contractual agreement with [Telecommunication Service Provider’s Name] for the provision of telecommunication services. In accordance with the terms of our agreement, we hereby request the issuance of an Irrevocable Letter of Credit in favor of [Telecommunication Service Provider’s Name].

Details of the Letter of Credit:

• Beneficiary: [Telecommunication Service Provider’s Name]
• Description of Services: The Letter of Credit is specifically intended to cover payments related to telecommunication services provided by [Telecommunication Service Provider’s Name].
• [Specify required documents, such as invoices, service reports, etc.]
• Payment Terms: Payments shall be made in accordance with the terms stipulated in the agreement between our company and [Telecommunication Service Provider’s Name].
• Currency and Amount: The Letter of Credit is issued in [Currency] for the total amount of [Amount].

This Letter of Credit is irrevocable and shall be governed by the Uniform Customs and Practice for Documentary Credits (UCP 600).

Please issue this Letter of Credit at your earliest convenience, and notify [Telecommunication Service Provider’s Name] of its availability.

Thank you for your prompt attention to this matter. If you require any further documentation or information, please feel free to contact us.

This letter is a starting point, and specific terms should be tailored to the agreement between the parties. Always seek professional advice to ensure compliance with relevant laws and regulations.

Credit Letter for Telecommunication Services

Letter of Credit for Research and Development

Below is a Letter of Credit for Research and Development. It’s important to note that the specific terms and conditions may vary based on the agreement between the parties involved. Always consult with legal and financial professionals when drafting or using Letters of Credit.

Subject: Irrevocable Letter of Credit for Research and Development Services

We are pleased to inform you that [Your Company Name] has engaged [Research and Development Service Provider’s Name] for the provision of research and development services. In accordance with the terms of our agreement, we hereby request the issuance of an Irrevocable Letter of Credit in favor of [Research and Development Service Provider’s Name].

• Beneficiary: [Research and Development Service Provider’s Name]
• Description of Services: The Letter of Credit is specifically intended to cover payments related to research and development services provided by [Research and Development Service Provider’s Name].
• [Specify required documents, such as progress reports, invoices, service completion certificates, etc.]
• Payment Terms: Payments shall be made in accordance with the terms stipulated in the agreement between our company and [Research and Development Service Provider’s Name].

Please issue this Letter of Credit at your earliest convenience and notify [Research and Development Service Provider’s Name] of its availability.

Credit Letter Format – Template

Here’s a template of Letter of Credit:

As per our discussion on [date], we are pleased to extend a credit line of [credit amount] to your company. We believe that this credit facility will enable us to strengthen our business relationship and help your company to meet its financial obligations.

Please find enclosed a credit application form that you will need to complete and sign to initiate the credit facility. Upon receipt of your completed application, we will review it and process it in a timely manner.

Please note that our credit approval process is rigorous and requires that all applications be reviewed carefully before a decision can be made. Once we have completed our review, we will notify you of our decision.

If you have any questions or concerns regarding the credit application process, please do not hesitate to contact us at [phone number] or [email address].

We look forward to a successful business relationship.

Letter of Credit Request Letter

Below is a Letter of Credit Request Letter:

Subject: Letter of Credit Request

We hope this letter finds you well. We are writing to request the issuance of an Irrevocable Letter of Credit in favor of [Beneficiary’s Name] in accordance with the terms and conditions outlined below.

• Letter of Credit Number: [To be assigned by the bank]
• Beneficiary: [Beneficiary’s Name]

Purpose of the Letter of Credit:

The Letter of Credit is required to facilitate a [brief description of the transaction, such as the purchase of goods, services, or other transactions]. The terms and conditions of the Letter of Credit will align with the agreement between our company and the beneficiary.

• Description of Goods/Services: [Provide a detailed description of the goods or services covered by the Letter of Credit]
• [Specify required documents, such as invoices, shipping documents, inspection certificates, etc.]
• Payment Terms: Payments shall be made in accordance with the terms stipulated in the agreement between our company and the beneficiary.
• Currency and Amount: The Letter of Credit is requested in [Currency] for the total amount of [Amount].

This Letter of Credit request is made in accordance with the Uniform Customs and Practice for Documentary Credits (UCP 600).

Please process this request at your earliest convenience and provide us with the necessary details, including the assigned Letter of Credit number.

Thank you for your prompt attention to this matter. Should you require any additional information or documentation, please do not hesitate to contact us.

This letter is a general guide, and specific terms and conditions should be adjusted based on the nature of the transaction and the agreement between the parties involved. Always seek professional advice to ensure compliance with relevant laws and regulations.

credit letter for Educational Services

Below is a Letter of Credit for Educational Services:

[Your Company Name or Your Name] [Your Company Address or Your Address] [City, State, Zip Code] [Date]

Subject: Irrevocable Letter of Credit for Educational Services

We are writing to request the issuance of an Irrevocable Letter of Credit in favor of [Educational Services Provider’s Name] to facilitate the payment for educational services rendered.

• Beneficiary: [Educational Services Provider’s Name]

The Letter of Credit is intended to cover the payment for educational services provided by [Educational Services Provider’s Name]. The terms and conditions of the Letter of Credit will align with the agreement between our company and the educational services provider.

• Description of Educational Services: [Provide a detailed description of the educational services covered by the Letter of Credit, including any relevant terms and conditions.]
• [Specify required documents, such as invoices, certification of enrollment, detailed service descriptions, etc.]
• Payment Terms: Payments shall be made in accordance with the terms stipulated in the agreement between our company and the educational services provider.

This letter is a general guide, and specific terms and conditions should be adjusted based on the nature of the educational services and the agreement between the parties involved. Always seek professional advice to ensure compliance with relevant laws and regulations.

Credit Letter for Educational Services

Letter of Credit for Raw Material Purchase

Below is a Letter of Credit for Raw Material Purchase:

Subject: Irrevocable Letter of Credit for Raw Material Purchase

We are writing to request the issuance of an Irrevocable Letter of Credit in favor of [Supplier’s Name] to facilitate the payment for the purchase of raw materials.

• Beneficiary: [Supplier’s Name]

The Letter of Credit is intended to cover the payment for the purchase of raw materials from [Supplier’s Name]. The terms and conditions of the Letter of Credit will align with the agreement between our company and the supplier.

• Description of Raw Materials: [Provide a detailed description of the raw materials covered by the Letter of Credit, including quantity, quality specifications, and any other relevant details.]
• [Specify required documents, such as invoices, packing lists, certificates of origin, etc.]
• Payment Terms: Payments shall be made in accordance with the terms stipulated in the agreement between our company and the supplier.

This letter is a general guide, and specific terms and conditions should be adjusted based on the nature of the raw material purchase and the agreement between the parties involved. Always seek professional advice to ensure compliance with relevant laws and regulations.

Email Format about Credit Letter

Here’s an email format of Letter of Credit:

Subject: Request for Credit Letter

Dear [Recipient’s Name],

I am writing this email to request a credit letter from your esteemed institution. My name is [Your Name] and I am a valued customer of your company for the past [duration]. I have always been impressed with the quality of your products/services and the excellent customer service provided by your team.

I am currently in the process of applying for a [purpose of credit letter] and one of the requirements for my application is a credit letter from my bank. Therefore, I kindly request you to provide me with a credit letter detailing my credit history with your institution. The letter should include information such as my account number, the date of account opening, my current balance, and the credit limit.

I would appreciate it if you could provide me with the credit letter at the earliest as the deadline for submission of my application is fast approaching. I assure you that this letter will be used solely for the purpose of my application and will be kept confidential.

Please let me know if there are any additional requirements or information needed from my end to process this request. I can be reached at [Your Contact Details] or you can reply to this email.

Thank you for your prompt attention to my request.

[Your Name]

Letter of Credit for International Trade

Below is a Letter of Credit for International Trade:

Subject: Irrevocable Letter of Credit for International Trade

We are writing to request the issuance of an Irrevocable Letter of Credit in favor of [Exporter’s Name] to facilitate an international trade transaction.

• Beneficiary: [Exporter’s Name]

The Letter of Credit is intended to cover the payment for the purchase of [Specify Goods or Raw Materials] from [Exporter’s Name] in accordance with the terms and conditions outlined in our international trade agreement.

• Description of Goods: [Provide a detailed description of the goods or raw materials covered by the Letter of Credit, including quantity, quality specifications, and any other relevant details.]
• [Specify required documents, such as invoices, packing lists, bills of lading, certificates of origin, etc.]
• Payment Terms: Payments shall be made in accordance with the terms stipulated in the agreement between our company and [Exporter’s Name].

This letter is a general guide, and specific terms and conditions should be adjusted based on the nature of the international trade transaction and the agreement between the parties involved. Always seek professional advice to ensure compliance with relevant laws and regulations.

credit letter for Performance Guarantee

Below is a sample template for a Letter of Credit for Performance Guarantee:

Subject: Irrevocable Letter of Credit for Performance Guarantee

We are writing to request the issuance of an Irrevocable Letter of Credit in favor of [Beneficiary’s Name] as a performance guarantee for a specific project or service.

The Letter of Credit serves as a performance guarantee for [Specify the nature of the project or service] to be carried out by [Your Company Name] in accordance with the terms and conditions outlined in our agreement with [Beneficiary’s Name].

• Description of Project or Service: [Provide a detailed description of the project or service covered by the Letter of Credit, including milestones, deliverables, and any other relevant details.]
• [Specify required documents, such as project completion certificates, inspection reports, etc.]
• Payment Terms: Payments shall be made as per the milestones and conditions stipulated in the agreement between our company and [Beneficiary’s Name].

This letter is a general guide, and specific terms and conditions should be adjusted based on the nature of the project or service and the agreement between the parties involved. Always seek professional advice to ensure compliance with relevant laws and regulations.

Credit Letter for Performance Guarantee

FAQS About Letter of Credit – Format, Email Ideas, Templates, Writing Steps

What is a credit letter.

A Letter of Credit is a financial instrument issued by a bank that guarantees the payment to a beneficiary (seller) on behalf of the applicant (buyer) once specific conditions are met. It serves as a form of payment assurance in international trade or other transactions.

What are the key elements of a Letter of Credit?

The key elements include the Letter of Credit number, issuing bank details, beneficiary details, expiry date, amount, purpose, terms and conditions, description of goods or services, and required documents for payment.

How does a Letter of Credit work in international trade?

In international trade, a buyer (applicant) obtains a credit letter from their bank to assure the seller (beneficiary) that payment will be made once specified conditions are fulfilled. The seller ships the goods, and documents proving shipment are presented to the buyer’s bank for payment.

What is the role of the Uniform Customs and Practice for Documentary Credits (UCP 600) in credit letter?

The UCP 600 is a set of rules established by the International Chamber of Commerce (ICC) that governs the use of Letters of Credit. It provides a standardized framework for the interpretation of terms, reducing discrepancies, and ensuring a common understanding of international trade practices.

What are the benefits of using a Letter of Credit?

credit letter provide security to both the buyer and the seller by ensuring that payment will be made only if the terms of the agreement are met. They also facilitate international trade by mitigating risks associated with transactions across borders.

What are the different types of Letters of Credit?

There are various types of credit letters, including Revocable and Irrevocable LCs, Confirmed and Unconfirmed LCs, Standby LCs, Transferable LCs, and Back-to-Back LCs, each serving different purposes and offering different levels of security.

The credit letter format is a standard template that is used by banks and other financial institutions to create LCs. It includes several key elements that provide a clear and concise description of the terms and conditions of the LC, including the name and address of the issuing bank, the amount and currency of the LC, the expiry date, and the documents required to be presented by the seller . By using an LC, buyers and sellers can reduce the risk of non-payment and ensure that transactions are completed smoothly and efficiently .

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Documents of Letter of Credit (LC)

Letter of credit is also known as documentary credit or bankers commercial credit. It is also considered as ” Letter of undertakings (Lou).”

A letter of credit assures the seller that the payment will be realized from the buyer as per the terms and conditions as specified in the letter of credit. If the buyer is unable to pay the amount, the bank will reimburse to the seller on due time, and the contract amount will recover from the buyer as per the undertakings. Commonly, a letter of credit is issued against a pledge of securities or cash. The bank collects necessary commission, charges against issuing the LC.

However, from this article you will know regarding the documents of a letter of credit, and you will also know why these documents is most important in the international transaction.

Considering the stage of letter of credit, the documents of letter of credit can be divided into four types, such as:

• Commercial Documents
• Insurance Documents
• Transport Documents
• Official Documents
• Commercial Documents:

Commercial documents is the overall guideline of the letter of credit transaction. Both exporter and importer are obliged to follow the condition as mentioned in the commercial invoice. The list of commercial documents are enumerated as follow:

2. Insurance Documents:

3. Transport Documents:

Transport documents usually three types, such as:

• Bill of Lading
• Air Transport documents
• Road Transport, Railway Transport or Inland waterway Transport documents.

4. Official Documents:

Office documents includes Certificate of Origin, Health Certificate and the invoice.

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Chancellor statement on public spending inheritance

On Monday 29 July 2024, the Chancellor delivered a statement to the House of Commons on immediate public spending pressures facing the government.

The full text of the Chancellor’s statement can be found here .

The press notice accompanying the launch can be found here .

As part of the statement, the Chancellor announced:

• the results of an audit of public spending undertaken by HM Treasury, immediate action to find savings in response, and long-term reforms to restore public spending control and improve public services
• the date of the next Budget as Wednesday 30 October 2024 and formally commissioned an OBR forecast for this date
• the launch of the next Spending Review which will settle 25-26 budgets alongside the Budget and conclude the multi-year Spending Review in spring 2025
• acceptance of the recommendations of the independent Pay Review Bodies for public sector workers’ pay
• the publication of next steps and draft legislation on priority tax commitments ahead of full announcement and costing at the Budget
• 29 July 2024
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Pay Review Body recommendations

The Office for Manpower Economics have published the reports containing the recommendations from all 8 independent Pay Review Bodies.

• Office of Manpower Economics

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AN OVERVIEW OF THE BUDGET PROPOSAL FOR THE NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY FOR FISCAL YEAR 2024 118th Congress (2023-2024)

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Text: AN OVERVIEW OF THE BUDGET PROPOSAL FOR THE NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY FOR FISCAL YEAR 2024

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