COMMODITY PAYMENT INSTRUMENTS

The Bank Comfort Letter (BCL)

A valid BCL must be issued in the Bank Letterhead, signed by two (2) bank officers, including
full banking coordinates, and stating clearly that the Account Holder is Ready, Willing and Able
(RWA) to undergo the transaction proposed (clearly identified including the product
description, total volume and monthly volume transacted), and the total amount of the contract
(clearly specified);

RWA Letter
Some Sellers will agree with a RWA Letter from the Bank, which are frequently transmitted to
the Seller’s Bank via SWIFT MT 799. Other generic letter terms, such as a simple referral letters
indicating the good standing of the Account Holder in the banking institution, have no value as
BCL. In case a RWA is presented, instead of BCL, the decision to send RWA bank to
bank must be stated in the ICPO/LOI body text. The names, positions and contact information
of the two (2) Bank officers signing the BCL/RWA must be clearly indicated;

The MT-799
The MT-799 is a free format SWIFT message type in which a banking institution confirms that
funds are in place to cover a potential trade. This can, on occasion, be used as an irrevocable
undertaking, depending on the language used in the MT-799, but is not a promise to pay or any
form of bank guarantee in its standard format. The function of the MT-799 is simply to assure
the seller that the buyer does have the necessary funds to complete the trade.

The MT-799 is usually issued before a contract is signed and before a letter of credit or bank
guarantee is issued. After the MT-799 has been received by the seller’s bank, it is then normally
the responsibility of the seller’s bank to send a POP (proof of product) to the buyer’s bank, at
which point the trade continues towards commencement.

The MT999 option provides?

An account with the SWIFT MT999 capability allows bank-to-bank SWIFT electronic
verification for Proof of Funds in the account, with no further comment.
This SWIFT format is an appropriate message for a simple Proof of Funds communication and it
is part of the Common Group of SWIFT formats providing a General Free Format for SWIFT
messaging.
**There is a $10 million minimum account size for a SWIFT MT999, and additional costs apply.

Documentary Letters of Credit

A Documentary Letter of Credit (LC) is a written undertaking given by a bank on behalf of an
Importer to pay the Exporter a given sum of money within a specified time, providing that the
Exporter presents documents which comply with the terms laid down in the Letter of Credit.

Letters of Credit can be for any amount, in any freely traded currency, and, subject to the
presentation of compliant documents, may be payable:
at sight, which means as soon as a compliant set of documents are presented to the paying
bank; or, after a specified term, e.g. at 30, 60, 90 or 180 days of sight or Bill of Lading date.
If the documents are not presented exactly as specified in the Letter of Credit, payment will not
be made unless the Importer gives their authority to waive or amend the specified condition.

A fundamental principle of Letters of Credit is that banks deal with documents and not with the
goods to which the documents refer.

For example, if the Importer is not happy with the quality of the goods but the documents
comply with the terms and conditions of the Letter of Credit, the Importer's bank is obliged to
pay the Exporter.

Understanding and Using Letters of Credit

Letters of credit accomplish their purpose by substituting the credit of the bank for that of the
customer, for the purpose of facilitating trade. There are basically two types: commercial and
standby. The commercial letter of credit is the primary payment mechanism for a transaction,
whereas the standby letter of credit is a secondary payment mechanism.

Commercial Letter of Credit

Commercial letters of credit have been used for centuries to facilitate payment in international
trade. Their use will continue to increase as the global economy evolves.

Letters of credit used in international transactions are governed by the International Chamber
of Commerce Uniform Customs and Practice for Documentary Credits. The general provisions
and definitions of the International Chamber of Commerce are binding on all parties. Domestic
collections in the United States are governed by the Uniform Commercial Code.

A commercial letter of credit is a contractual agreement between a bank, known as the issuing
bank, on behalf of one of its customers, authorizing another bank, known as the advising or
confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its
customer, opens the letter of credit. The issuing bank makes a commitment to honor drawings
made under the credit. The beneficiary is normally the provider of goods and/or services.
Essentially, the issuing bank replaces the bank's customer as the payee.

Elements of a Letter of Credit

• A payment undertaking given by a bank (issuing bank)
• On behalf of a buyer (applicant)
• To pay a seller (beneficiary) for a given amount of money
• On presentation of specified documents representing the supply of goods
• Within specified time limits
• Documents must conform to terms and conditions set out in the letter of credit
• Documents to be presented at a specified place

Beneficiary
The beneficiary is entitled to payment as long as he can provide the documentary evidence
required by the letter of credit. The letter of credit is a distinct and separate transaction from the
contract on which it is based. All parties deal in documents and not in goods. The issuing bank is
not liable for performance of the underlying contract between the customer and beneficiary. The
issuing bank's obligation to the buyer, is to examine all documents to insure that they meet all
the terms and conditions of the credit. Upon requesting demand for payment the beneficiary
warrants that all conditions of the agreement have been complied with. If the beneficiary (seller)
conforms to the letter of credit, the seller must be paid by the bank.

Issuing Bank
The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute
upon the completion of the terms and conditions of the letter of credit. Under the provisions of
the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable
amount of time after receipt of the documents to honor the draft.
The issuing banks' role is to provide a guarantee to the seller that if compliant documents are
presented, the bank will pay the seller the amount due and to examine the documents, and only
pay if these documents comply with the terms and conditions set out in the letter of credit.
Typically the documents requested will include a commercial invoice, a transport document
such as a bill of lading or airway bill and an insurance document; but there are many others.
Letters of credit deal in documents, not goods.

Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the
beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter of
credit is valid. In addition, the advising bank would be responsible for sending the documents to
the issuing bank. The advising bank has no other obligation under the letter of credit. If the
issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.

Confirming Bank
The correspondent bank may confirm the letter of credit for the beneficiary. At the request of
the issuing bank, the correspondent obligates itself to insure payment under the letter of credit.
The confirming bank would not confirm the credit until it evaluated the country and bank where
the letter of credit originates. The confirming bank is usually the advising bank.

Letter of Credit Characteristics

Negotiability
Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the
beneficiary, but also any bank nominated by the beneficiary. Negotiable instruments are passed
freely from one party to another almost in the same way as money. To be negotiable, the letter of
credit must include an unconditional promise to pay, on demand or at a definite time. The
nominated bank becomes a holder in due course. As a holder in due course, the holder takes the
letter of credit for value, in good faith, without notice of any claims against it. A holder in due
course is treated favorably under the UCC.

The transaction is considered a straight negotiation if the issuing bank's payment obligation
extends only to the beneficiary of the credit. If a letter of credit is a straight negotiation it is
referenced on its face by "we engage with you" or "available with ourselves". Under these
conditions the promise does not pass to a purchaser of the draft as a holder in due course.

Revocability
Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be
revoked or modified for any reason, at any time by the issuing bank without notification. A
revocable letter of credit cannot be confirmed. If a correspondent bank is engaged in a
transaction that involves a revocable letter of credit, it serves as the advising bank.

Once the documents have been presented and meet the terms and conditions in the letter of
credit, and the draft is honored, the letter of credit cannot be revoked. The revocable letter of
credit is not a commonly used instrument. It is generally used to provide guidelines for
shipment. If a letter of credit is revocable it would be referenced on its face.

The irrevocable letter of credit may not be revoked or amended without the agreement of the
issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the
issuing bank insures the beneficiary that if the required documents are presented and the terms
and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is
referenced on its face.
Transfer and Assignment
The beneficiary has the right to transfer or assign the right to draw, under a credit only when the
credit states that it is transferable or assignable. Credits governed by the Uniform Commercial
Code (Domestic) maybe transferred an unlimited number of times. Under the Uniform Customs
Practice for Documentary Credits (International) the credit may be transferred only once.
However, even if the credit specifies that it is nontransferable or nonassignable, the beneficiary
may transfer their rights prior to performance of conditions of the credit.

Sight and Time Drafts

All letters of credit require the beneficiary to present a draft and specified documents in order to
receive payment. A draft is a written order by which the party creating it, orders another party to
pay money to a third party. A draft is also called a bill of exchange.

There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented
for payment. The bank is allowed a reasonable time to review the documents before making
payment.

A time draft is not payable until the lapse of a particular time period stated on the draft. The
bank is required to accept the draft as soon as the documents comply with credit terms. The
issuing bank has a reasonable time to examine those documents. The issuing bank is obligated
to accept drafts and pay them at maturity.

Standby Letter of Credit

The standby letter of credit serves a different function than the commercial letter of credit. The
commercial letter of credit is the primary payment mechanism for a transaction. The standby
letter of credit serves as a secondary payment mechanism. A bank will issue a standby letter of
credit on behalf of a customer to provide assurances of his ability to perform under the terms of
a contract between the beneficiaries. The parties involved with the transaction do not expect
that the letter of credit will ever be drawn upon.

The standby letter of credit assures the beneficiary of the performance of the customer's
obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of
invoices, with evidence that the customer has not performed its obligation. The bank is obligated
to make payment if the documents presented comply with the terms of the letter of credit.

Standby letters of credit are issued by banks to stand behind monetary obligations, to insure the
refund of advance payment, to support performance and bid obligations, and to insure the
completion of a sales contract. The credit has an expiration date.

The standby letter of credit is often used to guarantee performance or to strengthen the credit
worthiness of a customer. In the above example, the letter of credit is issued by the bank and
held by the supplier. The customer is provided open account terms. If payments are made in
accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller
pursues the customer for payment directly. If the customer is unable to pay, the seller presents a
draft and copies of invoices to the bank for payment.

The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these
provisions, the bank is given until the close of the third banking day after receipt of the
documents to honor the draft.

Procedures for Using the Tool

The following procedures include a flow of events that follow the decision to use a Commercial
Letter of Credit. Procedures required to execute a Standby Letter of Credit are less rigorous. The
standby credit is a domestic transaction. It does not require a correspondent bank (advising or
confirming). The documentation requirements are also less tedious.
Step-by-step process:
• Buyer and seller agree to conduct business. The seller wants a letter of credit to
guarantee payment.
• Buyer applies to his bank for a letter of credit in favor of the seller.
• Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its
correspondent bank (advising or confirming). The correspondent bank is usually located
in the same geographical location as the seller (beneficiary).
• Advising bank will authenticate the credit and forward the original credit to the seller
(beneficiary).
• Seller (beneficiary) ships the goods, then verifies and develops the documentary
requirements to support the letter of credit. Documentary requirements may vary greatly
depending on the perceived risk involved in dealing with a particular company.
• Seller presents the required documents to the advising or confirming bank to be
processed for payment.
• Advising or confirming bank examines the documents for compliance with the terms and
conditions of the letter of credit.
• If the documents are correct, the advising or confirming bank will claim the funds by:
o Debiting the account of the issuing bank.
o Waiting until the issuing bank remits, after receiving the documents.
o Reimburse on another bank as required in the credit.
• Advising or confirming bank will forward the documents to the issuing bank.
• Issuing bank will examine the documents for compliance. If they are in order, the issuing
bank will debit the buyer's account.
• Issuing bank then forwards the documents to the buyer.
•
Standard Forms of Documentation
When making payment for product on behalf of its customer, the issuing bank must verify that
all documents and drafts conform precisely to the terms and conditions of the letter of credit.
Although the credit can require an array of documents, the most common documents that must
accompany the draft include:

Commercial Invoice
The billing for the goods and services. It includes a description of merchandise, price, FOB
origin, 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.

Bill of Lading
A document evidencing the receipt of goods for shipment and issued by a freight carrier engaged
in the business of forwarding or transporting goods. The documents evidence control of goods.
They also serve as a receipt for the merchandise shipped and as evidence of the carrier's
obligation to transport the goods to their proper destination.

Warranty of Title
A warranty given by a seller to a buyer of goods that states that the title being conveyed is good
and that the transfer is rightful. This is a method of certifying clear title to product transfer. It is
generally issued to the purchaser and issuing bank expressing an agreement to indemnify and
hold both parties harmless.

Letter of Indemnity
Specifically indemnifies the purchaser against a certain stated circumstance. Indemnification is
generally used to guaranty that shipping documents will be provided in good order when
available.
Common Defects in Documentation
About half of all drawings presented contain discrepancies. A discrepancy is an irregularity in
the documents that causes them to be in non-compliance to the letter of credit. Requirements
set forth in the letter of credit cannot be waived or altered by the issuing bank without the
express consent of the customer. The beneficiary should prepare and examine all documents
carefully before presentation to the paying bank to avoid any delay in receipt of payment.
Commonly found discrepancies between the letter of credit and supporting documents include:
• Letter of Credit has expired prior to presentation of draft.
• Bill of Lading evidences delivery prior to or after the date range stated in the credit.
• Stale dated documents.
• Changes included in the invoice not authorized in the credit.
• Inconsistent description of goods.
• Insurance document errors.
• Invoice amount not equal to draft amount.
• Ports of loading and destination not as specified in the credit.
• Description of merchandise is not as stated in credit.
• A document required by the credit is not presented.
• Documents are inconsistent as to general information such as volume, quality, etc.
• Names of documents not exact as described in the credit. Beneficiary information must
be exact.
• Invoice or statement is not signed as stipulated in the letter of credit.
When a discrepancy is detected by the negotiating bank, a correction to the document may be
allowed if it can be done quickly while remaining in the control of the bank. If time is not a
factor, the exporter should request that the negotiating bank return the documents for
corrections.
If there is not enough time to make corrections, the exporter should request that the negotiating
bank send the documents to the issuing bank on an approval basis or notify the issuing bank by
wire, outline the discrepancies, and request authority to pay. Payment cannot be made until all
parties have agreed to jointly waive the discrepancy.
Tips for Exporters
• Communicate with your customers in detail before they apply for letters of credit.
• Consider whether a confirmed letter of credit is needed.
• Ask for a copy of the application to be fax to you, so you can check for terms or
conditions that may cause you problems in compliance.
• Upon first advice of the letter of credit, check that all its terms and conditions can be
complied with within the prescribed time limits.
• Many presentations of documents run into problems with time-limits. You must be
aware of at least three time constraints - the expiration date of the credit, the latest
shipping date and the maximum time allowed between dispatch and presentation.
• If the letter of credit calls for documents supplied by third parties, make reasonable
allowance for the time this may take to complete.
• After dispatch of the goods, check all the documents both against the terms of the credit
and against each other for internal consistency.

Summary
The use of the letters of credit as a tool to reduce risk has grown substantially over the past
decade. Letters of credit accomplish their purpose by substituting the credit of the bank for that
of the customer, for the purpose of facilitating trade.
The credit professional should be familiar with two types of letters of credit: commercial and
standby. Commercial letters of credit are used primarily to facilitate foreign trade. The
commercial letter of credit is the primary payment mechanism for a transaction.
The standby letter of credit serves a different function. The standby letter of credit serves as a
secondary payment mechanism. The bank will issue the credit on behalf of a customer to
provide assurances of his ability to perform under the terms of a contract.
Upon receipt of the letter of credit, the credit professional should review all items carefully to
insure that what is expected of the seller is fully understood and that he can comply with all the
terms and conditions. When compliance is in question, the buyer should be requested to amend
the credit.

Understanding and Using Letters of Credit - Part II

Purpose
The purpose of this document is to provide a general understanding of letters of credit, their use
and application. The topics covered are the following:
• General background information;
• Types of letters of credit;
• Common problems with letters of credit;
• Procedures for establishing letters of credit;
• Amendments; and
• General tips to both buyers and sellers.
In addition, attachments to this document detail a step-by-step letter of credit procedures.

Definition
Letters of credit are commonly used to reduce credit risk to sellers in both domestic and
international sales arrangements. By having a bank issue a letter of credit, in essence, one is
substituting the bank's credit worthiness for that of the customer.

Types
There are two basic forms of letters of credit: Standby and Documentary. Documentary letters of
credit can be either Revocable or Irrevocable, although the first is extremely rare. Irrevocable
letters of credit can be Confirmed or Not Confirmed. Each type of credit has advantages and
disadvantages for the buyer and for the seller, which this information will review below. Charges
for each type will also vary. However, the more the banks assume risk by guaranteeing payment,
the more they will charge for providing the service.

Documentary Revocable Letter of Credit

Revocable credits may be modified or even canceled by the buyer without notice to the seller.
Therefore, they are generally unacceptable to the seller.

Documentary Irrevocable Letter of Credit

This is the most common form of credit used in international trade. Irrevocable credits may not
be modified or canceled by the buyer. The buyer's issuing bank must follow through with
payment to the seller so long as the seller complies with the conditions listed in the letter of
credit. Changes in the credit must be approved by both the buyer and the seller. If the
documentary letter of credit does not mention whether it is revocable or irrevocable, it
automatically defaults to irrevocable.

There are two forms of irrevocable credits:

Unconfirmed credit (the irrevocable credit not confirmed by the advising bank)
In an unconfirmed credit, the buyer's bank issuing the credit is the only party responsible for
payment to the seller. The seller's advising bank pays only after receiving payment from the
issuing bank. The seller's advising bank merely acts on behalf of the issuing bank and, therefore,
incurs no risk.
Confirmed credit (the irrevocable confirmed credit)
In a confirmed credit, the advising bank adds its guarantee to pay the seller to that of the buyer's
issuing bank. Once the advising bank reviews and confirms that all documentary requirements
are met, it will pay the seller. The advising bank will then look to the issuing bank for payment.
Confirmed Irrevocable letters of credit are used when trading in a high-risk area where war or
social, political, or financial instability are real threats. Also common when the seller is
unfamiliar with the bank issuing the letter of credit or when the seller needs to use the
confirmed letter of credit to obtain financing its bank to fill the order. A confirmed credit is more
expensive because the bank has added liability.
Standby Letter of Credit
This credit is a payment or performance guarantee used primarily in the United States. They are
often called non-performing letters of credit because they are only used as a backup should the
buyer fail to pay as agreed. Thus, a stand-by letter of credit allows the customer to establish a
rapport with the seller by showing that it can fulfill its payment commitments. Standby letters of
credit are used, for example, to guarantee repayment of loans, to ensure fulfillment of a contract,
and to secure payment for goods delivered by third parties. The beneficiary to a standby letter of
credit can cash it on demand. Stand-by letters of credit are generally less complicated and
involve far less documentation requirements than irrevocable letters of credit. See Credit
Administration, Sample Procedure for Administration of a Standby Letter of Credit for a
systematic procedure for establishing a standby letter of credit.

Special Letters of Credit

The following is a brief description of some special letters of credit.

Back-to-Back Letter of Credit

This is a new letter of credit opened based on an already existing, nontransferable credit used as
collateral. Traders often use back-to-back arrangements to pay the ultimate supplier. A trader
receives a letter of credit from the buyer and then opens another letter of credit in favor of the
supplier. The first letter of credit serves as collateral for the second credit.

Deferred Payment (Usance) Letter of Credit

In Deferred Payment Letters of Credit, the buyer accepts the documents related to the letter of
credit and agrees to pay the issuing bank after a fixed period. This credit gives the buyer a grace
period for payment.

Red Clause Letter of Credit

Red Clause Letters of Credit provide the seller with cash prior to shipment to finance production
of the goods. The buyer's issuing bank may advance some or all of the funds. The buyer, in
essence, extends financing to the seller and incurs the risk for all advanced credits.

Revolving Letter of Credit

With a Revolving Letter of Credit, the issuing bank restores the credit to its original amount
once it has been used or drawn down. Usually, these arrangements limit the number of times the
buyer may draw down its line over a predetermined period.

Transferable Letter of Credit

This type of credit allows the seller to transfer all or part of the proceeds of the original letter of
credit to a second beneficiary, usually the ultimate supplier of the goods. The letter of credit
must clearly state that it is transferable for its to be considered as such. This is a common
financing tactic for middlemen and is common in East Asia.

Assignment of Proceeds
The beneficiary of a letter of credit may assign all or part of the proceeds under a credit to a
third party (the assignee). However, unlike a transferred credit, the beneficiary maintains sole
rights to the credit and is solely responsible for complying with its terms and conditions. For the
assignee, an assignment only means that the paying bank, once it receives notice of the
assignment, undertakes to follow the assignment instructions, if and when payment is made.
The assignee is dependent upon the beneficiary for compliance, and thus this arrangement is
riskier than a transferred credit. Before agreeing to an assignment of proceeds arrangement, the
assignee should carefully review the original letter of credit.
Common Problems with Letters of Credit
Most problems result from the seller's inability to fulfill obligations stated in the letter of credit.
The seller may find these terms difficult or impossible to fulfill and, either tries to fulfill them
and fails, or asks the buyer to amend to the letter of credit. As most letters of credit are
irrevocable, amendments may at times be difficult since both the buyer and the seller must
agree.
Sellers may have one or more of the following problems:
• The shipment schedule cannot be met;
• The stipulations concerning freight costs are unacceptable;
• The price becomes too low due to exchange rates fluctuations;
• The quantity of product ordered is not the expected amount;
• The description of product is either insufficient or too detailed; and,
• The stipulated documents are difficult or impossible to obtain.
Even when sellers accept the terms of a letter of credit, problems often arise late in the process.
When this occurs, the buyer's and seller's banks will try to negotiate any differences. In some
cases, the seller can correct the documents and present them within the time specified in the
letter of credit. If the documents cannot be corrected, the advising bank will ask the issuing bank
to accept the documents despite the discrepancies found. It is important to note that, if the
documents are not in accord with the specifications of the letter of credit, the buyer's issuing
bank is no longer obligated to pay.

Basic Procedures for Establishing a Letter of Credit

The letter of credit process has been standardized by a set of rules published by the
International Chamber of Commerce (ICC). These rules are called the Uniform Customs and
Practice for Documentary Credits (UCP) and are contained in ICC Publication No. 500. The
following is the basic set of steps used in a letter of credit transaction. Specific letter of credit
transactions follow somewhat different procedures.
1. After the buyer and seller agree on the terms of a sale, the buyer arranges for his bank to open
a letter of credit in favor of the seller. Note: The buyer will need to have a line of credit
established at the bank or provide cash collateral for the amount of the letter of credit.
2. The buyer's issuing bank prepares the letter of credit, including all of the buyer's instructions
to the seller concerning shipment and required documentation.
3. The buyer's bank sends the letter of credit to the seller's advising bank.
4. The seller's advising bank forwards the letter of credit to the seller.
5. The seller carefully reviews all conditions stipulated in the letter of credit. If the seller cannot
comply with any of the provisions, it will ask the buyer to amend the letter of credit.
6. After final terms are agreed upon, the seller ships the goods to the appropriate port or
location.
7. After shipping the goods, the seller obtains the required documents. Please note that the seller
may have to obtain some documents prior to shipment.
8. The seller presents the documents to its advising bank along with a draft for payment.
9. The seller's advising bank reviews the documents. If they are in order, it will forward them to
the buyer's issuing bank. If a confirmed letter of credit, the advising bank will pay the seller
(cash or a bankers' acceptance).
10. Once the buyer's issuing bank receives and reviews the documents, it either (1) pays if there
are no discrepancies; or (2) forwards the documents to the buyer if there are discrepancies for
its review and approval.

Opening a Letter of Credit Level of Detail

The wording in a letter of credit should be simple, but specific. The more detailed an L/C is, the
more likely the seller will reject it as too difficult to fulfill. At the same time, the buyer will wish
to define in detail what its is paying for.
Type of Credit
Letters of credit used in trade are usually either irrevocable unconfirmed credits or irrevocable
confirmed credits. In choosing which type to open both the seller and the buyer should consider
the generally accepted payment processes in each country, the value and demand for the goods,
and the reputation of the buyer and seller.

Documents
In specifying required documents, it is very important to include those required for customs and
those reflecting the agreement reached between the buyer and the seller. Required documents
usually include the bill of lading, a commercial and/or consular invoice, the bill of exchange, the
certificate of origin, and the insurance document. Other documents required may be an
inspection certificate, copies of a cable sent to the buyer with shipping information, a
confirmation from the shipping company of the state of its ship, and a confirmation from the
forwarder that the goods are accompanied by a certificate of origin. Prices should be stated in
the currency of the letter of credit and documents should in the same language as the letter of
credit.

The Letter of Credit Application

The following information should be addressed when establishing a letter of credit.
1. Beneficiary
The seller should provide to the buyer its full corporate name and correct address. A simple
mistake here may translate to inconsistent or improper documentation at the other end.
2. Amount
The seller should state the actual amount of the letter of credit. One can request a maximum
amount when there is doubt as to the actual count or quantity of the goods. Another option is to
use words like "approximate", "circa", or "about" to indicate an acceptable 10 % plus or minus
from the stated amount. For consistency, if you use this wording you will need to use it also in
connection with the quantity.
3. Validity
The seller will need time to ship and to prepare all the necessary documents. Therefore, the
seller should ensure that the validity and period for document presentation after the shipment
of the goods is long enough.
4. Seller's Bank
The seller should list its advising bank as well as a reimbursing bank if applicable. The
reimbursing bank is the local bank appointed by the issuing bank as the disbursing bank.
5. Type of Payment Availability
The buyer and seller may agree to use sight drafts, time drafts, or some sort of deferred payment
mechanism.
6. Desired Documents
The buyer specifies the necessary documents. Buyers can list, for example, a bill of lading, a
commercial invoice, a certificate of origin, certificates of analysis, etc. The seller must agree to
all documentary requirements or suggest an amendment to the letter of credit.
7. Notify Address
This is the address to notify upon the imminent arrival of goods at the port or airport of
destination. A notification listing damaged goods is also sent to this address, if applicable.
8. Description of Goods
The seller should provide a short and precise description of the goods as well as the quantity
involved. Note the comments in step #2 above concerning approximate amounts.
9. Confirmation Order
With international arrangements, the seller may wish to confirm the letter of credit with a bank
in its country.
Amendment of a Letter of Credit
For the seller to change the terms noted on an irrevocable letter of credit, it must request an
amendment from the buyer. The amendment process is as follows:
1. The seller requests a modification or amendment of questionable terms in the letter of
credit;
2. If the buyer and issuing bank agree to the changes, the issuing bank will change the letter
of credit;
3. The buyer's issuing bank notifies the seller's advising bank of the amendment; and
4. The seller's advising bank notifies the seller of the amendment. Tips for Buyers and
Sellers

Seller
1. Before signing a sales contract, the seller should make inquiries about the buyer's
creditworthiness and business practices. The seller's bank will generally assist in this
investigation.
2. In many cases, the issuing bank will specify the advising and/or confirming bank. These
designations are usually based on the issuing bank's established correspondent relationships.
The seller should ensure that the advising/confirming bank is a financially sound institution.
3. The seller should confirm the good standing of the buyer's issuing bank if the letter of credit is
unconfirmed.
4. For confirmed letters of credit, the seller's advising bank should be willing to confirm the
letter of credit issued by the buyer's bank. If the advising bank refuses to do so, the seller should
request another issuing bank as the current bank may be or is in the process of becoming
insolvent.
5. The seller should carefully review the letter of credit to ensure its conditions can be met. All
documents must conform to the terms of the letter of credit. The seller must comply with every
detail of the letter of credit specifications; otherwise the security given by the credit is lost.
6. The seller should ensure that the letter of credit is irrevocable.
7. If amendments are necessary, the seller should contact the buyer immediately so that the
buyer can instruct the issuing bank to make the necessary changes quickly. The seller should
keep the letter of credit's expiration date in mind throughout the amendment process.
8. The seller should confirm with the insurance company that it can provide the coverage
specified in the letter of credit and that insurance charges listed in the letter of credit are correct.
Typical insurance coverage is for CIF (cost, insurance and freight) often the value of the goods
plus about 10 percent.
9. The seller must ensure that the goods match the description in the letter of credit and the
invoice description.
10. The seller should be familiar with foreign exchange limitations in the buyer's country that
could hinder payment procedures.

Buyer
1. When choosing the type of letter of credit, the buyer should consider the standard payment
methods in the seller's country.
2. The buyer should keep the details of the purchase short and concise.
3. The buyer should be prepared to amend or re-negotiate terms of the letter of credit with the
seller. This is a common procedure in international trade. With irrevocable letters of credit, the
most common type, all parties must agree to amend the document.
4. The buyer can reduce the foreign exchange risk by buying forward currency contracts.
5. The buyer should use a bank experienced in foreign trade as its issuing bank.
6. The validation time stated on the letter of credit should give the seller ample time to produce
the goods or to pull them out of stock.
7. A letter of credit is not fail-safe. Banks are only responsible for the documents exchanged and
not the goods shipped. Documents in conformity with the letter of credit specifications cannot
be rejected on grounds that the goods were not delivered as specified in the contract. The goods
shipped may not in fact be the goods ordered and paid for.
8. Purchase contracts and other agreements pertaining to the sale between the buyer and seller
are not the concern of the issuing bank. Only the letter of credit terms are binding on the bank.
9. Documents specified in the letter of credit should include those the buyer requires for
customs clearance.

TYPES OF LETTERS OF CREDIT

Revocable letter of credit

Just like the name says the LC can be revoked by the Issuing Bank without the agreement of the
beneficiary.

Irrevocable letter of credit

Cannot be cancelled or amended without all the parties’ agreement.

Standby letter of credit

Guarantee of payment. If the beneficiary does not get paid from its customer it can then
demand payment from the Bank by forwarding the copy of the invoice that was not paid and
supporting documentation.

Auto revolving letter of credit

It is established when there are regular shipments of the same commodity between supplier and
customer. Eliminates the need to issue an LC for each individual transaction

INCOTERMS
Transportation
Shipping terms set the parameters for international shipments, specify points of origin and
destination, outline conditions under which title is transferred from seller to buyer, and
determine which party is responsible for shipping costs. They also indicate which party assumes
the cost if the merchandise is lost or damaged during transit. To provide a common terminology
for international shipping, INCOTERMS (International Commercial Terms) have been
developed under the auspices of the International Chamber of Commerce.