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Letters
of Credit Application |
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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:
- The seller requests a modification
or amendment of questionable terms in the letter of credit;
- If the buyer and issuing bank agree
to the changes, the issuing bank will change the letter of credit;
- The buyer's issuing bank notifies
the seller's advising bank of the amendment; and
- 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.
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The handbook takes you through the practical aspects of exporting essential for both experienced and novice exporters. It covers Export Procedures and Documentation, Customs Export Regulations, Internet Commerce, Banking and Finance, Export Risk and Credit Insurance, Marine Insurance, Shipping and Air Cargo, Freight Forwarding, Export Packaging and Resources for International Trade.
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