International Trade Facilities - Commercial Letter of Credit and Documentary Letter of Credit (DLC). We offer international trade facilities for importers and exporters for importers and exporters worldwide. The Letter of credit or DLC are normally for short term pre-shipment credit or packing credit limits.
The price range of such DLC or LC ranges from USD 100,000 up to USD 5 million. Normally the period for DLC or LC ranges from 60 days up to 180 days. Letter of credit or DLC (Documentary Letter of Credit) at Sight is different than Usance Letter Of Credit.
DLC are issued from prime banks based in Singapore, Hong Kong and some Europe based countries and USA.
FAQ Related to Letter of Credit at Sight or DLC...
At sight letter of credit is a banking terms that refers to a document issued by bank that verifies the payment of goods or services, payable once it is presented along with the necessary documents as per the agreed terms between buyer and seller.
The Buyer (company) that offers a sight letter of credit commits itself to paying the agreed amount of funds provided the provisions of the letter of credit are met. The seller can claim on letter of credit only upon fulfilment of products or service delivery. Sight letters of credit give each party involved in the transaction some degree of protection similar to escrow services however it’s not escrow but the bank acts as middle party and this decreases some of the risk involved, especially when it comes to international trade dealings.
DLC at Sight or letter of credit at Sight involves three to four parties including the buyer - the importer, the issuing bank acting on behalf of buyer's instruction, the seller who is usually the exporter party and the fourth in some cases is consignee party. Consignee can be separate entity other than buyer party. However mostly the buyer party itself can be consignee party.
Sometimes the buyers do not have the facilities to issue the letter of credit at sight to the exporter party. In such case We help exporter's with issuing the letter of credit from Singapore/HK top prime banks.
DLC issued from prime banks will help the exporters with existing trade finance facilities from their local bank in Asia / Africa / Europe, only then they can request for LC to come in to their account, without the trade facilities if they receive the DLC and his banker does not support with the advance payment (also called packing credit) than exporter party could be at loss or he has to find money and means to complete the orders as per DLC terms. Exporters without trade finance facilities have to depend on their supplier's credit if they don’t have packing credit limits.So first thing to check in case of issuing 3rd party DLC is that if the exporter party has pre-shipment / packing credit lines with his local bank.
Many Importer / Exporter parties are confused between Sight LC and time letter of credit. Although both require certain documents, and both are common practice within the import & Export trade arena, there is clear difference between the two.
A sight Letter of Credit becomes due as soon as the beneficiary presents the proof of delivery or proof of shipment, and other ancillary documents. Whereas, a Time Letter of Credit or USANCE letter of needs certain days to pass after submitting a letter of credit, proof of delivery or shipment, and other required documents, before the payment becomes due. Time period or Usance period is negotiated between buyer (Importer) and seller (exporter) which can be anywhere from 15 days to 360 days credit period.
Yes, The Letter of credit is the payment undertaking given by a bank (DLC issuing bank) On behalf of a buyer (applicant), To pay a seller (beneficiary and exporter party) for a given amount of money
On presentation of specified documents representing the supply of goods or services, within specified time line and the exporter's documents must conform to terms and conditions set out in the letter of credit.
Then the Documents to be presented at a specified place usually the buyer's bank. The beneficiary who is the exporter party is entitled to receiving the payment as long as he can provide the documentary evidence required by the letter of credit. The issuing bank is not liable for performance of the underlying contract between the Importer and Exporter party. The issuing bank's obligation to the Importer, is to examine all documents to ensure that they meet all the terms and conditions of the credit. Upon requesting demand for payment, the beneficiary (exporter party) warrants that all conditions of the agreement have been complied with. If the beneficiary (Exporter Party) conforms to the letter of credit, the seller must be paid by the bank. In case of the discrepancy, the documents can be rejected and returned to the beneficiary and no payment is granted. Usually, the buyer would protect their interest using strict inspection clause and timeline for the shipment.
Below is Step-By-Step Process… (Also View the Flowchart Visual Below)
The Proforma Invoice is required by the issuing bank at the time of application of letter of credit and this proforma invoice has to come from the seller / exporter party (beneficiary). The proforma invoice value can be precise value or with tolerance value of the goods volume (quantity). The commercial invoice is prepared upon the shipment which has to be submitted together with Bill of Lading, Insurance (if any) and Inspection Certification (if any) for the payment claim.
The details in commercial invoice are about the billing for the goods and/or services. It includes a description of merchandise, price of product(s) and/or services, free on board (FOB) origin, and name and address of buyer (Importer) and seller (exporter / beneficiary party). The Importer/Buyer and Exporter/Seller information must be precisely corresponding 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 such as Bill of lading and inspection certification (if any).
The Airway Bill is issued by the freight carrier that is usually airline and it depends from cargo to cargo of what means of transportation is used. For example - gold jewellery, rough diamonds and many low volume high value items can be using Airline transport. Even fresh flowers, vegetables are exported via airline route. On the other hand, the Bill of Lading is a shipping document proof of the receipt of goods for shipment and issued by a freight carrier engaged in the business of forwarding or transporting goods. This BL or Bill of Lading are the documents evidence control of goods. This type cargos are usually break-bulk cargos that require sea freight delivery. 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 port.
UCP 600 is the latest version of the rules that govern letters of credit transactions worldwide.
As Per Wikipedia - Click Here - The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules on the issuance and use of letters of credit. The UCP is utilized by bankers and commercial parties in more than 175 countries in trade finance. Some 11-15% of international trade utilizes letters of credit, totalling over a trillion dollars (US) each year.
Historically, the commercial parties, particularly banks, have developed the techniques and methods for handling letters of credit in international trade finance. This practice has been standardized by the International Chamber of Commerce (ICC) by publishing the UCP in 1933 and subsequently updating it throughout the years. The ICC has developed and moulded the UCP by regular revisions, the current version being the UCP600. The result is the most successful international attempt at unifying rules ever, as the UCP has substantially universal effect. The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25 October 2006. This latest version, called the UCP600, formally commenced on 1 July 2007.
As of July 2017 a decision had been made not to revise the 2007 version of UCP600, although the ICC agreed that the need for a revision would be "kept under review"
MT 700 is a type of swift message which is used by banks when issuing a letter of credit. It is sent by the issuing bank to the advising bank.
Below picture gives tag wise description of each clause about the MT700 messaging system. For full detail description, you can visit this URL - Click Here.
A warranty given by the Exporter Party (seller party) to the Importer or Buyer party of goods that states that the title being conveyed is good and that the transfer of the ownership is rightful. This is a method of certifying clear title to product(s) transfer of the ownership. It is generally issued to the buyer party (purchaser) and issuing bank expressing an agreement to indemnify and hold both parties (Buyer and Seller) harmless.
This letter Specifically indemnifies the purchaser against a certain stated circumstance. The Indemnification is generally used to guaranty that shipping documents will be provided in good order when available. This is not mandatory but it’s between buyer and seller to mutually agree upon the contract. In some cases, the Importer party would insist the Indemnity agreement with the seller as extra precautionary measures to ensure that the letter of credit is not abused.
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:
When such a discrepancy is observed or 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 beneficiary party (exporter) could request that the negotiating bank return the documents for corrections.
In case if the DLC expiry dates are nearing the deadline and that If there is not enough time to make corrections, the seller could request that the negotiating bank send the documents to the issuing bank on an approval basis or notify the issuing bank by wire (swift messaging), outline the discrepancies, and request authority to pay. Payment is on hold and cannot be made until all parties have agreed to jointly waive the discrepancy. Usually, minor discrepancy like spell errors etc does not make the purchaser to back out of the trade unless there are major issues with quality of goods/services shipped or missing documents such as inspection / insurance certifications.
Issuing bank is more or less serving as in escrow role serving as middle party between the importer and exporter. As for the issuing bank's liability to pay and to be reimbursed from its client becomes absolute upon the completion of the terms and conditions of the DLC. Under the provisions of the Uniform Customs and Practice for Documentary Credits - UCP600, the bank is given a reasonable amount of time after receipt of the documents to honour the draft.
The issuing banks' key role is to provide a guarantee to the seller or exporter or beneficiary party 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. In case of discrepancy, both the buyer and seller have to exchange the swift message amendments to mutually agree upon otherwise the documents can be reject by the issuing bank to protect the buyer party.
Typically, the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill or seaway bill, an insurance document and the inspection certification of goods.
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary party who is the exporter of the goods. Generally, the exporter party or seller would want to use a local bank to ensure 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 to make any payment under the letter of credit. If the issuing bank does not pay the beneficiary, the advising bank is not responsible to pay.
The correspondent bank may confirm the letter of credit for the beneficiary who is the seller or exporting party. At the request and or on behalf of the issuing bank of letter of credit, the correspondent obligates itself to insure or guarantee the 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 but it’s not mandatory.
Usually at sight Letter of Credit, the payment of export proceeds sent to exporter’s bank by Importer’s bank immediately up on receipt of original shipping documents as per the terms and conditions mentioned on DLC, on acceptance of documents by Importer/buyer. In Here, the Importer/buyer accepts original documents from his bank for clearance of goods under import regulation.
If the Importer and exporter parties agrees to surrender bill of lading at port of loading and such clause has been added in the terms and conditions of letter of credit, exporter can surrender original bill of lading at load port and arrange to send release message to Importer (the buyer) to take delivery of goods. However, in a payment term Letter of Credit at sight, LC opening bank also does not prefer to surrender OBL at load port, as buyer can take delivery of goods, as carrier does not insist for original bill of lading. The opening bank remits amount of sale of goods mentioned in commercial invoice to the exporter’s bank immediately up on receipt of shipping documents which satisfy with all terms and conditions of Letter of Credit at Sight.
So under most of the terms under Letter of credit at sight requires Original Bill of Lading as one of the shipping documents to be enclosed by exporter after export of goods at load port. Hence, surrender of OBL at load port under LC at sight is not permitted, unless otherwise agreed between Importer (buyer) and Exporter (seller). The release of Sea way bill (Bill of lading) also not permitted under Letter of Credit at Sight, unless otherwise bother parties mutually agreed.
Types of Letter of Credit / Documentary Letter of Credit (DLC)
Depending on the type of business transaction and the trade requirement, the present banking system under UPC600 regulation, here are various types of letter of credit (DLC) available.
Most common are Revocable and Irrevocable, Stand-by LC, Confirmed & Unconfirmed, Revolving, Commercial, Transferable and Non-Transferable, Front to Back, Back-to-Back, Red Clause, Green Clause, LC at Sight, Usance or Deferred Payment, and Direct Pay LC.
The Summary on Letter of Credit & Overall Understanding:
International Chamber of Commerce (ICC) established the UCP600 regulation for International Trade Standard to safeguard both Parties - Importer & Exporter and thus the various swift messaging standards were adopted by the banks including MT700 for Letter of Credit for the international payment system.
The letters of credit (DLC’s) are a tool to reduce risk for bother involved parties (Exporter and Importer) has grown substantially over the years. DLC or Documentary Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating import/export trade across the globe.
The most common use of DLC - letter of credit with the swift message MT700 is for International Trade for a short duration with usually about 60 days to 180 days whereas the standby letter of credit serves a different need such as long-term trade guarantees. The standby letter of credit serves as a secondary payment mechanism or guarantee of payment to the exporter. The bank will issue the credit on behalf of the importer party to provide assurances of his ability to perform as the paymaster under the terms of a contract.
Upon receipt of the letter of credit, the seller party (exporter) should review all the details and terms carefully to ensure 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 with negotiations. It’s also advisable that seller should avoid submission of any documents with any type of discrepancy. Such a situation could be risky as the buyer can refuse to accept the documents and the exporter party has to suffer the loss of re-calling the cargo from destination port which could financial loss.
One must become familiar with normal letter of credit terms such as FOB, BL, Shipping Documents, LC, DLC, SBLC doing the Import Export Trading and involved with Trade Finance.