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Top 10 Letter Of Credit PowerPoint Presentation Templates in 2024

A Letter of Credit (LC) is a financial document issued by a bank on behalf of a buyer that guarantees payment to a seller once certain conditions are met. This widely used payment method in international trade provides security for both parties involved in a transaction. The buyer is assured that the seller will only receive payment if the terms of the agreement are fulfilled, while the seller is guaranteed payment as long as the specified documents are presented. LCs help mitigate the risk of non-payment and ensure smooth transactions across borders. They are particularly useful in cases where the buyer and seller are unfamiliar with each other or when dealing with high-value transactions. LCs can also be used to provide financing for the buyer or as a means of securing goods in transit.

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LETTER OF CREDIT

Aug 23, 2014

1.76k likes | 3.47k Views

LETTER OF CREDIT. LETTER OF CREDIT /DOCUMENTARY CREDIT.

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• nominated bank negotiating bank
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• advising bankhas
• deferred payment undertaking

Presentation Transcript

LETTER OF CREDIT /DOCUMENTARY CREDIT Letter of Credit is an undertaking issued by a Bank (Issuing Bank), on behalf of the buyer (the importer), to the seller (exporter) to pay for goods and services provided that the seller presents documents which comply with the terms and conditions of the Letter of Credit

LETTER OF CREDIT UCPDC – 600 Edition effective from 1st July 2007 Documentary Credit means any arrangement that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honoura complying presentation.

Complying presentation • a presentation that is in accordance with • the terms and conditions of the credit, • the applicable provisions of these rules (UCP 600) and • international standard banking practice. • Honour • a. to pay at sight if the credit is available by sight payment. • b. to incur a deferred payment undertaking and pay at maturity if • the credit is available by deferred payment. • c. to accept a bill of exchange ("draft") drawn by the beneficiary and pay at maturity if the credit is available by acceptance. 4

LETTER OF CREDIT • Three main contracts underlying LC - Sale Contract between Buyer & Seller - Application-cum-Guarantee between Applicant(Buyer) and Issuing Bank - LC itself (contract between Issuing Bank and Beneficiary/Seller) ( LC independent of other two contracts)

GOODS EXPORTER IMPORTER Letter of Credit OPENS CREDIT DOCUMENTS DOCUMENTS PAYMENT PAYMENT Mechanics of Documentary Credit CONTRACT GOODS DOCS DOCS Advising bank Negotiating Bank/ Confirming Bank Reimbursing Bank 6

Parties to Letter of Credit • Opener/Buyer • Issuing Bank • Advising Bank • Beneficiary/Seller • Nominated Bank/Negotiating Bank • Confirming Bank • Reimbursing Bank

Types of credit Security to beneficiary Confirmed Mode of settlement Payment/ deferred payment Acceptance Negotiation Involving middlemen Transferable Back to back Involving advances Red Clause Credit Green Clause Credit Involving repeated transactions Revolving Stand by 9

Transferable Credits Credit has to be opened as transferable The beneficiary is normally a trader or agent He transfers credit to his supplier - second beneficiary. Transferred by a bank at the request of first beneficiary Second beneficiary can supply goods and negotiate documents as if he had received the credit. He may pay commission to first beneficiary for the order There can be more than one second beneficiary. No third beneficiary is permitted. 10

Transferable Credits The following parameters may be changed while transferring a credit Amount of credit, unit price and quantity of goods Date of expiry, last date of shipment and last date of negotiation can be brought forward % of insurance cover may be increased. First beneficiary has the right to substitute documents negotiated by second beneficiary. 11

Back to Back Credits Exporter receives a credit from his buyer ( Selling credit) He has to procure goods from other suppliers He opens a credit for purchase of the goods ( buying credit) Second credit is said to be back to back to the first one. Bill proceeds of the export LC (Selling LC) will be used to meet liabilities under the second (Buying LC) Amount of back to back credit will be lower. Usance period of the back to back credit should be equal to or more than that of the export credit. Bank still at risk if the customer fails to export No concession in margin and security norms. 12

Revolving Credits Credit is opened to cover a series of regular transactions over a longer period Beneficiary will submit a series of documents Maximum value of each document will be fixed and is the revolving limit LC amount is the maximum value of documents that can be handled under the credit. The credit may be reinstated automatically or after payment of earlier bill. It can be opened as cumulative or non cumulative. 13

Standby Letters of Credit • Credit is issued for a particular amount and for a particular period • Trade takes place on running account basis. • Beneficiary does not submit documents to bank. • If there is a default, he can claim funds from opening bank giving a certificate of default • No quibbling over discrepancies and documents • Opening bank will pay on demand • Works like a bank guarantee • UCPDC is applicable if so declared in the credit

LC Regulations • Foreign Trade Policy requirements. • FEMA requirements. • Credit norms of Central Bank. • UCPDC 600 Provisions. • Bank’s Internal Credit Policies/ procedures. • Public notices issued by DGFT • Uniform Rules for bank-to-bank reimbursements 525 • Incoterms 2010

Bank’s Obligation & Responsibilities • Issuing Bank (opening bank) ( UCP Article 7) -the prime obligator -to ensure credit-worthiness and trust-worthiness of the applicant - Once credit is opened, the bank is placing itself as a substitute for the buyer.

Bank’s Obligation & Responsibilities • Advising Bankhas the obligation to authenticate the credit once it is received and passing it promptly on to the beneficiary ( Art.9). • Confirming Bank takes over the responsibilities of the issuing bank as far as the beneficiary is concerned though it has got recourse to the Issuing Bank (Art 8).

Bank’s Obligation & Responsibilities Negotiating Bank • to examine docs. Within 5 banking days after receipt of the documents at their counters(Art 14b). • to ensure compliance of credit terms ( on the basis of documents alone) as well as consistency of docs with each other.

Protection to Banks • Banks are not responsible : • for the genuineness or contents of any documents submitted (Art. 34) • For losses etc. arising from transmission problems (Art. 35) • Force Majeure ( Art. 36) • For the failings of their correspondent Banks (Art. 37)

Protection to Banks • Issuing Bank is responsible for all Bank charges and other costs at home or abroad even if they are supposed to be paid by other party (Art. 37 c). • Applicant is responsible for any adverse consequences of foreign laws (Art. 37d).

LETTER OF CREDITAppraisal / Assessment • satisfactory track record. • dealings with only one bank. • Liabilities of the applicant to the Bank and third parties. • Means by which the applicant is expected to meet his commitment once the bills arrive. • Margin he should deposit.

Appraisal Issues.. • Limit to be commensurate with turnover and CC limits. • Should be for genuine trade/ manufacturing activity. • Usance period of the LC should ordinarily have relation to the working capital cycle. • Level of inventory carried should be commensurate with industry norms / past trends.

Appraisal Issues…. • LCs for purchase of machinery / capital goods should be backed by borrower’s own funds or a term loan sanctioned for the purpose. • Wherever warranted, in addition to margin, where prescribed, we may also retain a lien on the undrawn portion of the CC limit for the value of bills to be received under the LC.

Appraisal Issues • Sister concerns: • Where the opener and beneficiary are sister concerns, LCs should not normally be necessary. • Take care of kite-flying operations. • Standing of the beneficiary. • D/A facilities to applicants of undoubted standing and where security available is much more than the value of LC.

Appraisal Issues • While computing purchase of imported material on LC basis take net of import duty. • Assess limits for usance and sight LC separately. • Usance period should not exceed the production cycle excepting in the case of bulk imports. • Keep in mind the accepted projections regarding Sundry Creditor levels. • Margins & security depending on track record. • Cash budget monitoring to track availability of funds.

Appraisal Issues…. Revolving LCs: • To be valid for not more than 1 year • The limit should be a sub-limit. • The LC value should be restored for further negotiation only after the advice of retirement of the previous bill has been received from the issuing bank by the beneficiary bank.

ASSESSMENT OF LC LIMIT While assessing Letter of Credit Limit, the following points need to be noted: Purchases of RM on LC basis should be net of Import Duty; LC amount should cover FOB, CIF or C&F value of goods- should not include customs duty and other charges payable in India. Payment of these charges should be taken care of by the main working capital(CC) A/C of Applicant. Transit time should be treated as ‘Nil’ if usance period starts from shipment date.

Other issues Arriving at D.P: • Ensure that the stocks covered by bills which have been received under LCs opened by us, and not yet retired, are not included for computing the D.P. in CC account. Devolvement of LCs: • In case of irregularity in CC account do not open further LCs. • Take adequate margins and step up in case of it becoming a habit – in worse cases stop further issues. • Mark lien on DP so that usance bills are properly retired on due date.

Treatment of stocks covered by Usance LC • Lien should be earmarked against advance value of stocks for the outstanding usance LC bills. • This ensures provision of margins on the stocks covered by usance LCs right from the time the stocks are bought on credit backed by the Bank’s commitment. • Thus, it ensures that the margin is available well before the CC a/c is debited for the matured LC bill.

Treatment of stocks covered by Usance LC • In some cases it is quite possible that the units may not be in a position to provide margins right from the time of purchases against LCs. In such cases, based on merits, earmarking of lien for the value of usance LC billsoutstanding may be permitted against the aggregate ‘market value’ of stocks (including the LC stocks)instead of against the ‘advance value’ of securities.

Precautions • The limits for demand LCs and usance LCs should be assessed separately with ample justifications. • The usance period should not, generally, exceed the production cycle. • In case of bulk imports, establishment of LCs for longer usance period may be considered selectively. • When liability under LC is met by creating an irregularity in the Cash Credit account, the relative LC limit should not be released for opening further LCs till the account is adjusted. • Frequent Devolvement's: Warning signal!

Assessment of LC Limit • We assume that: - Annual consumption of material to be purchased under LC ……… C (Rs..) • Lead time from opening LC to shipment: L (months) - Transit time: T (months) - Credit (usance) period available: U (months)

Assessment of LC Limit • L+ T+ U = Purchase Cycle: P (months) • LC Limit = P x C/12 Say, lead time, i.e. time from order placement to shipment = 10 days Transit period = 20 days Usance period from arrival of goods= 3m Total Purchase Cycle = 4m Monthly consumption of material = Rs 100 lacs LC Limit(4 x 100) = Rs 400 lacs

ASSESSMENT OF LC LIMIT : M/s XYZ COMPANY LIMITED LETTER OF CREDIT LIMIT OF Rs. 20 CRORES (Rs. in crores)

Assessment of LC Limit • Let us assume as follows: (Rs in lacs) i) Annual purchase of RM: 3200 ii) RM purchase under LC(50%): 1600 iii) Purchase under demand LC: 800 iv) Purchase under usance LC: 800

Assessment of Demand LC Limit • Time gap from opening till shipment: 1 m • Transit period from date of shipment till date of retirement: 0.5 m • Demand LC Limit: 800 x 1.5/12 = Rs 100 lacs

Assessment of Usance LC Limit • Lead Time, i.e from opening LC till shipment: 1 month • Transit Period, i.e. from date of shipment till date of receipt of documents by importer: 0.5 months • Average usance period: 2 months • Usance LC Limit: 800x3.5/12= Rs 233 lacs

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Letter Of Credit and Its Basic Features

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LETTER OF CREDIT - PowerPoint PPT Presentation

• LETTER OF CREDIT

Title: Letters of Credit Author: sba Last modified by: ADMIN Created Date: 3/10/2006 9:37:22 PM Document presentation format: On-screen Show (4:3) Other titles – PowerPoint PPT presentation

• Letter of Credit is an undertaking issued by a Bank (Issuing Bank), on behalf of the buyer (the importer), to the seller (exporter) to pay for goods and services provided that the seller presents documents which comply with the terms and conditions of the Letter of Credit
• UCPDC 600 Edition effective from 1st July 2007
• Documentary Credit means any arrangement that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.
• Complying presentation
• a presentation that is in accordance with
• the terms and conditions of the credit,
• the applicable provisions of these rules (UCP 600) and
• international standard banking practice.
• Three main contracts underlying LC
• - Sale Contract between Buyer Seller
• - Application-cum-Guarantee between Applicant(Buyer) and Issuing Bank
• - LC itself (contract between Issuing Bank and Beneficiary/Seller)
• ( LC independent of other two contracts)
• Opener/Buyer
• Issuing Bank
• Advising Bank
• Beneficiary/Seller
• Nominated Bank/Negotiating Bank
• Confirming Bank
• Reimbursing Bank
• Financial documents Drafts (ISBP Para 43 to 56)
• Transport documents BL, AWB etc
• (UCP Articles 19 to 27, ISBP Para 68 to 169)
• Insurance documents Certificate/ policy
• (UCP Article 28, ISBP Para 170 to 180)
• Commercial documents Invoices
• (UCP Article 18, ISBP Para 57 to 67)
• Miscellaneous documents All other documents
• Certificate of origin, Packing list, Quality certificate etc.
• Documents other than invoices, transport and insurance documents are not defined by UCPDC
• Only Certificate of Origin dealt with under ISBP Para 181 to 185
• Security to beneficiary
• Mode of settlement
• Payment/ deferred payment
• Negotiation
• Involving middlemen
• Transferable
• Back to back
• Involving advances
• Red Clause Credit
• Green Clause Credit
• Involving repeated transactions
• Credit has to be opened as transferable
• The beneficiary is normally a trader or agent
• He transfers credit to his supplier - second beneficiary.
• Transferred by a bank at the request of first beneficiary
• Second beneficiary can supply goods and negotiate documents as if he had received the credit.
• He may pay commission to first beneficiary for the order
• There can be more than one second beneficiary.
• No third beneficiary is permitted.
• The following parameters may be changed while transferring a credit
• Amount of credit, unit price and quantity of goods
• Date of expiry, last date of shipment and last date of negotiation can be brought forward
• of insurance cover may be increased.
• First beneficiary has the right to substitute documents negotiated by second beneficiary.
• Exporter receives a credit from his buyer ( Selling credit)
• He has to procure goods from other suppliers
• He opens a credit for purchase of the goods ( buying credit)
• Second credit is said to be back to back to the first one.
• Bill proceeds of the export LC (Selling LC) will be used to meet liabilities under the second (Buying LC)
• Amount of back to back credit will be lower.
• Usance period of the back to back credit should be equal to or more than that of the export credit.
• Bank still at risk if the customer fails to export
• No concession in margin and security norms.
• Credit is opened to cover a series of regular transactions over a longer period
• Beneficiary will submit a series of documents
• Maximum value of each document will be fixed and is the revolving limit
• LC amount is the maximum value of documents that can be handled under the credit.
• The credit may be reinstated automatically or after payment of earlier bill.
• It can be opened as cumulative or non cumulative.
• Credit is issued for a particular amount and for a particular period
• Trade takes place on running account basis.
• Beneficiary does not submit documents to bank.
• If there is a default, he can claim funds from opening bank giving a certificate of default
• No quibbling over discrepancies and documents
• Opening bank will pay on demand
• Works like a bank guarantee
• UCPDC is applicable if so declared in the credit
• Foreign Trade Policy requirements.
• FEMA requirements.
• Credit norms of Central Bank.
• UCPDC 600 Provisions.
• Banks Internal Credit Policies/ procedures.
• Public notices issued by DGFT
• Uniform Rules for bank-to-bank reimbursements 525
• Incoterms 2010
• Issuing Bank (opening bank)
• ( UCP Article 7)
• -the prime obligator
• -to ensure credit-worthiness and trust-worthiness of the applicant
• - Once credit is opened, the bank is placing itself as a substitute for the buyer.
• Advising Bank has the obligation to authenticate the credit once it is received and passing it promptly on to the beneficiary ( Art.9).
• Confirming Bank takes over the responsibilities of the issuing bank as far as the beneficiary is concerned though it has got recourse to the Issuing Bank (Art 8).
• Negotiating Bank
• to examine docs. Within 5 banking days after receipt of the documents at their counters(Art 14b).
• to ensure compliance of credit terms ( on the basis of documents alone) as well as consistency of docs with each other.
• Banks are not responsible
• for the genuineness or contents of any documents submitted (Art. 34)
• For losses etc. arising from transmission problems (Art. 35)
• Force Majeure ( Art. 36)
• For the failings of their correspondent Banks (Art. 37)
• Issuing Bank is responsible for all Bank charges and other costs at home or abroad even if they are supposed to be paid by other party (Art. 37 c).
• Applicant is responsible for any adverse consequences of foreign laws (Art. 37d).
• satisfactory track record.
• dealings with only one bank.
• Liabilities of the applicant to the Bank and third parties.
• Means by which the applicant is expected to meet his commitment once the bills arrive.
• Margin he should deposit.
• Limit to be commensurate with turnover and CC limits.
• Should be for genuine trade/ manufacturing activity.
• Usance period of the LC should ordinarily have relation to the working capital cycle.
• Level of inventory carried should be commensurate with industry norms / past trends.
• LCs for purchase of machinery / capital goods should be backed by borrowers own funds or a term loan sanctioned for the purpose.
• Wherever warranted, in addition to margin, where prescribed, we may also retain a lien on the undrawn portion of the CC limit for the value of bills to be received under the LC.
• Sister concerns
• Where the opener and beneficiary are sister concerns, LCs should not normally be necessary.
• Take care of kite-flying operations.
• Standing of the beneficiary.
• D/A facilities to applicants of undoubted standing and where security available is much more than the value of LC.
• While computing purchase of imported material on LC basis take net of import duty.
• Assess limits for usance and sight LC separately.
• Usance period should not exceed the production cycle excepting in the case of bulk imports.
• Keep in mind the accepted projections regarding Sundry Creditor levels.
• Margins security depending on track record.
• Cash budget monitoring to track availability of funds.
• Revolving LCs
• To be valid for not more than 1 year
• The limit should be a sub-limit.
• The LC value should be restored for further negotiation only after the advice of retirement of the previous bill has been received from the issuing bank by the beneficiary bank.
• While assessing Letter of Credit Limit, the following points need to be noted
• Purchases of RM on LC basis should be net of Import Duty LC amount should cover FOB, CIF or CF value of goods- should not include customs duty and other charges payable in India. Payment of these charges should be taken care of by the main working capital(CC) A/C of Applicant.
• Transit time should be treated as Nil if usance period starts from shipment date.
• Arriving at D.P
• Ensure that the stocks covered by bills which have been received under LCs opened by us, and not yet retired, are not included for computing the D.P. in CC account.
• Devolvement of LCs
• In case of irregularity in CC account do not open further LCs.
• Take adequate margins and step up in case of it becoming a habit in worse cases stop further issues.
• Mark lien on DP so that usance bills are properly retired on due date.
• Lien should be earmarked against advance value of stocks for the outstanding usance LC bills.
• This ensures provision of margins on the stocks covered by usance LCs right from the time the stocks are bought on credit backed by the Banks commitment.
• Thus, it ensures that the margin is available well before the CC a/c is debited for the matured LC bill.
• In some cases it is quite possible that the units may not be in a position to provide margins right from the time of purchases against LCs. In such cases, based on merits, earmarking of lien for the value of usance LC bills outstanding may be permitted against the aggregate market value of stocks (including the LC stocks) instead of against the advance value of securities.
• The limits for demand LCs and usance LCs should be assessed separately with ample justifications.
• The usance period should not, generally, exceed the production cycle.
• In case of bulk imports, establishment of LCs for longer usance period may be considered selectively.
• When liability under LC is met by creating an irregularity in the Cash Credit account, the relative LC limit should not be released for opening further LCs till the account is adjusted.
• Frequent Devolvement's Warning signal!
• We assume that
• - Annual consumption of material to be purchased under LC C (Rs..)
• Lead time from opening LC to
• shipment L (months)
• - Transit time T (months)
• - Credit (usance) period available U (months)
• L T U Purchase Cycle P (months)
• LC Limit P x C/12
• Say, lead time, i.e. time from order placement to shipment 10 days
• Transit period 20 days
• Usance period from arrival of goods 3m
• Total Purchase Cycle 4m
• Monthly consumption of material Rs 100 lacs
• LC Limit(4 x 100) Rs 400 lacs
• M/s XYZ COMPANY LIMITED
• LETTER OF CREDIT LIMIT OF Rs. 20 CRORES
• (Rs. in crores)
• Let us assume as follows (Rs in lacs)
• i) Annual purchase of RM 3200
• ii) RM purchase under LC(50) 1600
• iii) Purchase under demand LC 800
• iv) Purchase under usance LC 800
• Time gap from opening till shipment 1 m
• Transit period from date of shipment
• till date of retirement 0.5 m
• Demand LC Limit 800 x 1.5/12 Rs 100 lacs
• Lead Time, i.e from opening LC till shipment 1 month
• Transit Period, i.e. from date
• of shipment till date of receipt of documents by importer 0.5 months
• Average usance period 2 months
• Usance LC Limit 800x3.5/12 Rs 233 lacs

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Letter of Credit

What is a Letter of Credit? Parties Involved in LC Transaction Letter of Credit Process Types of Letter of Credit Documents of Letter of Credit Advantages of Letter of Credit Disadvantages of Letter of Credit Read less

More Related Content

• 1. Letter of Credit
• 2. Table of Contents  What is a Letter of Credit?  Parties Involved in LC Transaction  Letter of Credit Process  Types of Letter of Credit  Documents of Letter of Credit  Advantages of Letter of Credit  Disadvantages of Letter of Credit
• 3. What is a Letter of Credit?  A letter of credit is an undertaking issued by a bank for the account of the buyer (applicant), to pay the seller (beneficiary) provided the terms and conditions of the letter of credit are complied with.  A letter of credit usually satisfies the seller’s desire for cash payment and the buyer’s desire for credit.  A Letter of Credit is also known as a Documentary Credit.  It is mostly used in international trade, and it is a way of reducing the payment risks associated with the movement of goods.
• 4. Parties Involved in LC Transaction  The Applicant is the party that arranges for the letter of credit to be issued.  The Beneficiary is the party named in the letter of credit in whose favor the letter of credit is issued.  The Issuing or Opening Bank is the applicant’s bank that issues or opens the letter of credit in favor of the beneficiary and substitutes its creditworthiness for that of the applicant.  An Advising Bank may be named in the letter of credit to advise the beneficiary that the letter of credit was issued. The role of the Advising Bank is limited to establish apparent authenticity of the credit, which it advises.
• 5. Letter of Credit Process
• 6. Types of Letter of Credit  Revocable & Irrevocable Letter of Credit  Confirmed Letter of Credit  Sight Credit and Usance Credit  Back to Back Letter of Credit  Transferable Letter of Credit  Stand by Letter of Credit
• 7. Revocable & Irrevocable Letter of Credit Revocable:  A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification.  It is rarely used in international trade and not considered satisfactory for the exporters but has an advantage over that of the importers and the issuing bank.  It should be indicated in LC that the credit is revocable. if there is no such indication the credit will be deemed as irrevocable. Irrevocable:  In this case it is not possible to revoked or amended a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary.  Form an exporters point of view it is believed to be more beneficial.  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.
• 8. Confirmed Letter of Credit  Confirmed Letter of Credit is a special type of L/C in which another bank apart from the issuing bank has added its guarantee.  Although, the cost of confirming by two banks makes it costlier, this type of L/C is more beneficial for the beneficiary as it doubles the guarantee.
• 9. Sight Credit and Usance Credit  Sight credit states that the payments would be made by the issuing bank at sight, on demand or on presentation.  In case of usance credit, draft are drawn on the issuing bank or the correspondent bank at specified usance period.  The credit will indicate whether the usance draft are to be drawn on the issuing bank or in the case of confirmed credit on the confirming bank.
• 10. Back to Back Letter of Credit  Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as back to back credit when a L/C is opened with security of another L/C.  Counter credit is actually a method of financing both sides of a transaction in which a middleman buys goods from one customer and sells them to another. Parties Involved:  The buyer and his bank as the issuer of the original Letter of Credit.  The seller/manufacturer and his bank.  The manufacturers subcontractor and his bank.
• 11. Transferable Letter of Credit  A transferable letter of credit credit is a type of credit under which the first beneficiary which is usually a middleman may request the nominated bank to transfer credit in whole or in part to the second beneficiary.  This type of L/C is used in the companies that act as a middle man during the transaction but don’t have large limit.  In the transferable L/C there is a right to substitute the invoice and the whole value can be transferred to a second beneficiary.
• 12. Standby Letter of Credit  Initially used by the banks in the United States, the standby letter of credit is very much similar in nature to a bank guarantee.  The main objective of issuing such a credit is to secure bank loans.  Standby credits are usually issued by the applicant’s bank in the applicant’s country and advised to the beneficiary by a bank in the beneficiary’s country.
• 13. Documents of Letter of Credit Financial Documents Commercial Documents Shipped Documents Shipping Documents Transport Documents Bill of Exchange Invoice Insurance Policy Transport Documents Bill of Lading Co-Accepted Draft Packing List Insurance Certificate Airway Bill Commercial Documents Truck/Lorry Receipt Legal Documents Railway Receipt
• 14. Advantages of Letter of Credit For Exporters:  Reach out New Customers: Establishing a new business connection is not easy. It is difficult to find a new buyer who is ready to make an advance payment to an untested exporter. By offering a letter of credit, the exporter can increase the chance of securing the order.  Increasing Export Coverage: Exporters can increase their export coverage by regional means if they can effectively use letters of credit. For example, letter of credit is the main payment option for majority of the Middle East countries.  Mitigates Default Risk of the Importer: By using a letter of credit, the exporter can replace default risk from the importer to the importer’s bank, because the letter of credit is a conditional payment undertaking of the issuing bank.  Eliminates Importing Country’s Political Risks via Confirmation: By adding confirmation, the exporter can eliminate importing country’s political risks, at least in theory. For further information please read our post “Confirmation and Confirmed Letter of Credit”.  Discounting Possibilities: It is possible to discount letters of credit that do not payable at sight. Once the issuing bank or confirming banks determines that the letter of credit documents are complying, the respected bank can discount the credit.
• 15. Advantages of Letter of Credit For Importers:  Proof of Creditworthiness: By issuing a letter of credit from a reputable bank, the importer proves that he is a financially reputable company.  More Favorable Payment Terms: The importer may be able to convince the exporter to work with a deferred payment terms instead of an at sight payment via a letter of credit. As the exporter can discount the credit any time after the complying presentation, deferred payment should not a big issue for him. Most frequently used deferred payment options under the letters of credit are 30 days, 60 days or 90 days after the bill of lading date.  Timely Shipments: Importers can determine the shipment period by using a letter of credit. If the exporter can not shipped the goods on time, he may face a late shipment discrepancy.
• 16. Disadvantages of Letter of Credit For Exporters:  Higher Learning Costs: Letter of credit is one of the most complex fields of the international trade. Exporters acting with lack of letter of credit expertise and experience may face unpleasant consequences.  Higher Bank Fees: Exporters may have to pay high letter of credit fees to the banks under different names comparing to other payment methods.  Time Consuming Procedures: Letter of credit is a conditional payment undertaking of the issuing bank. The condition is known as complying presentation. Making a complying presentation is not easy and a very time consuming process.
• 17. Disadvantages of Letter of Credit For Importers:  Fraud Risks: While not common, it is possible that exporters can reach to the funds under letters of credit by submitting fraudulent documents.  Higher Bank Fees: Just like exporters, importers have to pay high letter of credit fees to the banks under letters of credit transactions.  Risks Associated with Shipment of Low Quality Goods: It is not easy to stop payment under the letter of credit once the issuing or confirming bank determines complying presentation. The importer may have to pay for the goods not consistent with the sales contract.
• 18. THANK YOU!