Definition of Terms of Payment

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Definition of Terms of Payment

Documents Against Acceptance (D/A) 

Arrangement under documentary collection in which  an exporter instructs the presenting bank to hand over  shipping and title documents to the importer only if the  importer accepts the accompanying bill of exchange or  draft by signing it. 

Documents Against Payment (D/P) 

Arrangement under documentary collection in which  an exporter instructs the presenting bank to hand  over shipping and title documents to the importer  only if the importer fully pays the accompanying  bill of exchange or draft. Also called cash against  documents. 

Open Account 

Credit relationship in which buyer pays upon the  receipt of goods, or on deferred payment basis. 

Advance Payment 

The buyer pays before shipment. 

Letter of Credit (L/C) 

A letter of credit (L/C) is a document issued by a bank on  behalf of an applicant (the buyer) undertaking to make  payment to a beneficiary (the seller) up to a stated amount  of money, within a prescribed time limit and against  stipulated documents.  

There are usually two banks involved in a L/C operation.  The issuing bank is the bank of buyer and issues the  credit. The advising bank, usually location in the seller’s  country, is the bank through which the credit is sent to the  beneficiary. 

Terms of L/C  And UCP 600 


Letters of Credit are governed by a set of rules  from the International Chamber of Commerce.  The document is called “Uniform Customs and  Practice” and the latest version is document  

Irrevocable Credit : 

This type of credit can be amended or cancelled only with  the agreement of all parties concerned. 

It is also represents a definite undertaking by the issuing  bank to pay provided that the stipulated documents are  presented and that the terms and conditions of the credit  are complied with. 

Irrevocable and Confirmed Credit : 

This type of credit involves the undertaking of the advising  bank in addition to that of the issuing bank. 

It means that the issuing bank requests a second bank to  add its own confirmation to the credit so that the  confirming bank is responsible to make payment if the  issuing bank fails to pay the beneficiary.  

Sight L/C and Deferred Payment L/C 

Sight L/C (L/C at sight)  

A letter of credit that is payable once it is presented along  with the necessary documents.  

Deferred Payment L/C  

Also known as Usance L/C, that is paid a fixed number of  days after shipment or presentation of prescribed  documents. (L/C at ? Days sight) 

Standby L/C 

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 beneficiary. 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. 

Transferrable L/C 

A transferrable L/C can be transferred by the first beneficiary to one or more  second beneficiary(ies). Fractions of a transferable L/C can be transferred  separately, provided that the sum of the fractions does not exceed the  amount of the credit and the partial shipment is permitted. 

The letter of credit (L/C) can be transferred only on the terms and conditions  stipulated in the original L/C, except with the following which may be changed: 

 * the L/C amount 
 * the unit price of goods (if stated in the original L/C) 
 * the time of shipment 
 * the last date for presentation of negotiation documents 
 * the expiry date of L/C 

Back to Back L/C 

Arrangement in which one irrevocable L/C serves as the  collateral for another; the advising bank of the first L/C  becomes the issuing bank of the second L/C. In contrast to a  ’transferable letter of credit,’ permission of the ultimate buyer  (the applicant or account party of the first L/C) or that of the  issuing bank, is not required in a back-to-back L/C. It is used  mainly by middlemen (intermediaries) to hide the identity of  the actual supplier or manufacturer. Also called counter credit  or reciprocal letter of credit. 

L/C Opening 

Elements of L/C 

• 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  

Details required for L/C opening 

• Applicant’s details – Name, address, trade account number. 
• Beneficiary’s details – Name, address. 
• Beneficiary’s Bank details – L/C advising bank. 
• Goods covered by the L/C – Goods description, PO numbers, Qty., Unit price,  Amount, Shipment date, etc.
• The latest shipment date, the meaning of the shipment date.  
• The latest date for presentation. 
• Expiry date. 
• The port (or point) of shipment and the port (or point) of destination. • The partial shipment/drawing is permitted or prohibited. 
• The transshipment is permitted or prohibited. 
• The L/C is transferable or non-transferable. 
• The type of risk and the amount of insurance coverage, if required. • The documents required. 
• Consignee on transportation documents.