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