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 The Exporter's Guide To Documentary Letters Of Credit Letters of Credit have been a cornerstone of international trade dating back to the early 1900s. They continue to play a critical role in world trade today. For any company entering the exporting market, Letters of Credit are an important payment mechanism to understand.
TD's Crash Course in International Trade offers more information, including the mechanics of a Letter of Credit. A Letter of Credit, simply defined, is a written instrument issued by a bank at the request of its customer, the Importer (Applicant), whereby the bank promises to pay the Exporter (Beneficiary) for goods or services provided that the Exporter presents all documents called for, exactly as stipulated in the Letter of Credit, and meets all other terms and conditions set out in the Letter of Credit. A Letter of Credit is also commonly referred to as a Documentary Credit. Note: In the diagram below, the Advising Bank is also acting as the Confirming Banks.   Accepting Bank: The bank named in a term Letter of Credit on which drafts are drawn that has agreed to accept the draft. By accepting the draft, the Drawee Bank signifies its commitment to pay the face amount at maturity. After accepting the draft, the Drawee Bank becomes the Accepting Bank. Advising Bank: The bank to which the Issuing Bank sends the Letter of Credit, with instructions to notify the Exporter (Beneficiary). "Available with" Bank: The Bank authorized in the Letter of Credit to effect payment under, accept or negotiate the Letter of Credit. Confirming Bank: The bank which, at the request of the Issuing Bank, adds its confirmation to the Letter of Credit. In doing so, the Bank undertakes to make payment to the Exporter upon presentation of documents under the Letter of Credit assuming all terms and conditions of the Letter of Credit have been met. Drawee Bank: The bank named in the Letter of Credit on which the drafts are to be drawn. Exporter/ Beneficiary/ Seller: The party that has contracted to sell goods. Importer/ Applicant/ Buyer: The party that has contracted to buy goods. Issuing Bank: The bank issuing the Letter of Credit at the request of its customer the Importer (Applicant) in favour of the Exporter (Beneficiary. Reimbursing Bank: The bank designated in the Letter of Credit to reimburse the "available with" Bank which submits payment claims under the Letter of Credit. Must-Know Facts About Letters of Credit Can a Letter of Credit be amended or revoked without your consent? Some Letters of Credit can be amended or revoked without the Exporter's consent. It depends on whether the credit is Revocable or Irrevocable. A Revocable Letter of Credit can be revoked without the consent of the Exporter, meaning that it may be canceled or changed up to the time the documents are presented. As a Revocable Letter of Credit affords the Exporter little protection, it is rarely used. On the other hand, an Irrevocable Letter of Credit cannot be canceled or changed without the consent of all parties, including the Exporter. Unless otherwise stipulated, all Letters of Credit are Irrevocable. Does a Letter of Credit protect you from country risks (e.g. war, embargo) and/or Issuing Bank risks (e.g. bank failure, bank fraud)? When a Letter of Credit is issued, the risk of payment has shifted from the Importer to the Issuing Bank. However, you still assume both Issuing Bank and country risks. In the case where the Issuing Bank is not considered an acceptable risk and/or the country where it is located has high political or economic uncertainty, you should consider requesting a Confirmed Letter of Credit. With a Confirmed Letter of Credit, another bank, known as the Confirming Bank, usually located in your country, will add its "confirmation" to the Letter of Credit. By adding its confirmation, the Confirming Bank undertakes to honour your claim under the Letter of Credit, assuming all terms and conditions of the Letter of Credit are met. The risk of payment is now assumed by the Confirming Bank, as well as the Issuing Bank, thereby providing you more protection. How to get a Letter of Credit Confirmed An Exporter who decides to have a Letter of Credit confirmed should inform the Importer to instruct the Issuing Bank to issue an Irrevocable Letter of Credit requesting a confirmation. For a bank to add its confirmation, the Letter of Credit must state that a confirmation be added. It is recommended that you check with your own bank prior to the issuance of the Letter of Credit as to whether it is prepared to add its confirmation, should it be requested to do so by the Issuing Bank. To make this decision, the bank will need preliminary information about the Letter of Credit such as the name of the Issuing Bank, country of issuance, expiry date and amount. Are there agreed-upon, international standards for transactions involving Letters of Credit? The International Chamber of Commerce (ICC) publishes internationally agreed-upon rules, definitions and practices governing Letters of Credit, called "Uniform Customs and Practice for Documentary Credits" (UCP). The UCP facilitates standardization of Letters of Credit among all banks in the world that subscribe to it. These rules are updated from time to time; the last revision became effective January 1, 1994, and is referred to as the UCP 500. Copies of the UCP 500 are available from your TD branch or your nearest TD International Trade Services office. Step-by-Step Process for the Exporter The following is a detailed explanation of the process you, as an Exporter, follow when named as a Beneficiary under a Letter of Credit. In this explanation, TD is acting as the Advising Bank and Confirming Bank.
What an Exporter Should Look for when Reviewing a Letter of Credit
After reviewing the Letter of Credit, if you find any terms and conditions that are not to your satisfaction, you must ask the Importer (Applicant) to instruct the Issuing Bank to make the necessary amendments to the Letter of Credit. It is recommended that you do not proceed with shipment until such amendments are received. Document Preparation Checklists The following checklists are intended to provide you with simple guidelines for document preparation. Note that in addition to checking the documents for inconsistencies with the Letter of Credit, the "available with" Bank checks for inconsistencies between documents. "Checklist is not all inclusive, and should be used as a general guideline only." It is recommended that Exporters unfamiliar with such documents use or consult with a reputable freight forwarder. Since payment to you depends on the documents being in exact accordance with the Letter of Credit, the preparation of these documents is an extremely important part of the Letter of Credit process. Draft A Draft, also known as a Bill of Exchange, is a legally enforceable instrument, which is regarded as the formal evidence of debt under a Letter of Credit. An academic definition is an unconditional order in writing addressed by one person to another, signed by the person giving it, and requiring the addressee to pay at a fixed or determinable time a certain sum of money to the order of a specified party. A draft must be presented with all other documents requested in the Letter of Credit, unless stipulated otherwise. Drafts may be obtained from any of TD's International Trade Services offices.  How to Complete a Draft
2. Payment term e.g. "at sight", "30 days after sight", "60 days after Bill of Lading Date" (Field 42C). 3. Date you present documents to the "available with" Bank. 4. Dollar amount of the Draft written out in words along with the currency. 5. Dollar amount of the Draft in figures along with the currency 6. Letter of Credit number assigned by the Issuing Bank. (Field 20) 7. Date the Letter of Credit was issued. (Field 31c) 8. Name and address of the Issuing Bank. (Listed in the Header under "Received From") 9. Name and address of the bank on which the Drafts are to be drawn. (Field 42D) If it states "yourselves", it is drawn on whichever of TD's International Trade Service offices that advised the Letter of Credit. 10. Signature of an authorized signing officer of the Company. The Beneficiary's name as shown on the Letter of Credit must be spelled out below the line. Commercial Invoice The Commercial Invoice is the accounting document through which you charge the importer for goods and services purchased. The Invoice gives details about the goods and/ or services (size, quantity etc.) as well as the trade terms (C.I.F., F.O.B. etc.).
Transport Document (commonly referred to as a "Bill of Lading") A Transport Document (e.g. Bill of Lading, Airway Bill, Railway Consignment Note) is a document issued by the carrier that describes the goods that have been accepted for carriage. In some forms, the Bill of Lading may also act as a document of title to the goods.
Insurance Document Under the Insurance Document, the shipment of goods is guaranteed in part or in whole -- depending on the terms and conditions -- by an insurance company. The Insurance Document will specify the goods shipped on a named vessel, will briefly indicate the applicable coverage, and show to whom loss is payable.
Certificates of Origin and Inspection The Certificate of Origin notes the country where the goods were produced. The Certificate of Inspection offers an opinion that specified, quality and quantity related conditions have been met.
Packing and Weight Lists A Packing List is usually supplied by the exporting shipper in cases where a diversified shipment is packed in several packages. The list will show the contents of each box or case identified by a specific number. A Weight Certificate is supplied by you, the Exporter, at the request of the Importer. It certifies the weight of each large unit in a shipment or the net and gross weights of packages containing smaller units. It is of particular value when the price of the goods is based on weight and, also, is often used by the carrier in arriving at the weight to be recorded on the Bill of Lading as a basis for the freight charges.
Advantages & Disadvantages of a Letter of Credit Advantages to the Exporter
Disadvantages to the Exporter
Questions Exporters Commonly Ask About Letters of Credit Amendments Q: I have received a Letter of Credit, but it does not meet the sale terms agreed upon. What should I do? A:If the Letter of Credit is not acceptable to you, you should request an amendment to the Letter of Credit from the Importer. If the Importer does not agree to the request for amendment, you may refuse to ship against the Letter of Credit and simply let it expire unused. Reimbursing Bank Charges Q: I just received a list of charges for a Letter of Credit that I presented documents under. What are Reimbursing Bank charges? A: A Reimbursing Bank is one authorized by the Issuing Bank to effect the transfer of funds between TD and the Issuing Bank. It may be necessary to have a Reimbursing Bank involved because reimbursement is in a foreign currency or because the Issuing Bank and TD do not share settlement accounts. The Reimbursing Bank will charge a fee to facilitate the payment. This fee is your responsibility if the Letter of Credit states that all charges outside of the Importer's country will be paid by the Exporter. Advising & Negotiating the Letter of Credit Q: I received a Letter of Credit advised by a Canadian bank other than TD. Can I still negotiate my documents with TD? A:If the Letter of Credit states that it is "negotiable with any bank", then you may negotiate your documents with TD. This information is found in the Letter of Credit SWIFT format in field 41D "Available with...". In order to do so, you must have a copy of the original Letter of Credit. The Uniform Customs and Practice for Documentary Credits (UCP 500) Q: How do I get a copy of the Uniform Customs and Practice for Documentary Credits (UCP) 500, (1993 revision)? A:You can obtain a copy from your local TD branch or from a TD International Trade Services office. Avoiding Discrepancies Q: Because Letters of Credit can be so complicated, discrepancies seem almost unavoidable. Is there a way to convey my Letter of Credit requirements to the Importer simply and clearly? A:As an Exporter, you can be proactive and tell your customer (the Importer) exactly what terms and conditions you require in a Letter of Credit. You can communicate these terms and conditions by using a TD Letter of Credit Issuance Instructions form. While this will not guarantee the Letter of Credit will arrive exactly as you specified, it can help avoid misunderstandings between you and the Importer. Click here for a copy of the Letter of Credit Issuance Instructions form (p. 22 of TD's L/C Guide book, available at branches or your nearest TD Trade Service Office). Dealing with Non-Correctable Discrepancies Q: Due to unavoidable circumstances, the shipment was delayed. Having violated the terms of the Letter of Credit (late shipment), is there any chance I might get paid under the Letter of Credit? A: Late shipment is known as a non-correctable discrepancy. However, there is still a chance that you might be paid. As the Exporter, you can follow one of three routes: Option 1. Forward Documents on Approval -- TD sends the documents to the Issuing Bank at your risk, noting the relevant discrepancies. When the documents are received by the Issuing Bank, they will be checked and the discrepancies referred to the Importer for acceptance. Meanwhile, the documents will not be released to the Importer until the Issuing Bank receives the Importer's approval of the discrepancies. Once this occurs, payment will be made under the Letter of Credit. This route is often chosen when it is expected that the Importer will approve the discrepancies. It may also be that the shipment has already arrived or is about to arrive and you do not want the shipment to incur a demurrage charge. Option 2. Cable for Approval -- TD sends a telex or SWIFT message to the Issuing Bank requesting authority to negotiate the documents, noting the discrepancies found. The Issuing Bank, in turn, will notify the Importer of these discrepancies. The Importer will then indicate to the Issuing Bank whether the documents are acceptable with the discrepancies noted. If authorization to waive the discrepancies is received by TD from the Issuing Bank, TD will send the documents to the Issuing Bank and payment will be made according to the Letter of Credit terms assuming there are no additional discrepancies. Option 3. Indemnity -- In certain situations you may provide TD with an acceptable Indemnity Agreement for the discrepancies. Such indemnity enables TD to effect payment immediately, even though there are discrepancies in the documents. If documents are not accepted by the Importer, TD has the right to claim the funds back from you under the Indemnity Agreement. In any case, it is advantageous for you to advise the Importer directly of the discrepancies to ensure a quick response when the Importer is contacted by the Issuing Bank. Dealing with Correctable Discrepancies Q: The TD trade professionals noticed a discrepancy in my invoice. Does this mean I won't get paid? A: There are certain discrepancies that you or the freight forwarder may correct, either by amending the original documents or by replacing them with new ones. The Commercial Invoice falls in this category. If there is a discrepancy in a document issued by a third party -- such as the Certificate of Origin -- then the document must be returned to the issuing party for correction. Discounting Acceptances Q: My Letter of Credit matures in 90 days. Is there a way to collect payment under the Letter of Credit sooner than the maturity date? A: Instead of waiting until the maturity date of an Acceptance to obtain your funds, you may approach TD to have the accepted draft "discounted" at prevailing discount rates. This allows you, the Exporter, to collect your funds, net of discount charges, as soon as the draft has been accepted. To discount an Acceptance, a formal request is made to the TD Bank or any other bank. This request can be made at any time prior to the maturity of the Acceptance. In addition to receiving funds prior to the maturity date, another advantage to discounting is that the discount rate is based on the risk of the Accepting Bank and, therefore, may be lower than the your borrowing rate. |
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