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Documentary Letters of Credit LC | DLC | SBLC | UCP 500 ICC | UCP 600 ICC
In the context of international trade, taking into account the amounts, participation and distances separating business partners, they have led to the creation of specific tools necessary for making payments, namely documentary letters of credit.
The difficulty is that the positions of the buyer and seller are diametrically opposed. The former is the ideal way of looking at things “when I receive the goods, I pay”, while the latter prefers “when you pay, I will deliver the goods”. A documentary letter of credit is one way to satisfy both of these requirements!
A documentary letter of credit is concluded according to the rules and recommendations of the International Trade Board (ICC) UCP 500 or UCP 600 represents the bank with an obligation to pay a certain amount to the supplier of the product or service, in relation to receiving the specified list of documents in the agreed time period, which prove that the goods were expedited, or that the services or benefits promised were done well. The purpose of these documents is to provide the material basis of trust for the proper fulfillment of the obligations of the exporter. The bank will then transfer these documents to the buyer against reimbursement so that he can take possession of the goods.
A letter of credit is an obligation of a bank to pay a certain amount of money to a seller of goods or services upon timely submission of relevant documents confirming the shipment of goods or the performance of contractual services.
Letter of credit (accre-ditivus — trust):
Settlement form and type of bank account for which cashless payments are made. It is used in international settlements in commercial operations, as well as between domestic legal entities, when such a form is provided for by an agreement between the supplier and the customer (buyer). The letter of credit is opened on behalf of the payer in the bank that serves the supplier, on the basis of a clearly defined application. The source of opening a letter of credit can be both the buyer’s deposited funds and bank loans. The basis for the payment of a letter of credit is the supplier of the registers of accounts and transport documents confirming the shipment of the goods. Each letter of credit is intended for settlements with only one supplier.
Types of letters of credit used in international practice:
Advised — letter of credit, according to which the issuing bank sends an order to another bank to inform the beneficiary of the opening of the letter of credit without obligation on the part of the advising bank.
Directly advised — letter of credit, which the issuing bank sends directly to the beneficiary. This form of advising has certain inconveniences: it does not allow to control the authenticity of the letter of credit and complicates the process of ascertaining the solvency of the issuing bank.
Money — issued by the bank to its client for the right to receive the full amount indicated in it or in separate particles at other banks for a certain time.
Letter of credit with a previous memo — a letter of credit whereby the issuing bank requests from another bank (advising) to notify the beneficiary of the opening of the letter of credit without any obligation of the advising bank or issuing bank.
Compensation — a form of payment for export — import operations, according to which in the calculations using a compensation letter of credit. use two letters of credit. The first (main) letter of credit on behalf of a foreign buyer, his bank puts the beneficiaries to the intermediary. The second — on behalf of the intermediary beneficiary, his bank exposes the beneficiaries to the supplier of the goods.
Indivisible — a letter of credit, which provides for the payment of the amount of deliveries of goods (mainly export) only after completion of delivery in full, provided for by the agreement (contract).
Uncovered — a letter of credit, the payment of which in the event of a temporary lack of funds from the payer is guaranteed by the issuing bank by providing a bank loan.
Transferable — a letter of credit, which can be transferred for any settlements to another person (another holder).
Covered — a letter of credit, according to which the bank transfers the payer’s own funds on his account, or the loan granted to him at the disposal of the supplier bank.
Renewable — a letter of credit, which is intended for many consecutive payments with regular payments of goods to a stable participant in a trade transaction — a supplier of goods who delivers goods at intervals, at certain intervals.
Revolving — letter of credit, according to which payment for shipped goods is made one after the fact of shipment (only a certain part of the consignment of goods actually shipped is paid of the total amount of supplies provided for by the contract.
Payment mechanism for letter of credit
1. The importer (buyer) has a guarantee that the bank will not make a payment at its expense until it receives the documents in accordance with the terms of the letter of credit and makes sure that the received documents on the basis of external signs satisfy the requirements of the importer.
2. Banks will refuse to pay for documents at the expense of the importer, if the documents on the goods do not meet the conditions of the letter of credit, thereby protecting the interests of the importer.
3. The seller can be sure of receiving the payment as soon as he submits documents to the bank that comply with the terms of the letter of credit.
4. The seller receives, against shipping documents specified in the terms of the Letter of Credit, an immediate payment (if the letter of credit provides for the payment terms “upon presentation”).
5. Required documents usually include documents of title / loading documents, such as a bill of lading (receipt of the captain of the vessel), a bill of lading, a duplicate railway bill, indicating that the goods have been shipped in accordance with the requests and specifications of the buyer.
LC Letter of Credit documentary credit scheme
The letter of credit form of payments usually follows the following scheme
1. The exporter and the importer agree on the issue of a letter of credit (letter of credit settlements).
2. The importer (buyer), with the consent of the exporter (seller), asks his bank to issue a letter of credit. Thus, the importer’s bank (issuing bank) undertakes to pay the exporter a fixed amount, provided that the exporter submits documents that meet the conditions of the letter of credit within a specified period of time.
3. The issuing bank informs the exporter’s bank of the opening of the letter of credit.
4. Bank of the exporter (advising bank informs the exporter that a letter of credit has been issued in his favor).
5. The exporter ships the goods, prepares the necessary documents and sends them to his bank for submission to the performing bank.
6. The executing bank checks the documents and, if the documents comply with the terms and conditions of the letter of credit, pays the exporter the amount of documents submitted, but not exceeding the total amount of the letter of credit.
7. The executing bank sends the documents to the importer’s bank for further transfer to the importer, who can now use them to receive goods.
General advantages of a letter of credit
1. A letter of credit is a very flexible settlement instrument that can be used for settlements on a wide variety of client transactions.
2. A letter of credit is a tool, the rules, the use of which are determined by a reputable international organization, are uniform and are recognized practically throughout the world. This is beneficial both for customers and banks, since each participant in the transaction has a clear idea of their rights, obligations and standard requirements for all participants in the transaction.
3. A letter of credit is convenient as a short-term financing tool.
Benefits of a letter of credit for importers
1. A letter of credit may be opened at the expense of the client’s own funds, at the expense of funds provided by the bank on credit, as well as with the provision by the client of other security for the fulfillment of his obligations (pledge, deposit).
2. Payment is made after the shipment of the goods and the provision of documents.
3. The importer determines the list of documents against which payment will be made.
4. Limits the timing of the provision of documents and shipment of goods.
Benefits of a letter of credit for exporters
1. The obligation of the bank that opened the letter of credit is added to the buyer’s obligation to make a payment; moreover, this obligation does not depend on the relationship between seller and buyer.
2. If the letter of credit is confirmed, then there is a guarantee of payment from the second bank.
3. Fulfillment of the terms of the letter of credit — guarantee of payment.
A system using documentary letters of credit thus satisfies two requirements:
This allows the exporter to take advantage of the official obligation on the part of the bank — nothing other than the importer’s bank in fact — and yet is different from the actual payment by the importer (since the bank is obligated to make the payment even if the importer has difficulty accepting this);
this ensures that the importer of bank guarantees does not make a payment if the seller can show that he has correctly fulfilled the terms of his contract.
We recommend IABUDF for export-import activities, as well as for the efficient use of financial instruments, obtaining a bank guarantee SWIFT MT 799 / MT 760 BG / PBG / LC / from first-class banks, and use of a DLC / SBLC letter of credit.
SKR | Safekeeping Receipt bank safe receipt via Swift 799 or 760
SBLC | Stand-by letter of credit — standby letter of credit ICC 500 / ICC 600
LC Letter of credit — documentary letter of credit ICC 500 / ICC 600 / DLC
Swift MT 199
Swift MT 799
Swift MT 760
Swift MT 700
Swift MT 999
Swift MT 110
TS / Tear Sheet Account Statements — Bank Statement
RF / Reserved Funds Letter — Reserved Funds Letter
BF / Bank Blocked Funds Letter — Blocking Letter
Bank Capability Letter — List of allowed banking operations
BC / Bank Comfort Letter — Bank Support Letter
BP / Bank Proof Of Funds Letter Funded Letter
LOI / Letter of Intent — Letter of Intent
With best regards and wishes for success in business,«International ABU Development Foundation» (IABUDF) Legal Service
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