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Documentary Credit
Letter of credit L/C or LC Credits Commercial Letters of Credit Documentary Letters of Credit
Definition
L/C is a bank undertaking of payment separate from the sales or other contracts on which it is based.
A way of reducing the payment risks associated with the movement of goods
UCP
The Uniform Customs and Practice for Documentary Credits is an internationally agreed upon set of rules for all parties involved in all types of letter of credit transactions.
The latest version, called the UCP600, formally commenced on 1 July 2007.
Basic types
Revocable L/C Irrevocable L/C Confirmed L/C Sight payment L/C Deferred payment L/C
REVOCABLE L/C
Can be revoked any time before it has been performed.
REVOCABLE L/C
RISK
L/C
Buyer (Importer)
Seller (Exporter)
Issuing bank
IRREVOCABLE L/C
The issuing bank as well as importer dont have the right to revoke the credit before a specific time.
Only be cancelled if all of parties made an agreement
CONFIRMED L/C
A confirming bank will undertake the responsibility of payment in case the issuing bank can not make a payment.
Wheres my money??? Dont worry. Ill help u I have no enough money
Seller (Beneficiary)
Confirming bank
Issuing bank
NO DELAY
Seller
Money
Issuing Bank
Seller
Buyer
Standby L/C
Applicant: Importer Beneficiary: Exporter To be issued in favor of the exporter for the purpose of "backing-up" or insuring certain specified obligations of the Importer Irrevocable
Revolving L/C
Applicant: Importer Beneficiary: Exporter To be used for regular trade between an exporter and an overseas buyer. The credit amount is to be renewed or reinstated automatically without changes to the credit
Irrevocable or confirmed
Back-to-back L/C
Applicant: Importer; Intermediary (Exporter) Beneficiary: Intermediary(Exporter); Supplier To be issued on the security of the other when an exporter (not a manufacturer), obtains goods from a supplier by acting as an export agent for the supplier
Irrevocable
Transferable L/C
Applicant: Importer Beneficiary: Intermediary; Supplier To be used when the exporter is the importer's agent or a middleperson between real supplier and importer The exporter can transfer all or part of his/her rights to another party. Irrevocable
Operating process
Major components of an L/C Sample Participating parties Procedure
SAMPLE
SAMPLE
Signed Commercial Invoice In 03 Original(s)
SAMPLE
Full (3/3) Set Of Original And 03 Non-negotiable Clean Shipped On Board Bill Of Lading Made Out To Order Of Sacombank- Tan Phu Branch ,Blank Endorsed; Marked Freight Prepaid And Notify Applicant; Showing The Name And Address Of Shipping Agent At (Place)hochiminh City, Vietnam
SAMPLE
SAMPLE
Full Set Of Insurance Policy/Certificate For 110% Of The Invoice Value, Irrespective Of Percentage, Indicating Number Of Original Folds Issued, Blank Endorsed And Showing The Claim Payable Agency Or Survey Agent Or Settlement Agent (With Name And Full Address Stated) In Hochiminh City ,Vietnam, Covering Icc (A)
Participating parties
Applicant: the one who request a bank to issue an L/C
Participating parties
Beneficiary: the one in whose favour an L/C is issued
Participating parties
Issuing bank: the bank issue an L/C
Participating parties
Advising bank: the bank inform beneficiary about the availability and terms of an L/C
Procedure
Applicant / Importer (2) (8) Issuing Bank (1) (5) Beneficiary / Exporter (4) (6) (7)
(3)
(6) (7)
Advising Bank
Procedure
Applicant / Importer (2) (8) (1) (5) (3) (6) Beneficiary / Exporter (4) (6) (7)
Issuing Bank
(7)
Advising Bank
Procedure
Advantages of L/C
Security Versatility Guaranteed Payment
Financial benefits
Flexibility
To the Exporter/Seller
Open doors to international trade by providing a secure mechanism for payment
To the Importer/Buyer
Payment will only be made when the terms and conditions are complied with.
To the Importer/Buyer
Ties up the business credit line Expensive
Seller's bank controls the shipping documents The goods shipped may not conform (inferior quality for example) to the order.
To the Exporter/Seller
Q&A