Keep calm & don’t panic, here we are with the instructions for use
Letter of Credit is the payment method most often used in International Trade which offers the exporter best assurance of being paid for the products sold internationally.
The LC, also called documentary credit, better protects both the seller and the buyer by finding a fair compromise between their respective needs, especially if the buyer comes from a country with a high “country risk”.
First of all, there are four parties involved in this type of operation:
- The Buyer (so-called “Applicant”), who requests his bank to issue a letter of credit
- The Seller (so-called “Beneficiary”), who is basically the seller who receives his payment under the process
- The Issuing Bank (also called an opening bank), responsible for issuing the letter of credit at the request of the buyer
- The Advising Bank, responsible for the transfer of documents to the issuing bank on behalf of the exporter and is generally located in the country of the exporter
Three most relevant features of the letter of credit:
- The Letter of Credit shifts the payment risk from the buyer (applicant) to their bank (issuing bank), that is to a more reliable counterpart in terms of solvency
- With the Letter of Credit, payment is subject to the presentation of documents certifying the shipment of the goods
- Payments secured through Letter of Credits are based on documents only and not on the control of the goods shipped
The legal clauses of basic letters of credit are subject to regular standardization by the banking commission of the International Camber of Commerce (ICC)
Some useful tips
To avoid problems and damage when shipping, we recommend you to:
- Verify that the Letter of Credit is “irrevocable *, confirmed, at sight”
- Carefully examine the Letter of Credit as soon as it is notified by the Advising bank and, if necessary, immediately request the amendment
- Check that the terms of sale and the amount correspond to what was ordered
- Verify that the company names and addresses are correct (identical to how they appear in the documents)
- Verify that the Incoterms are correct and in compliance with what has been agreed. Furthermore, the incoterm indicated on the invoice must correspond to what is indicated in the L / C in the goods description field (45A)
- Verify that you can procure all the documentation in a way that fully complies with the requirements of the Letter of Credit. Furthermore, be careful with the submission of required number OBLs and copies, documents with inconsistent data or missing signature where required, not indicated L/C number , etc.
- Check that the expiration date of the LC (field 31D) is compatible with the time needed to prepare all the required documents (taking into account that many documents are issued by the freight forwarder, the insurance company, the Chamber of Commerce etc.)
- Pay attention not to present with delay the original transport documents required by the documentary credit, beyond the days indicated in field 48;
With regard to the Bill of lading, remember to specify whether the freight is prepaid or payable at destination (prepaid or collect), on board annotation, unidentified carrier, unauthenticated corrections, etc.
- Check that the shipping date (ON BOARD on BL) can be easily respected. The latest estimated shipping date (field 44C) must be compatible with the available transport service (ship / aircraft departure dates)
- Check that the port / airport of departure and the port / airport of arrival in the transport document are the same as those indicated in the L / C (fields 44E / 44F)
- Check, with particular attention, that the description of the goods is identical to that indicated on the invoice and in all documentation (field 45A of the swift)
- Pay attention not to make partial shipments when the credit does not allow it (field 43P)
- Verify that the insurance coverage is not expressed in a currency other than that of the L/C
- Be careful not to present a document (policy or certificate) other than that required in the L / C, to start the insurance coverage after the date of shipment or boarding, etc.
The topic is certainly complex and should be explored further.
For this reason, if you have any doubts, do not hesitate to contact us. We are available to check a draft of the letter of credit.
Are you looking for a trustable freight forwarder in Italy? Don’t hesitate to contact us for your international shipments with letter of credit!