letter of credit word doc

7/23/2019 Letter of Credit Word Doc

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INTRODUCTION

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 international market Letters of Credit are an important payment mechanism which help

eliminate certain risks. !ur purpose in publishing this guide is to provide a basic

understanding of Letters of Credit from both the "mporter#s and $%porter#s points of view. "n

addition we hope that it will serve as a handy reference tool as you use Letters of Credit in

your international trade transactions. & 'uide to Letters of Credit 1 & 'uide to (ocumentary

Letters of Credit ) *arties "nvolved in a Letter of Credit The following definitions will assist

in understanding a Letter of Credit +L,C- transaction. &ccepting ank The bank named in a

term +usance- Letter of Credit on which drafts are drawn that has agreed to accept the draft.

y accepting the draft the (rawee ank signifies its commitment to pay the face amount at

maturity to anyone who presents it at maturity. &fter accepting the draft the (rawee ank

becomes the &ccepting ank. &dvising ank The bank to which the "ssuing ank forwards

the Letter of Credit with instructions to notify the $%porter + eneficiary-. /available with

ank The bank authori ed in the Letter of Credit to effect payment under accept or negotiate

the Letter of Credit. Confirming ank The bank which at the re2uest of the "ssuing ank

adds its confirmation to the Letter of Credit. "n doing so the Confirming ank undertakes tomake payment to the $%porter upon presentation of documents under the Letter of Credit.

(rawee ank The bank named in the Letter of Credit on which the drafts are to be drawn.

$%porter, eneficiary,3eller The party that has contracted to sell goods.

"mporter,&pplicant, uyer The party that has contracted to buy goods. "ssuing ank The bank

issuing the Letter of Credit on behalf of the "mporter + uyer-. 4eimbursing ank The bank

designated in the Letter of Credit to reimburse the /available with ank which submits

payment claims under the Letter of Credit. Transferring ank The bank authori ed by the"ssuing ank to transfer all or part of the Letter of Credit to another party at the eneficiary#s

re2uest. & Letter of Credit simply defined is a written instrument issued by a bank at the

re2uest of its customer the "mporter + uyer- whereby the bank promises to pay the $%porter

+ eneficiary- for goods or services provided that the $%porter presents all documents called

for e%actly as stipulated in the Letter of Credit and meet all other terms and conditions set

out in the Letter of Credit. & Letter of Credit is also commonly referred to as a (ocumentary

Credit. There are two types of Letters of Credit5 revocable and irrevocable. & revocable Letter

of Credit can be revoked without the consent of the $%porter meaning that it may be


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cancelled or changed up to the time the documents are presented. & revocable Letter of Credit

affords the $%porter little protection6 therefore it is rarely used. &n irrevocable Letter of

Credit cannot be cancelled or changed without the consent of all parties including the

$%porter. 7nless otherwise stipulated all Letters of Credit are irrevocable. & further

differentiation is made between Letters of Credit depending on the payment terms. "f

payment is to be made at the time documents are presented this is referred to as a sight Letter

of Credit. &lternatively if payment is to be made at a future fi%ed time from presentation of

documents +e.g. 80 days after sight- this is referred to as a term usance or deferred payment

Letter of Credit. The "nternational Chamber of Commerce +"CC- publishes internationally

agreed upon rules definitions and practices governing Letters of Credit called /7niform

Customs and *ractice for (ocumentary Credits +7C*-. The 7C* facilitates standardi ation

of Letters of Credit among all banks in the world that subscribe to it. These rules are updated

from time to time6 the last revision became effective :anuary 1 199; and is referred to as

7C*


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What is a Letter of Credit

The following is a step by step description of a typical Letter of Credit transaction5

1. &n "mporter + uyer- and $%porter +3eller- agree on a purchase and sale of goods where payment is made by Letter of Credit.

=. The "mporter completes an application re2uesting its bank +"ssuing ank- to issue a Letter

of Credit in favour of the $%porter. >ote that the "mporter must have a line of credit with the

"ssuing ank in order to re2uest that a Letter of Credit be issued.

). The "ssuing ank issues the Letter of Credit and sends it to the &dvising ank by

telecommunication or registered mail in accordance with the "mporter#s instructions. &

re2uest may be included for the &dvising ank to add its confirmation. The &dvising ank is

typically located in the country where the $%porter carries on business and may be the

$%porter#s bank but it does not have be.

;. The &dvising ank will verify the Letter of Credit for authenticity and send a copy to the

$%porter. "ssuance of a Letter of Credit & 'uide to Letters of Credit uyer,"mporter "ssuing

ank eneficiary,$%porter &dvising,Confirming ank *urchase ? 3ales &greement 4e2uest

for a Letter of Credit 4e2uest to &dvise and possibly confirm the Letter of Credit &dvice of Letter of Credit


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the documents within the stated period and before the e%piry date to the /available with

ank. This may be the &dvising,Confirming ank. That bank checks the documents against

the Letter of Credit and forwards them to the "ssuing ank. The drawing is negotiated paid

or accepted as the case may be.

9. The "ssuing ank e%amines the documents to ensure they comply with the Letter of Credit

terms and conditions. The "ssuing ank obtains payment from the "mporter for payment

already made to the /available with or the Confirming ank.

10. (ocuments are delivered to the "mporter to allow them to take possession of the goods

from the transport company. The trade cycle is complete as the "mporter has received its

goods and the $%porter has obtained payment. >ote5 "n the diagram below the &dvising

ank is also acting as the Confirming ank. *ayment 7nder a Letter of Credit & key

principle underlying Letters of Credit is that banks deal only in documents and not in goods.

The decision to pay under a Letter of Credit is entirely on whether the documents presented

to the bank appear on their face to be in accordance with the terms and conditions of the

Letter of Credit. "t would be prohibitive for the banks to physically check all merchandise

shipped under Letters of Credit to ensure merchandise has been shipped e%actly as per each

Letter of Credit. &ccordingly the integrity of both the $%porter and "mporter are very

important in a Letter of Credit transaction. The appropriate due diligence should be e%ercised

by both parties. &pplicant,"mporter "ssuing ank eneficiary,$%porter &dvising,Confirming

ank 3hipment of 'oods *ayment *ayment (ocuments (ocuments *ayment (ocuments

Advantages to the Importer

"mporter is assured that the $%porter will be paid only if all terms and conditions of the

Letter of Credit have been met

. "mporter is able to negotiate more favourable trade terms with the $%porter when payment

by Letter of Credit is offered.

Disadvantages to the Importer

& Letter of Credit does not offer protection to the "mporter against the $%porter shipping

inferior 2uality goods and,or a lesser 2uantity of goods. Conse2uently it is important that the

"mporter performs the appropriate due diligence to assess the reputation of the $%porter. "f

the $%porter acts fraudulently the only recourse available to the "mporter is through legal


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proceedings. >ote5 &dded protection to the "mporter may be provided by re2uesting

additional documentation in the Letter of Credit e.g. a Certificate of "nspection. 4efer to

(ocuments 3ection

"t is necessary for the "mporter to have a line of credit with a bank before the bank is able

to issue a Letter of Credit. The amount outstanding under each Letter of Credit issued is

applied against this line of credit from the date of issuance until final payment. &dvantages to

the $%porter

The risk of payment relies upon the creditworthiness of the "ssuing ank and the political

risk of the "ssuing ank#s domicile and not the creditworthiness of the "mporter.

$%porter agrees in advance to all re2uirements for payment under the Letter of Credit. "f the Letter of Credit is not issued as agreed the $%porter is not obligated to ship against it.

$%porter can further reduce foreign political and bank credit risk by re2uesting

confirmation of the Letter of Credit by a Canadian bank. (isadvantages to the $%porter

(ocuments must be prepared and presented in strict compliance with the re2uirements

stipulated in the Letter of Credit.

3ome "mporters may not be able to open Letters of Credit due to the lack of credit facilities

with their bank which conse2uently inhibits e%port growth. & 'uide to Letters of Credit

"nstructions for Completing an "mport Letter of Credit &pplication Form T( ank clients

with an active line of credit have the option of forwarding duly completed Letters of Credit

applications to the respective 'lobal Trade Finance office either directly electronically or

manually through their branch. (ealing directly with the 'lobal Trade Finance office

electronically via T(#s "nternet based system td facilitrade is fast efficient and cost

effective. "nstructions for using T(#s electronic system td facilitrade can be obtained fromthe td facilitrade help desk. *lease contact the 'lobal Trade Finance office nearest you for

more details. & ranch. Complete address of branch of account for your line of credit.

&pplication (ate. $nter date of the application. C $%piry (ate. $nter the e%piry date of the

Letter of Credit +L,C-. >ote5 "n determining the e%piry date of an L,C you must allow

enough time for the $%porter + eneficiary- to effect the shipment and present the documents

re2uired in the L,C. The general rule is to take the Latest 3hipping (ate +D- and add the

number of days the $%porter is allowed to present the documents +E-. $%ample5 "f the Latest3hipping (ate is >ovember 1 and 10 days are allowed to present documents then the $%piry


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(ate of the L,C would be >ovember 11. 10 Letters of Credit "mporter#s *erspective 11 (

&pplicant. $nter your company name and address e%actly as it appears on your line of credit.

$ eneficiary. The name and address of the $%porter. F "ssue y. This is the method by

which we will send the Letter of Credit to the &dvising ank. "t may be sent at your option

by mail or tele transmission depending on the urgency of the situation. For a small cost tele

transmission enables your Letter of Credit to be received faster by the eneficiary. This is the

method most commonly used. ' Currency and &mount. $nter the currency and ma%imum

amount that can be drawn under the Letter of Credit. >ote5 Ariting the words /about

/appro%imately or /circa before the amount indicates that the amount may vary up to G,

10H. Iariance is not restricted only to the percentages indicated above6 you may choose any

other variances e.g. G, 1


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term payment is used. "n this case settlement is defined as a /(eferred *ayment . &t 3ight.

*ayment is made upon presentation of stipulated documents. This payment term is commonly

used.

(ays &fter 3ight or (ays after (ate of 5

The $%porter may agree to provide e%tended payment terms such as /payable 80 days after

sight or /)0 days after (ate of ill of Lading . This is referred to as a term payment. "n this

case payment will be made on the maturity date of the accepted draft. D 3hipment From.

>ame of the place,port from which the goods will be shipped. For Transportation To. >ame

of the place,port to which the goods will be shipped. "f specified goods cannot be shipped

earlier than this date. >ot Later Than. The latest mutually acceptable date for the shipment to

be made. Commonly known as the /Latest 3hipping (ate . L "nsurance. "ndicate whether

you the &pplicant or the 3hipper +$%porter- is responsible for insuring the goods. Deep in

mind that this must coincide with the Trade Term +>-. J 'oods. $nter a brief description of

the merchandise. The common practice is to use a *urchase !rder or *erforma "nvoice

number. $%ample5 Jen#s shoes as per *urchase !rder M=);( C&7T"!> *lease consider the following points and observations before completing and signing the form on the reverse5 The reputation and credit standing of

the beneficiary +seller- &n order should have been placed with the seller or a contract signed

prior to the opening of the Credit Trade terms must have been agreed upon with the seller

J!3T C!JJ!> T4&($ T$4J35 $O A!4D35 $%works +..named place- 3eller makes

the goods available at his premises +i.e works factory warehouse etc.- to the buyer FC&5

Free Carrier +Pnamed place- 3eller hands over the goods cleared for e%port into the charge

of the carrier named by the buyer at the named place or point F&35 Free &longside 3hip +Pnamed port of shipment- 3eller delivers the goods alongside the vessel on the 2uay or in


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lighters at the named port of shipment. F! 5 Free !n oard +Pport of shipment- 3eller

delivers the goods on board the vessel or at the airport at the named port,airport of shipment.

CF45 Cost and Freight +Pnamed port of destination- 3eller pays costs and freight and to

deliver the goods to the named port of destination. This term can only be used for sea and

inland waterway transport. C"F5 Cost "nsurance and Freight +Pnamed port of destination-

3eller pays costs insurance and freight to deliver the goods to the named port of destination.

C*T5 Carriage *aid to +Pnamed place of destination- 3eller pays freight and insurance for

carriage of the goods to the named destination. C"*5 Carriage and "nsurance *aid to +P

named place of destination- 3eller pays freight and insurance for the carriage of the goods to

the named destination. (&F5 (elivered at Frontier +Pnamed place- 3eller delivers the goods

at the named point and place at the frontier. ($35 (elivered $% 3hip +Pnamed port of

destination- 3eller makes the goods available to the buyer on board the ship uncleared for

import at the named port of destination. ($E5 (elivered $% Euay (uty *aid +Pnamed port

of destination- 3eller makes the goods available to the buyer on the 2uay +wharf- at the

named port of destination cleared for importation. ((75 (elivered (uty 7npaid +Pnamed

place of destination- 3eller makes the goods available to the buyer at the named place in the

country of importation. ((*5 (elivered (uty *aid +P named place of destination- 3eller

makes the goods available to the buyer at the named place in the country of importation. The

seller bears the risks and costs including duties ta%es and other charges of delivering the

goods. > Trade Terms. These are commonly referred to as ">C! terms. They determine the

obligations of the $%porter and "mporter with respect to freight costs insurance ta%es duties

etc. These terms are issued by the "nternational Chamber of Commerce. & list of the more

commonly used ">C! terms can be found on the reverse of the application form illustrated

on page 1C! terms for more information. $%ample5 "f the trade term is F.!. . +Free on

oard- Daoshiung Taiwan it will be marked /Freight Collect on the transport document

since the "mporter +&pplicant- is responsible for paying all freight charges and insurance

from Daoshiung Taiwan to the point of destination. ! (ocuments 4e2uired. The following is

a list of documents commonly re2uested in a Letter of Credit. The documents you choose will

be determined in the contract between you and the $%porter. Commercial "nvoice. The

commercial invoice is normally re2uired. "ndicate whether you re2uire original signed copies

of the invoice or simply copies of the original. ou must also stipulate the number of copies

that are re2uired. Transport (ocuments. The following are simple guidelines to assist you inmaking your selection. "t is advisable that you refer to the 7C*


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detailed information. "n general a transport document provides evidence the carrier has

received the goods it is responsible to ship. 3ome transport documents such as a

Jarine,!cean ill of Lading also carry title to the goods. & transport document is negotiable

if it transfers title to the goods. 18 & 'uide to Letters of Credit 1@ Full 3et !f5 & full set refers

to the number of original documents being issued. 'enerally ills of Lading are issued in

three originals. "f the method of transportation includes an ocean vessel indicate which of the

following two documents are re2uired5 1. Jultimodal Transport (ocument. For shipments

using more than one mode of transportation e.g. ocean vessel and truck. =. !n oard

Jarine,!cean ill of Lading. 7sed for ocean shipments from one ocean port to another. For

a city to be considered a port it must be accessible by ocean vessel year round. "ssued by5

ou may specify who is to issue the transport documents. Jarked Freight *repaid or Collect.

Check the appropriate bo% as to whether the freight charges will be prepaid by the $%porter

or if they are the responsibility of the "mporter and are therefore collect. This should be

consistent with the trade term used in 3ection >. >otify5 >ame the party to be notified once

the goods arrive at the destination point. &ir Transport (ocument. Transport document used

when the shipment is by air. This is a non negotiable document6 therefore it does not carry

title to the goods. ou must indicate to whom the goods are being consigned e.g. yourself

+&pplicant- or T(. Trucking,4ail ill of Lading. Transport document for shipment by truck

or rail. These bills of lading are not negotiable and are usually consigned to you the

&pplicant but may be consigned to another named party. & 'uide to Letters of Credit 1B

"nsurance (ocuments *olicy,Certificate. This document must be re2uested if the $%porter is

responsible for arranging insurance on the shipment. "t is recommended that the minimum

amount of insurance be 110H of the invoice value. ou must also state what risks the

insurance policy is covering. & standard insurance policy will cover all risks. The term /all

risks however does not mean that all risks are covered. Certain risks such as war strikes

and riots are not included and must be specifically re2uested. "t is important to understand

that there is a difference between an insurance policy and a certificate of issuance. 4efer to

the 7C*


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being shipped and may provide the "mporter with a preferential duty rate. "ndicate how many

copies are re2uired. ou should contact Canada Customs or your customs broker for

information regarding whether this document is re2uired. *acking List. & list of the packing

of goods being sent which can assist you in the inventory and distribution of the

merchandise. Canada Customs "nvoice. "mports into Canada re2uire that a Canada Customs

invoice be presented. This invoice can be prepared by you6 however it may be called for in

the Letter of Credit. "f this document is being re2uested you must indicate how many copies

you re2uire. "nspection Certificate. &n "nspection Certificate may be re2uested from a third

party or an agent of the "mporter located in the country of dispatch to ensure a certain 2uality

of goods. "n this case you must stipulate the & 'uide to Letters of Credit 19 issuer of such a

Certificate and if necessary the content or wording of the Certificate otherwise banks will

accept such a document as presented. "t is recommended that an "nspection Certificate be

re2uested wherever possible. Aeight List. & document stating the weight of the goods. *

3pecial Conditions Transport (ocuments issued by Freight Forwarders &cceptable. $%porters

often use the services of a freight forwarder to transport goods and prepare documents

relating to the shipment. "ndicate here whether documents prepared by a freight forwarder are

acceptable to you. *lease &dvice eneficiary by *hone or Fa%. "f it is urgent that the

eneficiary be notified immediately of the Letter of Credit please include instructions as to

who the &dvising ank must call or fa% upon its receipt. E (ocuments to be *resented

Aithin. 4efers to the number of days after shipment in which the $%porter is allowed to

present documents to the /available with ank. The shortest possible presentation time is

recommended to ensure that the importer receives documents prior to the arrival of goods at

destination. 4 anking Charges. "ndicate who will pay the $%porter#s banking charges along

with the charges of any other bank outside of Canada that is involved in the transaction such

as the 4eimbursing ank. "t is not uncommon for all banking charges outside Canada to be

for the eneficiary#s account. >ote that the "ssuing ank charges are always the

responsibility of you the &pplicant. 3 (ate. our branch must insert the date that you signed

the Continuing (ocumentary Credit &greement. Two authori ed bank officers must sign and

indicate their signature numbers. & 'uide to Letters of Credit =0 T our company name must

be typed,printed in full and the appropriate company signing officers must sign the form.

!nce the branch has received the application form and upon approval it will be forwarded to

T(#s nearest 'lobal Trade Finance office. *lease note that Letter of Credit applications can

also be handled electronically through the "nternet using tdfacilitrade. ou can feel secureknowing that the submitted application form will be closely reviewed and any clarifications


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will be discussed with you. &mendments to a Letter of Credit &fter issuance of a Letter of

Credit changes can be done through amendments subQect to acceptance by the $%porter.

&mendments to the Letter of Credit will be re2uired when either the "mporter or the $%porter

is unable to comply with the terms of the sale agreement or the agreement has been changed.

For e%ample an $%porter will ask for an amendment to e%tend the e%piry date and the latest

shipping date if they are unable to manufacture the merchandise according to the agreed upon

time. &n "mporter may re2uest an amendment to increase the value of the Letter of Credit if

they subse2uently decide to purchase a higher 2uantity of merchandise. The "mporter must

complete an amendment application listing all re2uired changes and forward the re2uest to

the respective 'lobal Trade Finance office via the same route the original application was

sent. T( clients with access to tdfacilitrade can forward amendments via the "nternet.

&mendment re2uests will be processed subQect to credit approval by the "ssuing ank where

necessary. &ny amendments to the Letter of Credit must be accepted by the $%porter and

where more than one change is included in an amendment they must be accepted as a whole

as opposed to accepting or reQecting individual items within the amendment. & 'uide to

Letters of Credit =1 E Ahen the Letter of Credit e%piry date is set should enough time be

allowed for the goods to reach me or for payment to be made when e%tended payment terms

have been negotiated +e.g. 80 days after sight-R & >o. The e%piry date should simply allow

the $%porter sufficient time after the latest shipping date to present documents to the

/available with ank. "n a Letter of Credit the "mporter is not allowed the opportunity to

inspect the goods prior to paying for them. Deep in mind that banks deal only in documents

and not in goods. E "s there any way that " can protect myself by using a Letter of Credit to

ensure " do not get inferior 2uality goodsR & es. This can be done by re2uesting appropriate

third party documents to be submitted under the Letter of Credit that would evidence

shipment of the proper goods e.g. "nspection Certificate Kealth Certificate &gent#s

Certificate etc. E Kow 2uickly will the $%porter receive my Letter of CreditR & !nce the

Letter of Credit application form is received by T(#s 'lobal Trade Finance office the Letter

of Credit will be issued within =; hours. "f it is sent by teletransmission,3A"FT the &dvising

ank will receive the advice the same business day or the ne%t business day the latest. ou

may include instructions in the application form for the &dvising ank to notify the

eneficiary by phone or fa% and that you also include the relevant numbers to be used

enabling the $%porter to receive a copy of the Letter of Credit without delay. E Ahat is the

cost to issue a Letter of CreditR & The fees vary based on the dollar amount of your Letter of Credit and the length of time it is outstanding. ou should contact your T( branch for a Fee


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3chedule. Euestions Commonly &sked by "mporters == E 7nder a Letter of Credit what

recourse is available to me if the 2uantity or 2uality of goods is different from what was

agreed uponR & 3ince banks deal only in documents and not in goods all disputes of

whatever nature may either be referred to "nternational Chamber of Commerce &rbitration or

handled through courts of law. E Ahat happens if my ocean shipment arrives before my

transport documentsR & ou have two options. !ne is to wait for the shipping documents to

arrive which may result in payment of demurrage charges. The other option often used by

importers is to obtain a shipping guarantee. & shipping guarantee is a bond of indemnity your

bank will issue to the shipping line allowing you to obtain the imported goods without

producing the original transport documents. !bviously the bank will note the liability of the

shipping guarantee against your line of credit. Ahen original transport documents do arrive

you must hand them over to the shipping company who will return the bond of indemnity to

you which you must deliver back to the bank to free your line of credit. & 'uide to Letters of

Credit =) 3tep by 3tep *rocess for the $%porter The following is a detailed e%planation of the

process you as an $%porter follow when named as a eneficiary under a Letter of Credit. "n

this e%planation T( is acting as the &dvising ank and Confirming ank. 1. There are

several different ways to notify you that a Letter of Credit has been issued in your favour.

T(#s $%port Letter of Credit (epartment will call you directly and obtain instructions as to

how you would like to receive the Letter of Credit. The choices include5 Fa%ing a copy of

the Letter of Credit. 3ending the original Letter of Credit by courier or mail. $lectronically

downloading the content of the Letter of Credit via tdfacilitrade allowing you to print your

own copy of the Letter of Credit. tdfacilitrade even allows you to electronically forward the

contents of the Letter of Credit to your Freight Forwarder. For more information please

contact the 'lobal Trade Finance office nearest you. *lease note that an $%porter does not

have to be a T( customer to be advised of a Letter of Credit through T(. =. 7pon receipt of

the Letter of Credit you should read it carefully paying close attention to all terms and

conditions to ensure they can be met. &ccompanying the Letter of Credit is a covering letter

which includes the address of T(#s 'lobal Trade Finance office and the appropriate phone

numbers to call with any 2uestions regarding the Letter of Credit. 3ee page =8 for an

illustration of a Letter of Credit in 3A"FT format. ). "f any of the terms and conditions in the

Letter of Credit differ from the sales contract between you and the "mporter you should

re2uest an amendment to the Letter of Credit. "t is recommended that shipments not be made

against the Letter of Credit until all amendments have been received. *lease refer to page =0for further information regarding amendments. ;. !nce you are satisfied with the terms and


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conditions of the Letter of Credit and the shipment is made all documents re2uested in the

Letter of Credit must be prepared or obtained. ou would then forward these documents

along with the draft +if re2uired- and a copy of the original Letter of Credit to T(#s 'lobal

Trade Finance office listed in the covering letter. Letters of Credit $%porter#s *erspective =;


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and we hereby engage with the drawers endorses and holders in due course of drafts drawn

under this Credit that such drafts will be duly honoured on presentation at our counter

provided that all terms and conditions of the Credit have been complied with. & 'uide to

Letters of Credit =8 Copy of an $%port Letter of Credit in 3A"FT Format 1 3A"FT +3ociety

for Aorldwide "nterbank Financial Telecommunications-5 an international electronic

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>! L&T$4 TK&> 10 (& 3 &FT$4 (&T$ !F 3K"**">' (!C7J$>T3 F!4

>$'!T"&T"!> 7T A"TK"> TK$ C4$("T I&L"("T ;95 C!>F"4J&T"!>

">3T47CT"!>3 5 A"TK 5 TK"3 "3 TK$ !*$4&T"I$ ">3T47J$>T

$>( !F J$33&'$ =@ Ahat an $%porter 3hould Look for Ahen 4eviewing a Letter of

Credit +4efer to the sample of an $%port Letter of Credit on opposite page- 1. Ahich bank

issued the Letter of Credit +L,C-R +L,C header under /4eceived From5 - "s this bank areputable one that can be relied on for paymentR +Contact T(#s local 'lobal Trade Finance


15/23

office if unsure.- "f not does the Letter of Credit allow for confirmation by another bankR

+field ;9- =. "s the Letter of Credit irrevocableR +Field ;0&- "f it is not stated the L,C is

irrevocable. ). &re the "mporter#s +&pplicant#s- name and address spelled correctlyR +Field


16/23

$%porter depends on the documents being in full compliance with the Letter of Credit the

preparation of these documents is an e%tremely important part of the Letter of Credit process.

(raft & (raft also known as a ill of $%change is a legally enforceable instrument which is

regarded as formal evidence of debt under a Letter of Credit. "t is defined as an unconditional

order in writing addressed by one person to another signed by the person giving it and

re2uiring the addressee to pay at a fi%ed or determinable time a certain sum of money to or to

the order of a specified party. & draft must be presented with all other documents re2uested in

the Letter of Credit unless stipulated otherwise. (rafts may be obtained from any of T(#s

'lobal Trade Finance offices. )0 & 'uide to Letters of Credit 3ample $%ample of a (raft

Kow to Complete a (raft +4efer to the Letter of Credit in 3A"FT format page =8- 1."f a

specific date of payment is in the Letter of Credit it must be entered here. =. *ayment term

e.g. /at sight / )0 days after sight /80 days after ill of Lading (ate . +Field ;=C- ).(ate

you present documents to the /available with ank. ;.(ollar amount of the (raft in words

along with the currency. ame and address of the bank on which the (rafts are to be drawn.

+Field ;=(- "f it states /yourselves it is drawn on whichever T( 'lobal Trade Finance

office assuming the Letter of Credit was advised by T(. 10. 3ignature of an authori ed

signing officer of the Company. The eneficiary#s name must be spelled out below the line.

)1 & 'uide to Letters of Credit (7$ UUUUUUUUUUUUU UUUUUUUUUUUUUUUUUU&FT$4 (&T$

F!4 I&L7$ 4$C$"I$( UUUUUUUUUUUUUUUUUU=0UUUU *& T! TK$ !4($4

!FUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUU TK$

!FUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUN UUUUUUUUUUUUUUUUU

&'&">3T L$TT$4 !F C4$("T >!. UUUUUUUUUUUUU(&T$( UUUUUUUUUUU=0UUU

"337$( UUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUU

T!UUUUUUUUUUUUUUUUUUUUUUUUUUU UUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUU

February 19 0= 73( Fifty Thousand 73(


17/23

the Letter of CreditR


18/23

acceptance. Jeanwhile the documents will not be released to the "mporter until the "ssuing

ank receives the "mporter#s approval of the discrepancies. 7pon receipt of the "mporter#s

approval payment will be made under the Letter of Credit. >ote5 "t is advantageous for the

$%porter to advise the "mporter directly of the discrepancies to ensure a 2uick response when

the "mporter is contacted by the "ssuing ank. ); & 'uide to Letters of Credit =. Cable for

&pproval. &t the re2uest of the $%porter T( sends a 3A"FT message to the "ssuing ank

re2uesting authority to negotiate the documents and noting the discrepancies found. The

"ssuing ank in turn will notify the "mporter of these discrepancies. The "mporter will then

indicate to the "ssuing ank whether the documents are acceptable with the discrepancies

noted. "f authori ation to waive the discrepancies is received +by T( from the "ssuing ank-

T( will send the documents to the "ssuing ank and payment will be made according to the

Letter of Credit terms. ). "ndemnity. The $%porter may provide T( with an acceptable

"ndemnity &greement for the discrepancies. 3uch indemnity enables T( to effect payment

immediately even though there are discrepancies in the documents. "f documents are not

accepted by the "mporter T( has the right to claim the funds back from the $%porter under

the "ndemnity &greement. &cceptances & Letter of Credit is said to be a /Term Letter of

Credit or / 7sance Letter of Credit when e%tended payment terms are agreed to such as 80

days after sight or 80 days after ill of Lading date. !nce documents and a usance draft are

presented under a /Term Letter of Credit and are found to be in good order instead of

paying the $%porter right away the (rawee ank /accepts the draft which is essentially a

promise to pay the $%porter on the maturity date stated in the draft. The &ccepting ank

holds the accepted draft until maturity or the draft can be returned to the eneficiary

depending on the eneficiary#s preference. !nce a draft has been accepted it becomes a

negotiable instrument called a anker#s &cceptance or simply referred to as an &cceptance.

&cceptances may be discounted as discussed on the ne%t page. )< & 'uide to Letters of

Credit (iscounting &cceptances "nstead of holding an &cceptance until the maturity date the

$%porter may have the accepted draft /discounted at prevailing discount rates. This allows

the $%porter to receive payment net of discount charges as soon as the draft has been

accepted instead of waiting until the maturity date. "n addition to the $%porter receiving

funds prior to the maturity date another advantage to discounting is that the discount rate is

based on the risk of the &ccepting ank and therefore is usually lower than the $%porter#s

borrowing rate. Contact one of T(#s 'lobal Trade Finance offices for further information.

&ssignment of *roceeds The eneficiary may assign part or all of the proceeds of the Letter of Credit to a third party +assignee- such as a supplier. & key point for the assignee to keep in


19/23

mind is that payment is forthcoming only if the $%porter receives payment under the Letter of

Credit over which the assignee has no control. &n assignment of proceeds is irrevocable and

therefore all parties must consent to any changes. &ssigning proceeds may be an acceptable

alternative to a supplier who otherwise might re2uest a Letter of Credit or demand funds in

advance of shipment. )8 & 'uide to Letters of Credit *rocedure to &ssign *roceeds 1. &n

&ssignment of *roceeds form must be completed by the $%porter once the Letter of Credit is

received. This form can be obtained directly from one of T(#s 'lobal Trade Finance offices.

=. !nce the form has been completed it is sent back to the 'lobal Trade Finance office for

acknowledgment. ). &n advice of the assignment is sent to the designated assignee.

&ssignment of *roceeds Euestions Commonly &sked by $%porters E " have received a Letter

of Credit but it does not meet the sale terms agreed upon. Ahat should " doR & "f the Letter

of Credit is not acceptable to you you should re2uest an amendment to the Letter of Credit

from the "mporter. 4efer to page =0 for details on amendments. "f the "mporter does not agree

to the re2uest for amendment you may refuse to ship against the Letter of Credit and simply

let it e%pire unused. )@ & 'uide to Letters of Credit &pplicant,"mporter "ssuing ank

eneficiary,$%porter &dvising ank and /&vailable with ank 1 ) *urchase ? 3ale

&greement 4e2uest to &dvise Letter of Credit = 4e2uest for a Letter of Credit < 4e2uest to

&dvise &ssignment of *roceeds ; &dvice of Letter of Credit 3upplier 8 &dvice of

&ssignment of *roceeds E Ahat is the fee for having a Letter of Credit confirmedR & The

confirmation fee is calculated as a percentage of the face value of the Letter of Credit and is

based on both the risks of the "ssuing ank and the country in which it is domiciled. The fee

is usually 2uoted on a per 90 day period and currently ranges upwards from appro%imately

0.10H. The rate is subQect to change at anytime based on prevailing market conditions. E "

Qust received a payment advice under a Letter of Credit detailing a list of charges. Ahat are

/4eimbursing ank chargesR & & 4eimbursing ank is one authori ed by the "ssuing ank

to facilitate the transfer of funds between T( and the "ssuing ank. "t may be necessary to

have a 4eimbursing ank involved because reimbursement is in a foreign currency or

because the "ssuing ank and T( do not share settlement accounts. The 4eimbursing ank

will charge a fee to facilitate the payment. This fee is the responsibility of the $%porter if the

Letter of Credit states that all charges outside of the "mporter#s country will be paid by the

$%porter. E " received a Letter of Credit advised by a Canadian bank other than T(. Can "

still negotiate my documents with T(R & "f the Letter of Credit states that it is /negotiable

with any bank then you may negotiate your documents with T(. This information is foundin the Letter of Credit 3A"FT format in field ;1( /&vailable with . . . /. E Kow do " get a


20/23

copy of the 7niform Customs and *ractice for (ocumentary Credits +7C*-


21/23

from the date of issue be issued in its favour for C&( N)0 000. ;0 & 'uide to Letters of

Credit ;1 & 'uide to Letters of Credit T!5 +P&(I"3">' &>DP- F4!J5 TK$

T!4!>T! (!J">"!> &>D &T TK$ 4$E7$3T !F !74 C73T!J$4 A$ TK$

T!4!>T! (!J">"!> &>D 'L! &L T4&($ F">&>C$ T4$&L E7$ $C C&>&(& K= 131 K$4$ "337$

"> !74 F&I!74 !74 "44$I!C& L$ 3T&>( L$TT$4 !F C4$("T "> TK$

T!T&L &J!7>T !F UUUUUUUUUUUUUUU A$ &7TK!4"S$ !7 T! (4&A !> TK"3

4&>CK 7>($4 TK"3 3T&>( L$TT$4 !F C4$("T "> TK$ F!4J !F &

($J&>( F!4 *& J$>T AK"CK ($J&>( A$ 3K&LL K!>!74 A"TK!7T

$>E7"4">' AK$TK$4 !7 K&I$ & 4"'KT &3 $TA$$> !7 &>( TK$

C73T!J$4 T! J&D$ 37CK ($J&>( &>( A"TK!7T &CD>!AL$('">' &>

CL&"J !F TK$ C73T!J$4. *4!I"($( K!A$I$4 TK&T !7 &4$ T! ($L"I$4

T! 73 &T TK$ & !I$ &((4$33 TK$ F!LL!A">' (!C7J$>T&T"!>5 !74

3"'KT (4&FT (4&A> !> 73 TK$ !4"'">&L !F TK"3 3T&>( L$TT$4 !F

C4$("T &>( &> &J$>(J$>T3 "F &> C!* !F 7>*&"( ">I!"C$3 &

C$4T"F"C&T$ *74*!4T$(L 3"'>$( &> &7TK!4"S$( !FF"C$4 !F !74

C!J*&> 3T&T">' TK&T UUUUUUUUUUUUUUUUUUUU "3 "> ($F&7LT &>( TK&T TK$

J!>"$3 (4&A> !7 &4$ (7$ &>( *& & L$ T! !7 $>$F"C"&4

*&4T"&L (4&A">'3 &4$ *$4J"TT$( "T "3 $O*4$33L 7>($43T!!( TK&T

>$"TK$4 TK"3 3T&>( L$TT$4 !F C4$("T >!4 "T3 *4!C$$(3 &4$

T4&>3F$4& L$ !4 &33"'>& L$ T! &> TK"4( *&4T TK"3 3T&>( L$TT$4

!F C4$("T "3 "337$( 37 :$CT T! 7>"F!4J C73T!J3 &>( *4&CT"C$ F!4

(!C7J$>T&4 C4$("T 199) 4$I"3"!> "CC *7 L"C&T"!> >!. T&T"!> J73T $ *4$3$>T$( &T TK"3 4&>CK !> !4 $F!4$ )500

*.J. !74 T"J$ !> UUUUUUUUUUUUUUUUUUUUU &T AK"CK T"J$ TK"3 3T&>(

L$TT$4 !F C4$("T 3K&LL $O*"4$. ack to ack Letter of Credit Ahen one Letter of

Credit is used to secure the issuance of another Letter of Credit the parties are said to be

dealing with a / ack to ack Letter of Credit transaction. 3uch a transaction is often

re2uested by an intermediary party such as a broker to provide settlement to a supplier from

which the goods are purchased. "n a ack to ack Letter of Credit scenario the intermediary

party would receive and be the eneficiary of a Letter of Credit from its customer that has

agreed to purchase goods. This Letter of Credit is referred to as the *rimary Credit.

3ubse2uently the intermediary party must issue a Letter of Credit referred to as the3econdary Credit to its supplier for a lesser amount than the one received. &t this point the


22/23

intermediary party would approach a bank offering the *rimary Credit as collateral for

issuance of the 3econdary Credit. The acceptance of the *rimary Credit as security for the

3econdary Credit is e%tremely risky to the intermediary party#s bank. Circumstances may

arise that prevent the intermediary party from meeting the terms and conditions in the

*rimary Credit e.g. insolvency. Therefore the intermediary party#s bank would be unable to

draw under the *rimary Credit it has taken as collateral. The supplier that received the

3econdary Credit however would not be precluded from drawing under its Letter of Credit

and the intermediary party#s bank is obligated to honour the drawing even though it could

not collect funds under the *rimary Credit. (ue to the inherent riskiness of a ack to ack

Letter of Credit transaction banks will likely not participate in such a transaction. &s an

alternative the intermediary party#s bank may recommend using a Transferable Letter of

Credit +described on ne%t page-. ;= !ther Types of Letters of Credit Transferable Letter of

Credit & Transferable Letter of Credit is used in cases where there are three parties to a

transaction as described in the ack to ack Letter of Credit transaction6 an "mporter

+ uyer- $%porter +3eller- and an intermediary party such as a broker who is responsible for

arranging the sale. "n such a transaction the intermediary party re2uests a Letter of Credit

from the "mporter as protection against non payment. The $%porter in turn wants assurance

from the intermediary party that payment will be made and will also re2uest a Letter of

Credit. "t may be the case however that the intermediary party has little working capital or

does not have access to a line of credit with its bank to issue a separate Letter of Credit to the

$%porter. &s an alternative the intermediary party may provide such assurance to the

$%porter by transferring over a portion of the Letter of Credit it received from the "mporter.

This is termed a Transferable Letter of Credit. To transfer a Letter of Credit the intermediary

party must re2uest a Transferable Letter of Credit from the "mporter. "f the Letter of Credit is

not designated to be transferable it cannot be transferred. The Letter of Credit can however

be amended to allow it to be transferable. "n addition the Letter of Credit must nominate a

bank generally the &dvising ank who is authori ed to effect a transfer. The intermediary

party would be the eneficiary of the Letter of Credit and in a Transferable Letter of Credit

transaction is referred to as the First eneficiary. The First eneficiary would then ask the

Transferring ank to transfer in part or in full its rights under the Letter of Credit to the

manufacturer of the goods which is referred to as the 3econd eneficiary. & Transferable

Letter of Credit may be transferred only once6 therefore a 3econd eneficiary is unable to

transfer a portion of a Transferable Letter of Credit to a third beneficiary. "t may however betransferred to more than one 3econd eneficiary. ;) & 'uide to Letters of Credit $%ample


23/23

The following is a simplified e%ample of a Transferable Letter of Credit transaction5

"mporter5 & C uyer "ntermediary *arty5 Canadian Japle Trading Company Janufacturer5

O S 3upplier Canada "ssuing ank5 AorldAide ank Transferring ank5 T( ank &s per

& C uyer#s instructions AorldAide ank issued a Transferable Letter of Credit in favour

of Canadian Japle Trading Company which is acting as the intermediary party in the trade

transaction. This Transferable Letter of Credit is in the amount of 73( N100 000 and T(

ank is authori ed and willing to do the transfer. The description of goods is < 000 pairs of

moccasins at 73( N=0 per pair. !nce Canadian Japle Trading Company as the First

eneficiary receives the Letter of Credit it re2uests T( ank to transfer 73( N@< 000 to

O S 3upplier Canada stating the same 2uantity of goods < 000 pairs of moccasins but at

73( N1< per pair. T( ank advises the transfer has been made to O S 3upplier Canada

which now becomes the 3econdary eneficiary of the Letter of Credit. !nce O S 3upplier

Canada has shipped the goods it presents documents in accordance with the Transferable

Letter of Credit along with its draft for 73( N@< 000 to T( ank. T( ank then notifies

Canadian Japle Trading Company of the presentation. Canadian Japle will present its own

invoice and draft showing a value of 73( N100 000. T( ank then substitutes these

documents with the draft and invoice presented by O S 3upplier Canada and forwards the

documents to AorldAide ank. T( ank receives 73( N100 000 and pays 73( N@< 000 to

O S 3upplier Canada and 73( N=< 000 to Canadian Japle Trading Company. ;; & 'uide

to Letters of Credit >ote5 Transferable Letters of Credit are rarely as simple as they seem and

many difficulties may arise. They should be undertaken only by e%perienced traders.

Transferable Letter of Credit ;< & 'uide to Letters of Credit &pplicant,"mporter +& C

uyer- "ssuing ank +Aorld Aide ank- "ntermediate *arty +Canadian Japle Trading Co.-

/First eneficiary Transferring ank +T( ank- 1 ) 3ales Contract +73( N100 000- Letter

of Credit = &pplication for Letter of Credit +73( N100 000- < 4e2uest to Transfer +73(

N@< 000- ; &dvice of Letter of Credit Janufacturer +O S 3upplier Canada- /3econd

eneficiary 8 Transfer of Letter of Credit +73( N@< 000- T( ank Financial 'roup is

providing this guide as a general discussion of Letters of Credit. &lthough every effort has

been made to ensure the information presented is correct we do not guarantee its accuracy.

Furthermore the information in this guide should not be intended as nor relied upon as legal

financial or investment advice. Ae hope this guide gives you a general understanding of

Letters of Credit as it was intended. ;8 & 'uide to (ocumentary Letters of Credit

letter of credit word doc

Documents