Letter of credit is an important payment method for international transactions. If you want to understand the basic content or cases full of opinions, this blog will bring you different surprises.

 

This blog contains the following：

 

1What is a letter of credit?

2What types of letters of credit are there?

3What is the content of the letter of credit?

4Who are the parties involved in the letter of credit?

5 What are the documents required for a letter of credit?

6 What are the three principles of a letter of credit?

7 What is the fee for obtaining a letter of credit?

8 What is the difference between an export letter of credit and a loan?

9 When will the seller or beneficiary receive the payment from the bank?

10 What are the characteristics of a letter of credit?

11 How does the letter of credit work?

12 What is the payment process for a letter of credit?

13 Is an export letter of credit the same as export credit insurance?

14 How long does it take to open a letter of credit?

15 Is the sales agreement part of the export letter of credit?

16 Can the letter of credit be transferred?

17 Can the letter of credit be amended?

18 How does an import letter of credit compare to an export letter of credit?

19 Documentary Credit VS Clean Credit

20 What kind of letter of credit is mainly used in international trade payment settlements?

21 Irrevocable L/C VS Revocable L/C

22 Confirmed L/C VS Unconfirmed L/C

23 According to the payment time, how to classify the letter of credit?

24 Transferable L/C VS Non-transferable Letter of Credit

25 What is a red clause letter of credit?

26 What is Revolving L/C?

27 What is Reciprocal L/C?

28 What is Back to Back L/C?

29 What is Anticipatory credit/Packing credit?

30 What is Standby credit?

31 What is the issuer of a letter of credit?

32 What are the rights and obligations of the issuer?

33 Who is the beneficiary of the letter of credit?

34 What are the obligations and rights of the beneficiary?

35 What is the issuing bank of the letter of credit?

36 What are the obligations and rights of the issuing bank of the letter of credit?

37 What is the sub-branch of the letter of credit?

38 What is the negotiating bank for the letter of credit?

39 What are the obligations and rights of the negotiating bank for the letter of credit?

40 What is the paying bank for the letter of credit?

41 What is a confirming bank for a letter of credit?

42 What is the accepting bank of the letter of credit?

43 What is the reimbursing bank of the letter of credit?

44 What is a standby letter of credit?

45 What are the characteristics of a standby letter of credit?

46 General Letter of Credit VS Standby Letter of Credit

47 What are the differences between a green term letter of credit and a red term letter of credit?

48 How to review the letter of credit?

49 What are the advantages of a letter of credit for buyers?

50 What are the advantages of a letter of credit for financing?

51 What are the disadvantages of L/C for sellers?

52 What are the advantages of L/C for sellers？

53 What is the validity period of the letter of credit?

54 What is the relationship between the validity period of the letter of credit and the latest shipment period?

55 What are the common frauds in letters of credit, and what are the risks of letters of credit?

56 What are the preventive measures against letters of credit fraud?

57 Which method of collecting money is the safest?

58 In global trade, which countries are safer to collect money?

59 Letter of credit Sample Format.

 

1 What is a letter of credit?

 

 

Letter of Credit, L/C, refers to the bank (issuing bank) in accordance with (applicant’s) requirements and instructions or on its own initiative, in accordance with the terms and conditions of the letter of credit, to the third party (beneficiary) with prescribed documents or its designated party to make a written document for payment. That is, a letter of credit is a written document issued by a bank with a conditional promise of payment.

 

In international trade activities, buyers and sellers may not trust each other. The buyer is worried that the seller will not deliver the goods as required by the contract after the advance payment; the seller is also worried that the buyer will not pay after the goods are delivered or the shipping documents are submitted. Therefore, two banks are required to act as guarantors for both buyers and sellers, collect payments and exchange bills of lading on their behalf, and replace commercial credit with bank credit. The tool used by the bank in this activity is the letter of credit.

 

It can be seen that a letter of credit is a certificate that banks conditionally guarantee payment and has become a common settlement method in international trade activities. In accordance with the general provisions of this settlement method, the buyer first deposits the payment in the bank, and the bank opens a letter of credit and informs the seller in the remote place to open the bank to inform the seller. The seller delivers the goods in accordance with the terms of the contract and the letter of credit, and the bank pays on behalf of the buyer.

 

2 What types of letters of credit are there?

 

 

3 What is the content of the letter of credit?

 

 

4 Who are the parties involved in the letter of credit?

 

The main participants of the letter of credit:

Applicant:

The applicant (buyer) is the person who requires his bank to issue a letter of credit.

 

Beneficiary:

The beneficiary is basically the seller who receives payment in the process.

 

Issuing bank:

The issuing bank is responsible for issuing letters of credit at the request of the buyer.

 

Advising bank:

The advising bank is responsible for transferring documents to the issuing bank on behalf of the exporter and is generally located in the country where the exporter is located.

 

Other parties involved in the arrangement of the letter of credit:

Confirming Bank:

Confirming acts as an additional guarantee as promised by the issuing bank. This situation occurs when the exporter is not satisfied with the guarantee of the issuing bank.

 

Negotiating bank:

The negotiating bank negotiates the documents related to the letter of credit submitted by the exporter. It pays the exporter based on the integrity of the documents and repays it based on the letter of credit.

 

Reimbursement Bank:

The reimbursement bank is the place where the issuing bank opens a payment account. The reimbursing bank accepts the negotiation/acceptance/payment claim received by the negotiating bank.

 

Second beneficiary:

A second beneficiary is a person who can represent the original beneficiary in the absence of the original beneficiary. In this case, the exporter’s credit is transferred to the second beneficiary, subject to the transfer clause.

5 What are the documents required for a letter of credit?

 

The seller needs to provide the following different documents for the export letter of credit:

 

Bill of Lading

Packing List

commercial invoice

Insurance certificate

Certificate of Origin

Health certificate

Inspection certificate

Draft

 

6 What are the three principles of a letter of credit?

 

1. The principle of independence and abstraction of letter of credit transactions;
2. The principle of strict compliance with the letter of credit;
3. The principle of exception to the letter of credit fraud.

 

7 What is the fee for obtaining a letter of credit?

 

L/C involves various expenses and reimbursements. In most cases, payments under the letter of credit are managed by the parties.

 

The fees charged by the letter of a credit bank may include:

• Account opening fees, including commitment fees charged in advance, and forward fees charged for the agreed term of the letter of credit.
• The notification fee charged by the advising bank, the reimbursement of foreign legal obligations that the applicant should pay to the bank, the confirming bank’s fees, and the bank fees payable to the issuing bank.
• Most banks usually charge a fee of about 0.2% to 2% based on different considerations.

 

8 What is the difference between an export letter of credit and a loan?

 

An export letter of credit is a letter issued by a bank or financial institution guaranteeing payment on behalf of the buyer to the seller for the goods purchased.

 

Submit to the seller after confirming that the goods have been shipped.

 

A loan is a sum of money borrowed from a third party to pay for the purchased goods or products.

 

Loan transactions are usually carried out directly between importers and exporters.

 

Loans usually generate interest, which is different from export letters of credit facilities, which are usually fixed-term.

 

9 When will the seller or beneficiary receive the payment from the bank?

 

In the letter of credit facility, the seller or beneficiary will only receive payment from the bank if the seller complies with the terms specified in the letter of credit document. When the delivery is on time, he/she will obtain relevant documents to prove that the delivery has been completed. These documents will be sent to the bank to meet bank requirements. Then the bank will need to pay the letter of credit without error.

 

 

10 What are the characteristics of a letter of credit?

 

One is that the letter of credit is a self-sufficient instrument. The letter of credit is not attached to the sale and purchase contract. When reviewing the documents, the bank emphasizes the verification in written form that the letter of credit is separated from the basic trade;

 

The second is that the letter of credit is a pure documentary transaction. A letter of credit is a payment against a document, not based on the goods. As long as the documents match, the issuing bank should pay unconditionally;

 

The third is that the issuing bank bears primary liabilities for payment. A letter of credit is a kind of bank credit. It is a guarantee document of the bank. The issuing bank has the primary payment responsibility for payment.

 

To sum up the following characteristics of the letter of credit:

Liquidity

Revocability

Assignment and distribution

Sight & Time Drafts

 

11 How does the letter of credit work?

 

• The issuance applicant shall fill out the issuance application form and pay the deposit or provide other guarantees according to the contract, and the issuing bank shall issue the certificate.

 

• The issuing bank shall issue a letter of credit to the beneficiary based on the content of the application and mail it to the advising bank where the exporter is located.

 

• After the advising bank verifies that the seal is correct, it will hand the letter of credit to the beneficiary.

 

• After the beneficiary verifies that the contents of the letter of credit are in conformity with the provisions of the contract, the goods are shipped according to the provisions of the letter of credit, the documents are prepared and the draft is issued, and within the validity period of the letter of credit, the negotiating bank is sent to the negotiating bank for negotiation.

 

• The negotiating bank will advance the payment to the beneficiary after verifying the correctness of the documents in accordance with the terms of the letter of credit.

 

• The negotiating bank sends the bill of exchange and shipping documents to the issuing bank or its specific paying bank for compensation.

 

• After the issuing bank verifies that the documents are correct, the payment is made to the negotiating bank.

 

The issuing bank notifies the issuer to pay the redemption note.

 

12 What is the payment process for a letter of credit?

 

• Both parties to the importer and exporter shall clearly stipulate the payment by letter of credit in the sales contract.

 

• The importer submits an application for issuance to the bank where it is located, fills in the application for issuance, and pays a certain issuance deposit or provides other guarantees, and asks the bank (issuing bank) to issue a letter of credit to the exporter.

 

• The issuing bank shall issue a letter of credit with the exporter as the beneficiary according to the content of the application, and notify the exporter of the letter of credit through its correspondent bank (collectively referred to as the advising bank) in the place where the exporter is located.

 

• After the exporter ships the goods and obtains the shipping documents required by the letter of credit, he shall negotiate the payment with his local bank (which may be the advising bank or other banks) in accordance with the provisions of the letter of credit.

 

(5) After the negotiating bank has negotiated the payment, the negotiated amount shall be indicated on the back of the letter of credit.

 

13 Is an export letter of credit the same as export credit insurance?

 

Of course, it’s different.

 

Export credit insurance bears the risks associated with non-payment by foreign buyers for the seller.

 

It reduces the risk of non-payment when conducting international business.

 

If foreign buyers cannot pay, this facility provides exporters with a conditional guarantee of payment for goods.

 

It covers the risks of insolvency and bankruptcy of the buyer.

 

On the other hand, the export letter of credit provides the exporter with a conditional guarantee that the buyer will pay for the goods.

 

As long as the document requirements are met, it can guarantee the seller’s payment for the delivered goods.

 

 

14 How long does it take to open a letter of credit?

 

It depends on the bank that issued the letter of credit.

 

The specific deadline depends on various general and potential problems between the bank and the applicant.

 

The applicant’s letter of credit limit and the approval of the bank’s auditor and other authorized signatories determine the time required.

 

However, if all factors remain the same, the export letter of credit should be opened within a few minutes to two days as required.

 

15 Is the sales agreement part of the export letter of credit?

 

No, but you can open the sales agreement in the export letter of credit, but it is not part of it.

 

A sales agreement is a contract between buyers and sellers to purchase goods.

 

16 Can the letter of credit be transferred?

 

Yes, as long as you create a secondary beneficiary, allowing you to transfer some or all of your credit to.

In this case, you will become the main beneficiary because you are the first party to accept the bank’s transferable letter of credit.

 

17 Can the letter of credit be amended?

 

Of course, before the expiry of the letter of credit, you can revise the letter of credit at any time and multiple times and notify the issuing bank.

 

But it is not recommended to modify too many times.

 

18 How does an import letter of credit compare to an export letter of credit?

 

The importer’s bank issues an import letter of credit with the supplier as the beneficiary.

 

On the other hand, once the exporter’s bank receives the same letter of credit, it becomes an export letter of credit.

 

The import letter of credit is opened by the importer’s bank, and the exporter’s bank receives the export letter of credit.

 

The terms and conditions in the import letter of credit are legally binding.

 

In contrast, the terms of export letters of credit are more flexible, and import letters of credit tend to increase the credibility of importers.

 

On the other hand, export letters of credit seem to increase the cash flow of exporters.

 

In essence, import and export letters of credit are similar, they are only different in perspective.

 

19 Documentary Credit VS Clean Credit

 

① Documentary Credit is a letter of credit for payment with a documentary draft or only with documents. The document here refers to the document of the ownership of the goods (such as ocean bill of lading, etc.), or the document that proves that the goods have been delivered (such as rail waybill, air waybill, postal parcel receipt).

 

② Clean Credit is a letter of credit for payment with Clean Draft without shipping documents. The bank pays with a clean letter of credit, and can also require the beneficiary to attach some non-shipment documents, such as invoices, advance lists, etc.

 

20 What kind of letter of credit is mainly used in international trade payment settlements?

 

The answer is: documentary credit

 

21 Irrevocable L/C VS Revocable L/C

 

① Irrevocable L/C. It means that once a letter of credit is issued, within its validity period, without the consent of the beneficiary and related parties, the issuing bank cannot unilaterally modify or revoke it. As long as the documents provided by the beneficiary meet the requirements of the letter of credit, the issuing bank must perform its payment obligations.

 

② Revocable L/C. The issuing bank does not need to obtain the consent of the beneficiary or the parties concerned to have the right to revoke the letter of credit at any time and should indicate the word “cancellable” on the letter of credit. But “UCP500” stipulates: As long as the beneficiary has obtained the guarantee of negotiation, acceptance, or deferred payment in accordance with the terms of the letter of credit, the letter of credit cannot be revoked or modified. It also stipulates that if the letter of credit does not indicate whether it is revocable, it should be regarded as an irrevocable letter of credit.

 

The latest “UCP600” stipulates that bank cannot issue revocable letters of credit! (Note: Irrevocable letters of credit are commonly used)

 

22 Confirmed L/C VS Unconfirmed L/C

① Confirmed L/C. Refers to a letter of credit issued by an issuing bank, and another bank guarantees payment obligations for documents that meet the terms of the letter of credit. The bank that confirms the letter of credit is called the confirming bank.

 

② Unconfirmed L/C. The letter of credit issued by the issuing bank has not been confirmed by another bank.

 

23 According to the payment time, how to classify the letter of credit?

 

①Sight L/C. Refers to a letter of credit that immediately fulfills the payment obligation after the issuing bank or the paying bank receives a documentary draft or shipping document that meets the terms of the letter of credit.

 

②Usance L/C. Refers to a letter of credit that performs payment obligations within a specified time limit when the issuing bank or the paying bank receives the documents of the letter of credit.

 

③Usance Credit Payable at Sight. The letter of credit stipulates that the beneficiary issues a forward draft, the paying bank is responsible for discounting, and stipulates that all interest and expenses shall be borne by the issuer. For the beneficiary, this kind of letter of credit is actually still a sight collection, and there is a clause of usance L/C payable at sight in the letter of credit.

 

24 Transferable L/C VS Non-transferable Letter of Credit

Transferable L/C. Refers to the bank (collectively referred to as the “transfer bank”) that the beneficiary of the letter of credit (first beneficiary) can request to authorize payment, assume the responsibility for deferred payment, accept or negotiate, or when the letter of credit is freely negotiated, can request the letter of credit The transferring bank specifically authorized in the transfer of the letter of credit in whole or in part to one or more beneficiaries (second beneficiaries) to use the letter of credit. The issuing bank must clearly indicate “transferable” in the letter of credit, and it can only be transferred once.

 

Non-transferable letter of credit. Refers to a letter of credit in which the beneficiary cannot transfer the rights of the letter of credit to others. Where “transferable” is not indicated in the letter of credit, it is a non-transferable letter of credit.

 

25 What is a red clause letter of credit?

 

This type of letter of credit allows the issuing bank to prepay part of the payment to the seller in advance after receiving the documents. This kind of letter of credit is often used in manufacturing.

 

26 What is Revolving L/C?

 

It means that after the credit is used in whole or in part, its amount is restored to the original amount and can be used again until the specified number of times or the specified total amount is reached. It is usually used in the case of uniform delivery in batches. Under the condition of a revolving letter of credit, the specific methods for restoring the original amount are as follows:

 

Automatic circulation. If a certain amount is used up in each period, it can be automatically restored to the original amount without waiting for the issuing bank’s notice.

Passive circulation. After a certain amount is used up in each period, you must wait for the issuing bank’s notice to arrive before the letter of credit can be restored to the original amount.

Semi-automatic circulation. That is, within a few days after a certain amount of money is used up each time, if the issuing bank does not provide a notice to stop the circulation, the original amount will be automatically restored from the x day.

 

27 What is Reciprocal L/C?

 

Refers to a letter of credit opened by two-letter of credit applicants with each other as the beneficiary. The amounts of the two letters of credit are equal or roughly equal, and they can be opened at the same time or one after the other. It is mostly used in barter trade or processing with supplied materials and compensation trade business.

 

28 What is Back to Back L/C?

 

Also known as re-opening a letter of credit, it means that the beneficiary requires the advising bank or other banks of the original letter to open a new letter of credit with similar content on the basis of the original letter. Certificate to be issued. The issuance of a back-to-back letter of credit is usually when the middleman resells the goods of others, or when the two countries cannot directly handle the import and export trade, the third party uses this method to communicate the trade. The amount of the original letter of credit (unit price) should be higher than the amount of the back letter of credit (unit price), and the shipping date of the back letter of credit should be earlier than the original letter of credit.

 

29 What is Anticipatory credit/Packing credit?

 

It means that the issuing bank authorizes the payment bank (advising bank) to prepay all or part of the amount of the letter of credit to the beneficiary. The opposite is true for forwarding letters of credit. The advance letter of credit is paid against the exporter’s clear ticket, and it also requires the beneficiary to attach an instruction sheet responsible for supplementing the documents stipulated in the letter of credit. When the shipping documents are delivered, the paying bank will deduct the interest on the advance payment when the remaining payment is paid.

 

30 What is Standby credit?

 

Also known as Commercial paper credit, guaranteed letter of credit. Refers to the certificate that the issuing bank promises to undertake a certain obligation to the beneficiary at the request of the issuing bank. That is, the issuing bank guarantees that when the issuing bank fails to perform its obligations, the beneficiary can obtain reimbursement from the issuing bank as long as the beneficiary presents the provisions of the standby letter of credit and submits the issuer’s proof of breach of contract. It is the bank credit. For the beneficiary, it is a way for the beneficiary to obtain compensation when the issuer breaches the contract.

 

31 What is the issuer of a letter of credit?

 

The person who applies to the bank to issue a letter of credit is also called the issuer in the letter of credit.

 

 

32 What are the rights and obligations of the issuer?

 

Obligations:

issue a certificate according to the contract; pay a proportional deposit to the bank; pay the redemption order in time

 

Rights:

accounting, redemption; inspection, and return (all based on the letter of credit)

 

Note:

The issuance application has two parts, namely the issuance application to the issuing bank and the declaration and guarantees to the issuing bank; a statement that the ownership of the goods belongs to the bank before the redemption payment is made; the issuing bank and its agent only bear whether the documents are on the surface Qualified responsibility; the issuing bank is not responsible for errors in the delivery of documents; not responsible for “force majeure”; guarantees payment due to redemption; guarantees payment of various expenses; the issuing bank has the right to add deposits at any time; the right to decide the goods agency， The cost of insurance and increasing the insurance level shall be borne by the applicant for the issuance of the license.

 

 

33 Who is the beneficiary of the letter of credit?

 

Refers to the person designated on the credit who has the right to use the card, that is, the exporter or the actual supplier.

 

34 What are the obligations and rights of the beneficiary?

 

Obligations:

After receiving the letter of credit, check with the contract in time, request the issuing bank to modify or refuse to accept or request the issuing bank to instruct the issuing bank to modify the letter of credit; if accepted, deliver the goods and notify the consignee, and prepare the documents Submit the documents to the negotiating bank for negotiation within the prescribed time; be responsible for the correctness of the documents. If they are not in conformity, the issuing bank shall implement the instructions to modify the documents and submit the documents within the time limit specified in the credit.

 

Rights:

The right to unilaterally cancel the contract and reject the letter of credit after notifying the other party if the amendment is refused or if the amendment is still inconsistent; if the issuing bank fails or unreasonably refuses to pay after the document is presented, the applicant can directly request the issuing applicant to pay; if the payment is received before If the issuing bank is bankrupt, the shipment of the goods can be stopped and handled by itself; if the issuing bank fails, the letter of credit has not been used yet, the applicant can be required to open another.

 

35 What is the issuing bank of the letter of credit?

 

Refers to the bank that accepts the issuance of a letter of credit entrusted by the applicant, and it assumes the responsibility of guaranteeing payment.

 

36 What are the obligations and rights of the issuing bank of the letter of credit?

 

Obligations:

correct and timely issuance of certificates; assume the first payment responsibility

 

Rights:

charge a handling fee and deposit; reject the beneficiary or negotiate bank’s inconsistent documents; after payment, if the issuing applicant is unable to pay the redemption order, the documents and goods can be processed; when the value of the goods is less than the amount of the payment, the issuing applicant can be Recourse balance.

 

37 What is the sub-branch of the letter of credit?

 

Refers to the bank that is entrusted by the issuing bank to transfer the letter of credit to the exporter. It only proves the authenticity of the letter of credit and does not undertake other obligations. It is the bank where the exporter is located.

 

Need to prove the authenticity of the letter of credit;

 

38 What is the negotiating bank for the letter of credit?

 

According to the payment guarantee of the issuing bank of the letter of credit and the request of the beneficiary, advance or discount the documentary draft delivered by the beneficiary in accordance with the provisions of the letter of credit, and claim against the bank (also known as the purchasing bank, The billing bank and the post-paying bank are present; generally they are the advising bank; there are limited negotiation and free negotiation).

 

39 What are the obligations and rights of the negotiating bank for the letter of credit?

 

Obligations:

Strictly review documents; advance or discount documentary drafts; back-approved letters of credit;

 

Rights:

Negotiable or non-negotiable; (shipping) documents can be processed after negotiation; the issuing bank closes after negotiation or the beneficiary can recover the advance payment from the beneficiary under the pretext of refusal to pay.

 

40 What is the paying bank for the letter of credit?

 

Refers to the bank designated for payment on the letter of credit. In most cases, the paying bank is the issuing bank.

 

The bank that pays the beneficiary for the documents that comply with the letter of credit (it can be the issuing bank or another bank entrusted by it).

 

The right to pay or not to pay; once paid, there is no right to recourse against the beneficiary or the holder of the draft.

 

41 What is a confirming bank for a letter of credit?

 

A bank entrusted by the issuing bank to guarantee the letter of credit in its own name.

 

Additional “guaranteed payment”; irrevocable confirmed commitment; independent responsibility for the letter of credit, payment against the voucher; after payment, you can only claim compensation from the issuing bank; if the issuing bank refuses to pay or goes bankrupt, it has no right to claim the beneficiary and negotiating bank Recourse.

 

42 What is the accepting bank of the letter of credit?

 

Refers to the bank that accepts the bill of exchange submitted by the beneficiary and is also the paying bank.

 

43 What is the reimbursing bank of the letter of credit?

 

Refers to the bank (also known as the clearing bank) that is entrusted by the issuing bank on the letter of credit to settle advances to the negotiating bank or the paying bank on behalf of the issuing bank.

 

Only pay without reviewing the documents; just pay regardless of the refund; if not, the issuing bank will reimburse.

 

44 What is a standby letter of credit?

 

A standby letter of credit, also known as a guaranteed letter of credit, refers to a letter of credit that is not for the purpose of repaying the price of a commodity transaction, but for loan financing or guarantee debt repayment.

 

A standby letter of credit is a special form of a letter of credit, which is proof that the issuing bank assumes an obligation to the beneficiary. The issuing bank guarantees that when the issuance applicant fails to perform its obligations, the beneficiary only needs to issue a draft to the issuing bank based on the provisions of the standby letter of credit, and attach a statement or documentary evidence that the issuance applicant has not performed its obligations, You can get reimbursement from the issuing bank. Standby letters of credit only apply to some of the terms of the “Uniform Customs and Practices for Documentary Credits” (No. 500).

 

 

45 What are the characteristics of a standby letter of credit?

 

1. Irrevocability. Unless otherwise stipulated in the standby letter of credit, or with the consent of the other party, the issuer shall not modify or revoke its obligations under the standby letter of credit.

 

2. Independence. The performance of the obligations of the standby letter of credit issuer does not depend on:

① The issuer has the right and ability to obtain reimbursement from the applicant.

② The beneficiary has the right to obtain payment from the applicant.

③The invocation of any reimbursement agreement or underlying transaction in the standby letter of credit.

④ Whether the issuer understands the performance or breach of any reimbursement agreement or underlying transaction.

 

3. Documentary. The obligation of the issuer depends on the presentation of the documents and the superficial examination of the required documents.

 

4. Mandatory. A standby letter of credit is binding upon issuance. It does not matter whether the applicant authorizes the issuance, whether the issuer has collected fees, or whether the beneficiary has received or relied on the standby letter or the amendment and has taken action, it will be against the issuing bank. All are mandatory.

 

 

46 General Letter of Credit VS Standby Letter of Credit

 

1) In a general commercial letter of credit, the issuing bank will only pay the amount under the letter of credit when the beneficiary submits relevant documents to prove that it has fulfilled the basic transaction obligations; standby letter of credit is when the beneficiary provides documents to prove that the debtor has not fulfilled the basic transaction The issuing bank only pays the payment under the letter of credit.

 

2) Generally, the issuing bank of a commercial letter of credit is willing to pay the bills and documents issued by the beneficiary in accordance with the provisions of the letter of credit, because this indicates that the basic transaction relationship between the buyer and the seller is proceeding normally; the issuing bank of the standby letter of credit does not want to follow the credit The provisions of the certificate of payment to the beneficiary’s bills of exchange and documents, because this indicates that there is a problem with the transaction between the buyer and the seller.

 

3) In general commercial letters of credit, the importer of the goods is always the applicant for the issuance and the exporter is the beneficiary; while the applicant and the beneficiary for the issuance of a standby letter of credit can be either the importer or the exporter.

 

 

47 What are the differences between a green term letter of credit and a red term letter of credit?

 

The difference between a green letter of credit and a red letter of credit is as follows:

 

Documentation requirements：

 

The difference between a green-term letter of credit and a red-term letter of credit lies in its documentation requirements. Although the advance payment can be transferred in the red clause letter of credit by showing a written commitment and receipt, an additional title document is required in the green clause letter of credit to transfer the advance payment.

 

Prepayment ratio：

 

In a red clause letter of credit, the proportion of available advance payment is usually 20% to 25% of the face value of the letter of credit. In contrast, the availability of prepayments under the green terms letter of credit can be expanded to 75% to 80% of the face value of the letter of credit.

 

Safety：

 

In such international transactions, buyers always worry about their safety when making advance payments to sellers. The buyer, that is, the importer, is more secure in the green letter of credit than in the red letter of credit. This is because the buyer is extending the prepayment according to the title document. This means that the buyer knows that the goods in question have been put in storage, and only the shipping procedures are left. On the other hand, in the red clause letter of credit, the advance payment can be extended even before production starts, which is riskier for the buyer.

 

48 How to review the letter of credit?

 

(1) The political background and capital situation of the issuing bank;

 

(2) Whether the nature of the letter of credit and the responsibilities of the issuing bank are clear and specific, the incoming letter must clearly indicate that it is an “irrevocable” letter of credit;

 

(3) The amount of the letter of credit must be consistent with the amount of the contract. If there is an “overfill or short package” clause for the number of goods in the contract, the amount of the letter of credit should also specify the corresponding mobile clause;

 

(4) Validity period, delivery date, and delivery date. According to the “Uniform Customs and Practices for Documentary Credits”, all letters of credit must have a validity period, that is, the due date for payment, acceptance, or negotiation. A letter of credit without a specified period of validity is an invalid letter of credit and cannot be used. The issuing bank has the right to refuse to accept any documents submitted after the validity period.

 

(5) The terms of transshipment and partial shipment of the letter of credit must be consistent with the contract. If the letter of credit does not stipulate “partial shipment is not allowed” and “transshipment is not allowed”, it can be regarded as “partial shipment allowed” and “transshipment allowed”. If the letter of credit stipulates that the goods are shipped in batches within the specified period, and any one of them is not shipped in accordance with the regulations, the letter of credit will be invalid for that period and subsequent periods.

 

49 What are the advantages of a letter of credit for buyers?

 

The advantage to the buyer is that he pays after the shipment has come out. As long as both parties do business honestly, buyers will not take much risk. Because at least the seller has actually shipped the goods and received the onboard bill of lading (B/L), and the quantity, date, and surface conditions are consistent with the sales contract. Unlike the mail-order method, after the buyer pays, he can’t even get a document, and the buyer doesn’t know whether it will be mailed or not.

 

With B/L, the buyer sees that all the conditions of the contract have been met, and he releases the money through the bank. Of course, buyers can also specify other documents they need for this voyage in L/C. Various trades have different document requirements. If it is imported food, the buyer may need an inspection report, which can be stated in the L/C. After it is written, the bank will settle the foreign exchange according to the entire set of documents. In this way, the buyer can wait to get the goods after receiving the complete set of documents, and the import procedures such as customs declaration and tax payment will be easier to handle in the future.

 

 

50 What are the advantages of a letter of credit for financing?

 

Buyers can also request the bank to grant credit assistance in accordance with L/C. International trading can cost millions of dollars at every turn, and the cost is high. If it is necessary to immediately provide the full amount for buying and selling, even a large company will cause capital strain, so it often relies on bank loans. Especially for some weak companies, they don’t have enough strength to do big business, but banks that are familiar with them often give support. Buyers open L/C, as long as the value of the goods bought by the buyer is within a certain limit, they can go to a familiar bank to open L/C without any special guarantee.

 

Through the L/C approach, the bank allows buyers to do larger transactions without or with very little money and can open an L/C of US$4 million to buy the goods. If the buyer waits for the goods to arrive at the port of destination, the seller will often disagree. Even if they agree, the buyer will not be able to afford it. It is not that simple to come up with a guarantee of 4 million RMB (guarantee payment when the goods arrive at the port of unloading), and 4 million RMB L/C will be easier to open instead. Someday the buyer will still have to use $4 million in exchange for the documents, but that will be a few months later. It takes a while for the ship to reach the port of destination, during which there will be a lot of second transactions-buyers can sell the goods in batches or in batches, get the payment, and naturally don’t worry about not changing the documents.

 

Using L/C as a payment method for the entire international trading can reduce a lot of costs and save a lot of trouble. Many transactions can be reached through a few telexes, and no one is required to do more work, which reduces the cost and time. One of them is the investigation fee-through L/C, the seller can make a deal without investigating the buyer’s creditworthiness. Otherwise, how can contracts of tens of millions of dollars be settled with a few telexes?

 

51 What are the disadvantages of L/C for sellers?

 

Of course, using L/C may also cause some problems. For sellers, the only worry is that L/C is out of order, mainly due to the discrepancy of the documents. In particular, sometimes the bank’s review may cause trouble. The documents are checked very strictly, and you have to make corrections if you type a wrong letter. According to ICC’s investigation, there was something wrong with the first tender of the L/C file, and about 40% of the banks turned their heads back. However, it generally does not pose a big problem, because the seller only needs to modify the documents slightly, and the foreign exchange can be settled at the second tender within the validity period of the letter of credit.

 

In addition, the reliability of the payment method of the letter of credit depends on the complexity of the document. If a document can be settled by signing a letter, then the L/C must be reliable; on the contrary, if it requires a lot of documents, And many of these files are not completely under your control, but are controlled by others, so you have to take a certain risk. If you are insured, the shipper will have an insurance policy as long as the premium is paid. If anything needs to be changed, it is easy for the shipper to change it. The second is the invoice. The owner of the invoice can go back and modify whatever the bank finds out.

 

The more worrying documents are the reliability of the B/L, inspection report or other official documents that need to be produced by a third party, because they may not be issued. Or the B/L needs to add comments, change the format, etc. The consignor has no choice but to settle the exchange as a result. Therefore, for sellers, the fewer and simpler documents in L/C, the more reliable.

 

52 What are the advantages of L/C for sellers？

 

For sellers, the biggest advantage of L/C is that it provides a reliable account-the payer, this is the bank, and it is a designated large bank. Therefore, the seller must strictly follow the contract and ship the goods on time, otherwise, the foreign exchange cannot be settled if the B/L is inconsistent with the L/C.

 

The purchase and sale agreement and L/C will not stipulate that unclean B/L is also acceptable because it is difficult to determine the scale of unclean B/L. If it is said that all rotten B/L is unclean B/L, but only a little bit is very small Damage doesn’t seem to be a big deal in a multi-million dollar transaction. But after all, there are comments, and it is not clean B/L. According to reason, this should not affect the foreign exchange settlement, because it is within an acceptable level, but the problem is not here. If both parties agree beforehand, it may be possible to modify the L/C or the buyer tells the bank Regarding improper documents, L/C can still accept.

 

But beforehand, who knows what will be lost in the future, to what extent, and what comments should be made? Moreover, as a buyer, what you want to buy is only a good batch of goods, that is, to clean the B/L, not to claim. No comments are required to comply with the so-called printed on the B/L: The surface is in good condition. The shipper only needs to get such a B/L (also called a “clean” bill of lading) to ensure that they will be able to get the money when they settle the exchange at the bank.

 

Therefore, L/C provides sellers with a reliable account, and sellers can basically do business with any buyer in the world by using L/C. He doesn’t care whether the buyer knows him or not, he doesn’t keep his promises, he doesn’t care whether the buyer’s place has foreign exchange control and political stability, or even whether the buyer will immediately go bankrupt. Anyway, what he believes is the bank, and the bank must pay when using L/C to settle foreign exchange.

 

53 What is the validity period of the letter of credit?

 

The validity period of the letter of credit is the time when the foreign trade enterprise comes to the bank to present the document for negotiation, not the time when the issuing bank receives the document. In the foreign trade business, the letter of credit is a relatively novel settlement method, and the validity period of the letter of credit is used as a time for negotiation. Therefore, foreign trade companies need to understand in order to facilitate foreign trade business.

 

It is reported that the validity period of the letter of credit is valid within 15 days after sailing. Before the issuance of the letter of credit, the validity period of the letter of credit needs to be calculated, and generally depends on these two factors, one is the latest shipment date, and the other is the delivery date.

 

 

The validity period of the letter of credit is not calculated, it is stipulated in the letter of credit. The delivery period sometimes needs to be calculated. Generally contains 3 clauses of the letter of credit.

1. Letter of Credit 31D: Date and Place of Expiry
2. Letter of Credit 44C: Latest Date of Shipment
3. Letter of Credit 48: Period for Presentation

54 What is the relationship between the validity period of the letter of credit and the latest shipment period?

 

1. What is the shipping date or the latest shipping date?

 

That is the deadline or latest date for the seller to load all the goods on the means of transport or deliver to the carrier. (The date of issuance of the bill of lading, that is, the date of departure shall not be later than the validity period specified in the letter of credit. If the validity date is not specified, the date of shipment shall not be later than the expiry date of the letter of credit)

 

2. What is the expiry date?

 

That is the validity period of the letter of credit. (The carrier, that is, the seller, shall not be later than this date when submitting the documents to the bank. Therefore, the carrier should deliver the bill of lading to the seller before this date so that it can submit the bill to the bank for negotiation in time.)

 

3. What is the delivery period?

 

That is, after the date of issuance of the transportation document, the document must be submitted to the bank designated by the letter of credit to request payment, acceptance or negotiation within a specific period. (If there are provisions in the letter of credit, the documents must be presented within the specified period of validity; if not specified, the documents must be submitted within 21 days of the date of the transport document; but in both cases, the documents must not be later than the expiry date of the letter of credit submit)

 

4. What is double expiration?

 

The latest shipping date and the negotiated due date stipulated in the letter of credit are the same day, or the shipping date is not specified, which is called double expiration in practice (in principle, there should be a certain interval between the due date of the letter of credit and the latest shipping date, So that the carrier has time to do document preparation, document presentation, negotiation, etc., but if there is a double expiration, the carrier should pay attention to loading the goods on the means of transportation or handing over to the carrier a few days before the expiry date of the letter of credit, In order to have enough time to prepare various documents, submit documents and handle the negotiation and other procedures.)

 

In summary, can the relationship between the validity period of the letter of credit be expressed as follows:

 

Expiry date (validity period) ≥ delivery date, latest shipment date;

 

Ideal expiry date (validity period) = latest shipment date + delivery date

 

55 What are the common frauds in letters of credit, and what are the risks of letters of credit?

 

Issuing a letter of credit not in accordance with the contract:

 

The terms should be strictly consistent with the sales contract, but in fact, due to a variety of reasons, the importer did not issue the license in accordance with the contract, which made the execution of the contract difficult or caused the exporter to suffer additional losses. The most common ones are: importers do not issue or do not issue certificates on time (such as market changes and strict foreign exchange and import controls); importers add some favorable additional terms in the letter of credit (such as unilateral increase Insurance category, amount, change of destination port, change of packaging, etc.) in order to achieve the purpose of attempting to change the contract; the importer has made many restrictive provisions in the letter of credit.

 

Deliberately set up barriers to the letter of credit:

 

This kind of letter of credit fraud generally has the following characteristics:

1. The letter of credit reaches the beneficiary without notice, and the envelope does not have the sender’s detailed address and the postmark is blurred;
2. The format of the letter of credit used is outdated
3. The signature of the letter of credit is not smooth, or a printed signature is used;
4. The terms of the letter of credit are contradictory or contrary to conventions;
5. The letter of credit requires that the goods be transported by air, or the bill of lading is made into the applicant (importer) as the recipient.

 

For example:

A foreign trade company in Henan once received a documentary letter of credit issued in the name of STANDARD CHARTERED BANK LTD. BIRMINGHAM BRANCH, ENGLAND, amounting to USD 37,200.00, and the notification line was NATIONAL WESTMINSTER BANK LTD. LONDON.

 

Because the card was not reviewed by the beneficiary’s local bank professionals, as usual, several suspicious points were found:

(1) The format of the letter of credit is very old, the envelope has no sender’s address, and the postmark is ambiguous, and it is impossible to identify where it is sent from;

(2) The letter of credit is restricted to the advising bank-the London National Westminster Bank for negotiation; it violates the convention;

(3) The detailed address of the acquiring bank cannot be found in the bank yearbook;

(4) The signature of the letter of credit is printed, not hand-signed, and cannot be verified;

(5) The letter of credit requires that the goods be shipped to Nigeria by air, and this country is a frequent place for letters of credit fraud.

 

Based on the above points, the bank initially determined that the card was a forged letter of credit, and then contacted the head office of the issuing bank to verify that it was indeed the case. Thus avoiding the fraud of forged credit documents.

 

Importers often use the “strict consistency” principle of the letter of credit to deliberately add some difficult conditions to the letter of credit or set up some traps. If the regulations are uncertain, there are errors and the content of the terms of the letter of credit are contradictory.

 

There are typos in the letter of credit, such as typos in the beneficiary’s name, address, shipping vessel, address, expiration date, etc. Don’t think it’s minor flaws.

 

They will directly affect the documents required to be presented and may become the reason for the issuing bank’s refusal to pay.In addition, the letter of credit stipulates that partial shipments are prohibited but the time limit for each shipment is limited, or the intermodal bill of lading is allowed but transshipment is prohibited, or the types of insurance required to overlap each other. These are undoubtedly contradictory.

 

Forged letter of credit:

 

Forging a letter of credit, or stealing a blank letter of credit that has been printed by another bank, or maliciously colluding with an employee of a bank that has failed or is on the verge of bankruptcy to issue a letter of credit, the exporter will cause huge losses if it is not detected.

 

This kind of letter of credit fraud usually has the following characteristics:

1. The evidence is not custody, but the claim is confirmed by the third bank’s call;
2. The validity period is short, so as to force the beneficiary to rush the shipment;
3. The letter of credit stipulates that the beneficiary will send an original bill of lading to the applicant after shipment;
4. Open a letter of credit for forwarding payment and allow a generous interest rate;
5. The applicant and the consignee in the certificate are in different countries or regions.

 

For example, a bank once received a letter of credit issued by the Canadian AC Bank ALERTA branch, amounting to about 1 million U.S. dollars, and the beneficiary was an import and export company in Anhui. The bank examiner found the following suspicious points in the certificate:

 

(1) The card is not confirmed by custody, only the card is issued with “this card will be called by XX line”;

(2) The validity period of the certificate is on the same day, and the date of departure is less than one week;

(3) After the letter of credit requires the beneficiary to ship the goods, quickly send a set of duplicate documents and an original bill of lading to the applicant by DHL express;

(4) The certificate is for payment within 45 days, and it is stipulated that the beneficiary can claim interest at an annual interest rate of 11%;

(5) The applicant of the letter of credit is in Canada, but the consignee is in Singapore;

(6) The incoming telegraphic number is unreasonable.

 

In response to these doubts, on the one hand, the bank warned the company that “this certificate does not comply with the secrecy, please postpone the shipment.”

 

Later,  received a confirmation telegram signed by “Bank”, but the telegram was not confirmed by the escort. So the bank tried to contact the representative office of Bank of America in Beijing for instructions and assistance, and finally received a reply: “The bank has never sent out Confirm the call and have no dealings with the issuing bank”. At this point, it was finally confirmed that this was a fraud case involving the embezzlement of a third bank’s secret custody.

 

L/C is not easy to obtain:

 

A document signed by a specific person, or a container bill of lading indicating the location of the cargo on the ship, or a container bill of lading in the cabin, or a clear requirement that the FOB can apply for negotiation with the insurance company’s return receipt under CFR conditions. These are simply impossible for the seller as the beneficiary Performance or beyond the control of the seller.

 

Different L/C requirements:

 

In practice, the seller should not be negligent that although the letter of credit ostensibly stipulates favorable conditions for its own party, the relevant national or local laws and the regulations of the relevant document department do not allow the provisions of the letter of credit to be realized. Therefore, it should be prevented First, understand first, and when appropriate, we should strive to delete the relevant clauses and should not be bound by the laws of other countries.

 

Letter of Credit Fraud:

 

The importer deliberately alters the expired letter of credit, alters the amount of the original letter, the shipping period and the name of the beneficiary, and directly mails or delivers it to the beneficiary in order to defraud the export goods or induce the exporter to open a letter of credit. Fraud bank financing.

 

Forgery and confirmation of the letter of credit:

 

The so-called “forged letter of credit fraud” refers to the fact that the importer deliberately forges the confirmation letter of the major international bank on the basis of providing the false letter of credit in order to gain the trust of the exporter, so as to achieve the purpose of defrauding the seller of bulk export goods.

 

For example, the Bank of China once received a letter of credit issued by Indonesia’s Jakarta Asia-Europe Bank requesting confirmation by New York UBS, the amount of which was 6 million U.S. dollars, the beneficiary was a Guangdong foreign trade company, and the export goods were 2 million Snakeskin, but checking the bank yearbook, there is no information about the issuing bank. Later, received a confirmation letter from the Swiss Union Bank of Zurich, but only one of the two signatures was similar, and the other could not be verified.

 

This kind of letter of credit fraud often has the following characteristics:

1. Banks where the issuance of the letter of credit is counterfeit or cannot be verified at all;
2. Confirmation acts as an internationally renowned bank to increase deceptiveness;
3. The confirmation letter will be sent separately, and its signature is a counterfeit signature;
4. The trading parties do not know in advance, and only get to know each other through the intermediary;
5. The amount of the certificate is relatively large, and the validity period is relatively short.

 

The letter of credit indicates separately:

 

If the letter of credit requires further shipment before shipment, the date of shipment shall be notified separately, the import license shall be approved, and the sample of the goods shall be inspected and approved, etc., it may cause the seller to suffer from the increase or decrease in the price of the goods after the goods are prepared due to non-notification. loss.

 

Non-certificate transaction of letter of credit:

 

It is stipulated that the payment must be made after the goods are delivered to the destination after the goods are inspected or approved by the foreign exchange authority, or the importer’s acceptance bill is the payment term. If the buyer does not accept, the issuing bank will not be responsible. It is no longer a letter of credit transaction, and there is no guarantee for exporters.

 

56 What are the preventive measures against letters of credit fraud?

 

Judging from the various situations of a single letter of credit fraud, the scammers’ targets are mainly export companies around the world, and the victims also involve exporting banks and trading companies. They should cooperate closely and take practical and effective measures to avoid or to reduce the occurrence of letter of credit fraud, the following preventive countermeasures can be implemented:

 

First, the exporting bank (referring to the advising bank) must seriously and responsibly verify the authenticity of the letter of credit and grasp the credit status of the issuing bank. For letter-opening letters of credit, the seal should be checked carefully, and for large-amount letters, the issuing bank should be required to conform with the issuing bank; for letter-opening letters of credit and amendments, it should be checked in a timely manner to prevent counterfeiting and counterfeiting. Forgery. At the same time, the name, address, and credit status of the issuing bank should be compared and analyzed with the bank yearbook. If any doubts are found, immediately check with the issuing bank or correspondent bank to ensure the authenticity, legality, and reliability of the issuing bank. sex.

 

Second, export companies must carefully choose trading partners. When looking for trading partners and trading opportunities, we should try our best to contact and understand customers through formal channels (such as participating in the Canton Fair, other formal global trade fairs, and on-site visits), and do not do business with customers with unknown or poor credit. Before signing the contract, you should try to entrust the relevant consulting agency to conduct a credit investigation on the customer, so that you can know it well and make the right choice, so as not to choose the wrong trading partner.

 

Third, banks and export companies need to carefully review letters of credit. Bank review of evidence focuses on incoming evidence and should also pay attention to the validity and risk of incoming evidence. Once it is found that the evidence contains “soft clauses”/”trap clauses” and other unfavorable clauses whose initiative is not in your own hands, you must resolutely and quickly contact the merchants to modify them or take corresponding preventive measures to prevent problems before they happen.

 

Fourth, when exporting companies or trading companies, when signing contracts with foreign investors, they should establish contract terms equally, reasonably, and carefully. Completely put an end to unequal and unreasonable clauses that damage interests, such as “prepayment of performance fees, warranty fees, support payments and intermediary fees,” etc., so as to avoid the other party’s trap and cause losses.

 

Why is FOB’s export so risky for sellers?

 

Because under the FOB clause, the bill of lading can easily be released automatically without the seller’s permission.

 

For sellers, try to use CIF or C&F to ship goods, but for buyers, FOB’s trading method is obviously more beneficial to them. More than 75% of the goods exported from China are Shipment is carried out in accordance with FOB.

 

57 Which method of collecting money is the safest?

 

The following is Bestforworld summed up years of experience, a total of relatively safe payment methods, and the safety factors are listed as follows:

 

(The safety factor should be based on the actual situation) For reference only:

 

1) 30% T/T deposit + 70% spot, confirmed, irrevocable letter of credit;

 

2) 100% spot, confirmed, irrevocable letter of credit + CIF shipping terms;

 

3) Spot, confirmed, irrevocable letter of credit + FOB;

 

4) 30% T/T deposit + 70% on the bill of lading and fax payment; (This payment method is suitable for businesses with a small trade volume. If the trade volume is large, this payment method is not used. Because there is no guarantee that foreign investors will eventually receive the goods Demand. Possibly, foreign businessmen give up trading due to market changes)

 

58 In global trade, which countries are safer to collect money?

 

The safest receiving countries and the least safe countries and regions for exporting, the following is Bestforworld‘s summary of the safer trading countries, and the safety factors are listed as follows:

 

(The safety factor should be based on the actual situation) For reference only.

 

1) The United States: Because this country has truly established a business reputation management system.

2) European countries: mainly refers to the United Kingdom, France, Germany, Spain, Belgium, the Netherlands, etc.;

3) Canada, Australia, Japan, South Korea, and Hong Kong;

 

The most insecure countries and regions:

1) African countries, especially Nigeria, where many trade fraud merchants gather;

2) Middle Eastern countries often change due to war situations and market changes;

3) In the Taiwan Province of China, merchants here often drop debts on the mainland.

 

59 Letter of credit Sample Format ：