Operations in the field of international trade require careful handling of a number of documents. The letter of credit is one of them. Below is a description of the way in which a letter of credit is arranged.
Read the following text. Pay special attention to the expressions that refer to the documents which are necessary for the operation described.
The Letter of Credit
Aletter of credit is a payment document widely used by banks in international trade operations; it is an instrument that facilitates business transactions between exporters and importers.
Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits.
A commercial letter of credit is a contractualagreement by which a bank (the issuing bank), on behalf of one of its customers, authorizes another bank (the advising or confirming bank) to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the letter of credit. The beneficiary is normally the provider of goods.
The issuing bank’s role is a) to provide a guarantee to the seller that, if compliantdocuments are presented, the bank will pay the seller the amount due, and b) to examine the documents, and only pay if these documents comply with the terms and conditions set out in the letter of credit. A letter of credit is usually negotiable i.e. the instrument is passed freely from one party to another almost in the same way as money.
The most common type of letter of credit is the irrevocableletter of credit, which may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. Therefore, it is crucial that the importer and the advising/confirming bank make sure that the beneficiary (the exporter) is in a good financial position before advising the credit.
All letters of credit require the beneficiary to present a draft and specifieddocuments in order to receive payment. A draft is a written order by which the party creating it orders another party to pay money to a third party. A draft is also called a bill of exchange.
There are two types of drafts: sight and usance. A sight draft is payable as soon as it is presented for payment. A usance draft is not payable until the ending of the time period stated on the draft. Theissuing bank is obligated to accept drafts and pay them at maturity. Accepted drafts can usually be discounted by the sellers if they do not want to wait until the due dates for their money.
Typically, the documents requested, called shipping documents, will include a commercial invoice, a transport document, such as a bill of lading or airway bill, and an insurance document, among others.
a. Acommercial invoice is the billing for the goods. It includes a description of merchandise, price, origin, and name and address of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit.
Invoicing can occur under two main agreement conditions: CIF terms and FOB terms. On C.I.F. terms (Cost Insurance and Freight), the exporter bills forthe cost of the merchandise, the insurance policy, and shipping charges; correspondingly, the importer pays for customs clearance and other costs and risks. On F.O.B. terms (Free on Board), the exporter invoices only for the cost of the merchandise and insurance charges until the merchandise is officially received for shipment. From that moment on, the importer has to cover the charges for freightand other costs and risks.
b. A bill of lading is a shipping document evidencing the receipt of goods for shipment and issued by a freight carrier engaged in the business of transporting goods. They also serve as a receipt for the merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination.
c. An insurance policy is a guarantee of payment...