Documentary letter of credit

 

 

Description

When to apply Documentary letter of credit

You are engaged in international trade, where there are a number of issues:

  • Absence of mutual confidence between the parties of the commercial transaction,
  •  Several risks both for buyer (importer) and seller (exporter),
  •  Absence of financial resources required for transaction.

 ACBA Credit Agricole Bank, as a partner of financial CREDIT AGRICOLE  bank group, offers to apply documentary letter of credit, which will enable you to overcome the difficulties related to international trade reducing the risks to the minimum.

The documentary letter of credit is the written obligation of the bank, which is issued according to the instruction of the buyer (importer) for the benefit of seller (exporter), where the (importer) undertakes obligation to pay the seller (exporter) an amount against the documents submitted in line with the requirements set forth in the letter of credit.  

Advantages

Advantages of the letter of credit for the buyer (importer)

  •  The seller delivers the goods prior to the payment by the buyer,
  •  The payment is performed by the buyer after the delivery of goods and submission of documents, which reduces the risks of the buyer,
  • In case the seller fails to meet any conditions initially established for delivery of goods, it may result in non payment for the delivered goods,
  • In case of letter of credit the seller relies on the solvency of the bank and it is sure that once all the conditions set forth in the letter of credit are fulfilled the payment will be received. Thus, without any risk related to the payment for the goods, the seller may deliver the goods on the condition of deferred payment (for example, 90 days following the submission of bill of lading),
  • In case there are not sufficient funds for the payment of letter of credit amount, the Bank may simultaneously fund your commercial transaction,
  • You can be sure that the seller will not receive the corresponding payment in case the latter fails to meet the delivery deadline agreed and fails to deliver the goods in timely manner.

Advantages of the letter of credit for the exporter (seller)

  •  The seller (exporter) is sure that he will receive the payment for the delivered goods, as in case of letter of credit the obligation of payment to the seller is transferred from the buyer (importer) to the Bank,
  •  Using export letter of credit, the seller may offer its partners deferred payment condition, which will enable to expand the volumes of sale and enter into new markets. Moreover, the payment for the goods may be received prior to submission of documents set forth in the letter of credit,
  •  Due to safe mode of payment, the seller can make use of the opportunity to operate in international markets on more competitive conditions,
  •  The seller receives the payment against the delivered goods before such goods reach the buyer,
  • The buyer cannot declare the commercial transaction as null and void or change any condition unilaterally, without prior consent of the seller.

 

Mode

The bank may issue the following types of letters of credit

  • Import letter of credit – The Bank issues letter of credit in accordance with the instruction of the buyer (importer). Import letter of credit is one of the most common tool for international commercial transactions and is widely applied in banking system,
  • Export letter of credit  - The Bank receives a letter of credit issued by other Bank for the benefit of seller(exporter).
  • In case of export letter of credit the Bank may issue short term export loans for financing of packaging of goods or other production processes,
  •  Confirmed letter of credit – on the basis of beneficiaries’ request the letter of credit may be confirmed by other leading bank acceptable for the latter. Moreover, the approval of the letter of credit is bank’s independent and additional obligation ensuring the fulfillment of letter of credit.
  • Unconfirmed letter of credit- The bank issues letter of credit, sending it directly to the noticing bank and requesting the latter to notice letter of credit beneficiary, without assuming any additional obligations,
  • Recovering letter of credit- this LC is used for payments for regular supplies, which are made in accordance with the schedule established by the contract. It foresees automatic recovery of letter of credit initial amount (quote) upon each use, until the maximum term established,
  •  Transferable letter of credit – foresees full or partial use of letter of credit by one or more persons. It enables the beneficiary to transfer  its  letter of credit fully or partially to other beneficiary . It is possible to use this type of letter of credit in case the beneficiary is not the main supplier of goods and it acts  in the capacity of intermediary between the buyer and the main supplier,
  • Stand-by letter of credit – is a specific type of letter of credit and virtually resembles bank guarantee. It can be used as an additional collateral to the payments to be done for the benefit of the exporter,
  • Counter letter of credit – the exporter acts in the capacity of intermediary between the main supplier and the end buyer and may stand down the rights vested by the letter of credit issued for the latter for another beneficiary.

Disbursement terms

Main conditions of issuing letter of credit by the Bank

  •  The letter of credit may be opened on the cash assets deposited by the client or within credit limit established by the Bank for the purpose of implementation of client’s letter of credit transaction,
  •  For the benefit of other resident and non-resident legal entities legal entities, organizations, economic operators, state institutions and financial bodies the Bank may issue import letter of credit on behalf of Bank resident legal entity and economic operators client on contractual bases 
  •  The bank opens letter of credit in AMD and foreign currency,
  • The maximum effective term of the letter of credit is 12 months.

FAQ

  1. The difference between documentary letter of credit and banking guarantee:
    - Documentary letter of credit in contrast to banking guarantee, is a payment instrument. It means that opening letter of credit, the Bank directly assumes payment obligation. Whereas, in case of banking guarantee, the Bank is obliged to pay to the amount demanded by the beneficiary only in case the debtor fails to fulfill its payment obligations.
  2. Whether in case of application of letter of credit the payment against the imported goods is made only upon delivery of goods to the buyer.
    - In the scope of letter of credit, the payment is make against the payment documents, in line with the payment conditions set forth by the letter of credit (immediate payment, deferred payment), and regardless of the fact whether the goods reached the actual destination of delivery. 
  3. What documents should be submitted for opening letter of credit 

- The documentary letter of credit is opened on the basis of client’s instruction (application). Thus, the letter of credit is independent from the sale-purchase contract; however existence of provision on payment by means of documentary letter of credit in sale-purchase contract is a precondition for opening letter of credit.

 

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