The basic letter of credit

Letter of credit
A document issued by a bank, whereby the bank replaces the buyer as the paying party. The exporter is basing his risk of getting paid on the bank rather than on the importer. The bank will have to be reimbursed by the importer.

 The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any.

 if the Credit provides for sight payment by payment at sight against compliant presentation if the Credit provides for deferred payment by payment on the maturity date(s) determinable in accordance with the stipulations of the Credit; and of course undertaking to pay on due date and confirming maturity date at the time of compliant presentation

 if the Credit provides for acceptance by the Issuing Bank by acceptance of Draft(s) drawn by the Beneficiary on the Issuing Bank and payment at maturity of such tenor draft, or if the Credit provides for acceptance by another drawee bank by acceptance and payment at maturity Draft(s)drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it,

- If the Credit provides for negotiation by another bank by payment without recourse to drawers, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit, (and so negotiated by the nominated bank )

Negotiation
Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate, viz the nominated bank. Mere examination of the documents and forwarding the same to issuing bank for reimbursement, without giving of value / agreed to give, does not constitute a negotiation.

Negotiate
To verify that documents presented under a letter of credit conform to requirement and then, when the documents are in order, to pay the exporter.

Stale
Documents can be considered stale when submitted to the opening bank after the merchandise has already arrive. A letter of credit can be considered stale if submitted after expiration date

Some of the Documents Called for under a LC

Financial Documents: Bill of Exchange, Coaccepted Draft Commercial Documents: Invoice, Packing list Shipping Documents: Transport Document, Insurance Certificate, Commercial, Official or Legal Documents

 Official Documents: License, Embassy legalization, Origin Certificate, Inspection Cert , Phyto-sanitary Certificate Transport Documents: Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt Insurance documents: Insurance policy, or Certificate but not a cover note.

Bill of exchange
A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange.

Invoice
A detailed statement showing goods sold or shipped, along with itemization of amount.

A typical invoice contains

The word "invoice A unique reference number Date of the invoice Name and contact details of the seller Tax or company registration details of seller (if relevant) Name and contact details of the buyer Date that the product was sent or delivered Purchase order number Description of the product(s)Unit price(s) of the product(s) Total amount charged Payment terms (including method of payment, date of payment, and details about charges late payment)

Type of invoice
Pro-forma invoice Commercial invoice Credit memo Debit memo

Packing list
An itemization of the contents of each container in an entire shipment

Weight list
A statement attesting the total or partial weight of a shipment of merchandise.

Certificate of Origin
A Certificate of Origin (often abbreviated to CO or COO) states from what country the shipped goods originate, but "originate" in a CO does not mean the country the goods are shipped from, but the country where their goods are actually made.

Inspection certificate
A document issued by an independent agency attesting to the presence, quantity and quality of the goods being shipped.

Bill of lading
A steamship company document that includes a contract for delivery of the merchandise, convey title to the goods, and is a receipt for the merchandise. It indicates details of weight, freight costs, and size of cargo.

Straight bill of lading

This bill states that the goods are consigned to a specified person and it is not negotiable free from existing equities, i.e. any endorsee acquires no better rights than those held by the endorser. Also known as a non-negotiable bill of lading; and from the banker's point of view this type of bill of lading is not safe

Order bill of lading

This bill uses express words to make the bill negotiable, e.g. it states that delivery is to be made to the further order of the consignee using words such as "delivery to A Ltd. or to order or assigns". Consequently, it can be endorsed by A Ltd. or the right to take delivery can be transferred by physical delivery of the bill accompanied by adequate evidence of A Ltd.'s intention to transfer.

Bearer bill of lading

This bill states that delivery shall be made to whosoever holds the bill. Such bill may be created explicitly or it is an order bill that fails to nominate the consignee whether in its original form or through an endorsement in blank. A bearer bill can be negotiated by physical delivery.

Surrender bill of lading

Under a term import documentary credit the bank releases the documents on receipt from the negotiating bank but the importer does not pay the bank until the maturity of the draft under the relative credit. This direct liability is called Surrender Bill of Lading (SBL), i.e. when we hand over the bill of lading we surrender title to the goods and our power of sale over the goods.

Blank endorsement ( endorse in blank)

To endorse an item without naming the party to whom title is transferred

 full set on board ocean bills of lading to order shipper, blank endorsed

Insurance policy
An insurance contract determines the legal framework under which the features of an insurance policy are enforced. Insurance contracts are designed to meet very specific needs and thus have many features not found in many other types of contracts. Many features are similar across a wide variety of different types of insurance policies.

Cargo insurance
Cargo insurance is underwritten on the Institute Cargo Clauses, with coverage on an A, B, or C basis, A having the widest cover and C the most restricted. Valuable cargo is known as specie

Marine insurance
Marine Insurance covers the loss or damage of ships, cargo, terminals, and any transport or property by which cargo is transferred, acquired, or held between the points of origin and final destination.

Average
1. In marine insurance, in the case of a partial loss, or emergency repairs to the vessel, average may be declared. This covers situations, where, for example, a ship in a storm might have to jettison certain cargo to protect the ship and the remaining cargo. General average requires all parties concerned in the venture (Hull/Cargo/Freight/Bunkers) to contribute to compensate the losses caused to those whose cargo has been lost or damaged. 'Particular Average' is levied on a group of cargo owners and not all of the cargo owners.

2. In the situation where an insured has underinsured, ie. insured an item for less than it is worth, average will apply to reduce the amount payable. There are different ways of calculating average, but generally the same proportion of under-insurance will be applied to any payout due.

General average
A marine insurance concept whereby all shippers on the given voyage reimburse those shippers whose cargo was jettisoned in bad weather to save the ship.

General average requires three elements

"1st. A common danger: a danger in which vessel, cargo and crew all participate; a danger imminent and apparently 'inevitable,' except by voluntarily incurring the loss of a portion of the whole to save the remainder.

 "2nd. There must be a voluntary jettison, or casting away, of some portion of the joint concern for the purpose of avoiding this imminent peril or in other words, a transfer of the peril from the whole to a particular portion of the whole. "3rd. This attempt to avoid the imminent common peril must be successful".

Transshipment
Transferral of merchandise from one vessel to another during shipment, usually at an intermediate port

Group E Departure
EXW Ex Works (named place): the seller makes the goods available at his premises. the buyer is responsible for all charges

Group F Main carriage unpaid

FCA Free Carrier (named place) FAS Free Alongside Ship (named loading port) FOB Free On Board (named loading port)

Group C Main carriage paid

CFR Cost and Freight (named destination port) CIF Cost, Insurance and Freight (named destination port) CPT Carriage Paid To (named place of destination) CIP Carriage and Insurance Paid to (named place of destination)

Group D Arrival
DAF Delivered At Frontier (named place) DES Delivered Ex Ship (named port) DEQ Delivered Ex Quay (named port) DDU Delivered Duty Unpaid (named destination place) DDP Delivered Duty Paid (named destination place)

The end