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LC / SBLC Process & Procedures Trade Finance

Letter of Credit Application – Payment Method at Sight, deferred payment, acceptance or negotiation

What should appear in the settlement type field?

An indication of the settlement terms applicable to the beneficiary. This should conform to the requirements expressed in the sale contract, proforma invoice or purchase order.

If the beneficiary requires settlement “at sight”, the options are payment or negotiation. 

From an applicant perspective, and where the beneficiary has not given an indication of preference, a documentary credit available by negotiation at sight would be the preferred option. 

If a documentary credit is available by sight payment, the nominated bank is provided with access to immediate funds of the issuing bank. The applicant will be responsible for the interest costs arising between the date of the issuing bank’s account being debited by the nominated bank and the date the applicant’s account is debited.

If a documentary credit is available by sight negotiation, the beneficiary has a choice of receiving immediate funds (in which case it is responsible for the payment of interest), or to await the remittance of proceeds by the issuing bank. The applicant’s account will only be debited on the date that the issuing bank provides reimbursement to the nominated bank.

Main UCP considerations

Sub-article 6 (b) requires that each documentary credit indicate whether it is available by payment, deferred payment, acceptance or negotiation.

What should appear in the settlement type field?

If the beneficiary requires settlement in the future, the options are deferred payment, acceptance or negotiation. From an applicant perspective, and where the beneficiary has not given an indication of a preference when a documentary credit is to be payable XXX days after sight, an availability of negotiation at XXX days sight would be the preferred option. 

If the documentary credit is available by negotiation, the due date will be XXX days after the date the documents are received by the issuing bank. Whereas, when it is available with a nominated bank or any bank by deferred payment or acceptance, the due date will be XXX days after the nominated bank receives the documents.

When a documentary credit is to be available at XXX days after the date of shipment, date of a document or date of an event, it generally matters not which form of availability is indicated. When given the choice, a beneficiary will often prefer deferred payment or acceptance.

Main UCP considerations

Sub-article 6 (b) requires that each documentary credit indicate whether it is available by payment, deferred payment, acceptance or negotiation.

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LC / SBLC Process & Procedures Trade Finance

Letter of Credit Application – Available with Which Bank

What should appear in the bank field?

The bank to whom the beneficiary may present its documents for payment, deferred payment, acceptance or negotiation (when other than the issuing bank, this bank is referred to as the nominated bank). When the nominated bank is the advising bank or any bank, the beneficiary also has the choice of presenting its documents directly to the issuing bank.

When this field indicates that the documentary credit is available with any bank, the beneficiary may present its documents to any bank. The scope of the term ‘any bank’ will be narrowed by the inclusion of the name of a city or country as part of the expiry date details referred to earlier in this module, in which case it is any bank in the named city or country that may pay, accept a draft, incur a deferred payment undertaking or negotiate.  

Wherever possible, situations should be avoided where the place of the bank with which the documentary credit is to be available is different from the place of expiry. 

Main UCP considerations

Sub-article 6 (a) indicates that a documentary credit must state the bank with which it is available or whether it is available with any bank.

Sub-article 6 (b) requires that each documentary credit indicate whether it is available by payment, deferred payment, acceptance or negotiation.

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LC / SBLC Process & Procedures SBLC Trade Finance

STANDBY LETTER OF CREDIT ISSUANCE PROCESS

How Standby Letters of Credit Work

The numbering is commensurate with that shown in the extract below.

1. As with any other trade transaction, an underlying sale contract is agreed between the exporter (seller) and importer (buyer). For the purpose of our example, the contract provides for settlement to be made in an agreed manner and for the issuance of standby to act as security for the exporter in the event of non-payment by the importer, despite the exporter complying with the conditions of the contract.

2. The importer applies to its bank for the issuance of standby in favour of the exporter.

3. Assuming the bank is willing to proceed, e.g., a credit facility exists for such issuance, the standby is issued and advised through a bank in the country of the exporter. At this point, the exporter is referred to as the beneficiary of the standby, and the importer is referred to as the applicant.

4. The standby is advised to the beneficiary. If confirmation has been requested, and added, this will form part of the advice that is sent to the beneficiary.

At this point, the beneficiary should ensure that the conditions of the standby reflect suitable security for it to proceed to perform under the contract. The standby is held by them as security, in the event it becomes necessary to make a claim thereunder.

For example, the standby should (a) be for the amount that may become due under the sale contract; (b) have an expiry date that extends beyond the completion of the contractual terms, including any period in which the applicant would be required to pay by the agreed means; and (c) clearly indicate the document(s) that is/are to be presented in order to demand payment thereunder.

Different Types of Standby

We can assist you with a wide variety of types of Standby Letter of Credit. This are more commonly seen in trade finance transactions. Common Ones are listed below. Most of these will be familiar to those acquainted with demand guarantees.

Performance – agreeing to undertake, deliver and/or complete contractual obligations. 

Advance Payment – undertakes repayment of all or part of a percentage of the value of a contract that has been paid by the beneficiary to the applicant as a down payment, advance payment, or deposit, upon the signing of the contract. 

Bid or tender bond – ensures a bidder (applicant) cannot alter its tender proposal, or withdraw from the tender process before the tender is awarded.

Counter – a standby issued by one bank, in favour of another bank, to support the issuance of a standby, guarantee, documentary credit or other forms of the undertaking, by that other bank.

Financial – supports a financial obligation to pay or repay.

Insurance – reinforces applicant obligations with respect to insurance or reinsurance activity.

Direct-pay – not necessarily related to default and is likely to be the primary means of payment rather than secondary which is normally the case. 

Commercial – acts as a security for payment of goods or services not settled by a buyer under other arrangements i.e., via open account trading or documentary collection.

Benefits and attributes of a Standby

  • A standby is often used to cover, and to mitigate, the many risks that can occur in finalising a contract between a buyer and seller. The benefits and attributes of a standby include: 
  • Independence from any underlying contract.
  • Provision of security.
  • Protection against non-performance of obligations, as opposed to a performance which results in non-payment (as is covered by instruments such as documentary credits i.e., with the shipment of goods and presentation of complying documents).
  • Can cover financial or non-financial obligations.
  • Can be used for cross-border or domestic transactions.
  • Contains many of the characteristics of a documentary credit e.g., independent from the underlying contract, payment made only if certain conditions are fulfilled, issued by banks, subject to a set of international rules.
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LC / SBLC Process & Procedures SBLC Trade Finance

Incoterm categories

There are 11 Incoterms, which are for use in domestic and international transactions.

Each one sets out the obligations of the seller and buyer under the sales contract and indicates the point at which responsibility is transferred from seller to buyer. The seller’s obligations escalate from EXW (‘ex-works’ – the minimum) to DDP (‘delivered duty paid’ – the maximum).

Any obligation that does not appear in a particular Incoterm is the responsibility of the buyer unless the sales contract states otherwise.

The 11 Incoterms are divided into two groups: seven that are suitable for any mode or modes of transport; the remaining four applying to sea or inland waterway transport only.

When incorporating an Incoterm into a sales contract, the seller and buyer should take care to ensure that the term selected is appropriate to the agreed point of delivery and the mode of transportation to be used.

SBLC Trade

The 11 Incoterms are grouped as follows:

◆◆ Group 1: Rules for any mode or modes of transport

–– EXW (‘ex-works’)

–– FCA (‘free carrier’)

–– CPT (‘carriage paid to’)

–– CIP (‘carriage and insurance paid to’)

–– DAT (‘delivered at terminal’)

–– DAP (‘delivered at place’)

–– DDP (‘delivered duty paid’)

◆◆ Group 2: Rules for sea or inland waterway transport only

–– FAS (‘free alongside ship’)

–– FOB (‘free on board’)

–– CFR (‘cost and freight’)

–– CIF (‘cost, insurance and freight’)

Applying the appropriate Incoterm, and the applicable transport and insurance document requirements. The Incoterms are set out in a logical order under each grouping, starting with the term that imposes the least obligation on a seller and ending with that which imposes the most.

Sellers and buyers are advised to review the full content of ICC Publication No. 715 once an Incoterm has been identified so that they understand its full implication and the obligations that it imposes. Irrespective of the chosen Incoterm, the buyer pays for the goods according to the terms of settlement agreed in the sales contract, proforma invoice or purchase order.

Courtesy – ifs University College 2015