17: Export documentation > Documents involving
the importer > Letter of credit
In this section we discuss the following
topics and terminology within the area of documentary
This is an easy enough term to explain.
A sight credit or L/C is one which paid upon presentation
of the required documentation (as stipulated in the original
L/C) to the issuing or confirming bank. As exporter, you
need to be careful however, as some L/Cs state that payment
will only be made at a specified branch counter of the
issuing or confirming bank (and won't necessarily be paid
or transferred directly into your account). The process
of having to go to a particular branch and receive payment
and then to transfer this payment into your account will
slow down the payment process and may add further costs
to the overall process. Thus, when working with sight
L/Cs (or any L/Cs for that matter) make sure where payment
will be made.
An L/C can specify any credit period that
you have negotiated with the importer. A letter of credit
that that incorporates a payment after a given term (e.g.
60 days) is known as a usance credit (also referred to
as a term or acceptance credit). The correct phrase is
hat the L/C is at usance, meaning that it will come into
effect at some future date (also referred to as maturity).
note that the maturity date may also have further stipulations
associated with it; for example:
- 90 days sight
- 120 days from Bill of Lading (B/L)
- 60 days and upon issuing of a FDA
(US Food and Drug Administration) clearance
Some of these provisos can have a
significant impact on your receiving payment and
you should make yourself fully aware of any such
provisos to your L/C. A usance/term credit will
require you, as exporter, to finance the gap between
delivery and payment.
An irrevocable L/C may also be transferable.
In the case of a transferable L/C, the exporter
can transfer all or part of his/her rights to another
party. Transferable letters of credit are often
used when the exporter is the importer's agent or
a middleperson (i.e. export agent) between supplier
and importer, and not the actual supplier of merchandise.
With a transferable letter of credit, the exporter
uses the credit standing of the issuing bank and
avoids having to borrow or use his own funds to
buy goods from a supplier. Hence, it is a viable
pre-export financing vehicle. Before transfer can
be made, the exporter must contact, in writing,
the bank handling the disbursement of funds - the
transferring bank. Transferable L/Cs can only be
transferred based on the terms and conditions specified
in the original credit, with certain exceptions.
Therefore, it may be difficult to achieve flexibility
and confidentiality with this finance method.
The transferring bank, whether it has
confirmed the letter of credit or not, is only obligated
to make the transfer to the extent and in the manner
expressly specified in the L/C. Transferable L/Cs
involve specific risks. When a bank opens a transferable
letter of credit for a buyer, neither party can be
certain of who will be the ultimate supplier. Both
parties must rely upon the importer's assessment of
the exporter's reputation and ability to perform.
To reduce overall risk and prevent the shipment of
substandard goods, an independent certificate of inspection
may be required in the documentation.
For simplicity's sake, many banks prefer
single transfer and discourage multiple transfers,
but will do multiple transfers if conditions are right.
Partial transfers can also be made to one or several
suppliers if the terms of the original L/C allow for
partial shipments. The processing of this type of
letter of credit can become complicated and tricky,
requiring logistics coordination and the highest level
of precision. Incomplete and/or ambiguous information
on the transferable letter of credit almost always
leads to problems. Furthermore, the beneficiary of
the transferable letter of credit must be available
throughout the entire negotiation process to assist
the transferring bank.
The term "revolving" is used to describe
a letter of credit, which, incorporates a condition
whereby the credit amount is to be renewed or reinstated
automatically without the need for a specific amendments
to the credit. This type of credit is used when
regular trade is conducted between an exporter and
an overseas buyer. A revolving credit can be irrevocable
or confirmed. Although a credit may, in theory,
revolve in relation to amount, in practice this
is rare, as it would mean that there might be no
limit to the number of times a specific amount could
be drawn. A credit, which revolves in relation to
time, is a much more common form of a revolving
credit. For example, a revolving credit could be
made available for an amount of US$ 10 000 per month
(irrespective of whether any sum was drawn during
the previous month) with an overall validity of
six months. A revolving credit may be:
- Cumulative, i.e. any sum
not utilised during the first period is carried
over and may be utilised in the subsequent period.
- Non-cumulative i.e. any sum
not utilised during the first period ceases
to be available in subsequent periods.
Back-to-back L/Cs are another common
occurrence in the world of international trade.
When an exporter, who is not a manufacturer, but
obtains goods from a supplier by acting as an export
agent for the supplier for example, has received
an L/C from an importer, the exporter, in turn,
may request his bank to open a L/C in favour of
his supplier on the strength of the existing L/C.
These two credits are said to be "back-to-back",
that is to say the one is issued on the security
of the other. A bank will only consider opening
a second credit if the same goods are involved in
both credits. In terms of the back-to-back L/C,
the exporter is both the beneficiary/exporter of
the first credit and the applicant/buyer for the
A standby L/C is one which is issued
in favour of the exporter for the purpose of "backing-up" certain
specified obligations of the importer. A standby
letter of credit requires the exporter's presentation
of documents which indicate that importer has not
met the obligations which the standby letter of
credit backs-up. A standby letter of credit, therefore,
is not intended to be drawn upon by the standby
letter of credit beneficiary unless the standby
letter of credit applicant does not meet its obligations
as specified by the standby letter of credit.