LETTERS OF CREDIT

Speed up your business with these expert tips on "Documentary Credits". Take a look and discover this TIP!

It is a a recognised method in international trade whereby a bank in your country acts on your behalf to collect payment for goods. The exporter hands over his documents to a bank so that the bank willin accordance with the instructions received, handle and deliver the documents to the buyer upon payment and/or acceptance. 

It is a payment mandate The importer must submit a request through his financial institution for the importer to be able to directly or through another bank, pay to the exporter the amount of the transaction, provided that the exporter complies with the following conditionsThe credit is strictly conditional on the credit itself (usually the provision of certain documentation).

• The first step is that the importer and exporter reach an agreementThe importer and the exporter have a contract of international sale and purchase and clear conditions of the documentary credit, with all the documents that must be included in it. At this point, the importer will ask his bank to open the documentary credit in favour of the exporter, including in this request all the conditions of the credit.
• The second step depends on the issuing bank (importer), which receives the credit application, studies the documentation and the risk of the operation and proceeds with its approval or refusal.

If so, it proceeds to the issuance of the credit by underwriting with a bank in the exporting country. (advising bank) the document in which the documentary credit materialisesThe importer shall be informed thereof.

• The third step depends on the exporter's bank, which notifies the opening of the documentary credit and informs you of the conditions. The exporter will study these conditions and if they are in accordance with what has been agreed with the importer, he will proceed with the shipment of the goods.

Once the goods have been shipped, the exporter shall submit all the required documentation to the bank. In this case, if everything is as stipulated, the advising bank pays the amount of the credit to the exportereither on demand or agrees to pay at a later date. It then sends the issuing bank the documentation and ratifies the terms of payment.

The issuing bank will reimburse you the amount advanced and deliver the documents received against payment on demand or against acceptance of payment at a later date. Finally, the issuing/importing bank will make the payment and with the documentation received, the issuing bank may take back the goods.. Payment may be on demand or at a future date, depending on the terms of the credit.

PRACTICAL EXAMPLE OF A DOCUMENTARY CREDIT

A Spanish company (the payer) imports sugar cane from Jamaica for one million euros. As agreed with the Jamaican exporter (the beneficiary), it approaches its bank (the confirming bank), requesting that it open a documentary credit (also known as a letter of credit) by that amount.

In this document or letter it states that the issuing bank will pay this amount when the exporter provides them with specific documentation. The most common is usually the bill of lading of the goodsplus any other documentation deemed appropriate (health certificates, expert opinions, insurance, etc.).

In addition to the usual risk of collecting or not collecting inherent in any commercial transaction, there is the fact that they are usually large transactions, with claims that are complex to carry out, as different jurisdictions are involved. Documentary credit is therefore a risky operation for the financial institution.

Types of documentary credits:

Documentary credits may be revocable or irrevocable. The former make little sense, as they can be cancelled after they have been issued, ceasing to fulfil the guarantee function.

AND SO WE WILL GENERALLY FIND OURSELVES WITH IRREVOCABLE DOCUMENTARY CREDITS:

• Unconfirmed letter of credit: ethe bank issuing the credit, to communicate to the exporter thereof, shall make use of a bank in the country of such exporter.

That bank is the called a warning bank, who shall act on behalf of the issuing bank, notify the opening of the credit, collect the documentation and pay, if necessary.

If the adviser is limited to that, it is a confirmed documentary credit, originates when the exporter has requested, and the issuer has done so, than a bank in your country, either the advising bank or another bank specified by the beneficiary, guarantee that the issuer will pay you.

Depending on when the payment is made, it will be made on demand, upon delivery of the documentation, or at a later date, as soon as the documentation is delivered.

• TRANSFERABLE DOCUMENTARY CREDITS

These are those in which the beneficiary can identify other persons who may share the guarantee and to whom the money is to be paid, The exporter is a mere intermediary or "broker", acting on behalf of other clients. Another modality with similar purposes is the "back-to-back" documentary credit which is when the exporter-intermediary opens or orders a documentary credit with the guarantee of another of which he is the beneficiary.

Documentary credit may have a partial advance clause in favour of the beneficiary, prior to the delivery of the documentation. If it is the red clause shall be against a mere receipt of funds or a guarantee. If it is green will need to prove ownership of the goods. Finally, it is worth mentioning the revolving documentary creditsthose that can be reused for a certain period of time.

• USUAL FEES FOR DOCUMENTARY CREDITS

It should be recalled that the documentary credit is a hybrid of collateral and means of payment, which in turn makes it possible to use it as a financing tool. Fees for this type of credit are shared between the payer and the payee. The originator company will pay fees structured like those for guarantees: an arrangement fee and a quarterly risk fee..

If the payment is deferredThe quarterly risk is replaced by an equivalent one for deferred payment as soon as the documentation is submitted. If the appropriation has to be amended or there are discrepancies (discuss the documentation submitted), commissions are usually charged as well. In addition, the costs of the SWIFT used throughout this process are usually passed on.

The payee will have to bear fees such as the payer's bank notice fee, confirmation fee, transfer fee or cash payment fee. This arrangement can be negotiated to be borne by the payer.

Advantages and disadvantages of documentary credits:

Within the advantages for the exporter This will provide a high level of payment security, as well as timely collection if all the required documents are presented.

In addition makes it possible to finance with the guarantee of the documentary credit itself: for the importer, it offers certainty as to the date and conditions of delivery of the goods. It also guarantees its solvency vis-à-vis the exporter.

As far as the disadvantages, it has a higher cost than other means of payment: the exporter may have some difficulty in presenting all compliant documents.

For the importer, the greatest inconvenience may arise from having to make payment without verifying the characteristics of the goods.

A documentary credit is a tool used in international trade that allows an importer to obtain payment for goods delivered by an exporter. This type of credit works through an intermediary bank that handles the documents and makes payments according to the instructions set out in the credit.

To obtain a documentary credit, the importer must apply to his bank, including all the conditions of the credit and the documents necessary to support the commercial operation. The issuing bank studies the application and approves or denies the credit. If approved, the issuing bank issues a document materialising the documentary credit and sends it to a bank in the exporter's country (the advising bank).

The exporter studies the credit conditions and sends the goods once he agrees with the credit conditions. Once the goods have been shipped, the exporter submits all the required documents to the bank, which makes the payment if everything is in order.

Documentary credits may be transferable or revocable, and may have partial advance or revolving clauses. The fees involved in documentary credits are structured like those for guarantees, and are divided between the originator and the beneficiary.

The advantages of documentary credit include a high level of payment security and a guarantee of delivery of the goods. However, There are also disadvantages, such as a higher cost than other means of payment and the possibility of difficulties in submitting compliant documents.

In summary, a documentary credit is an important tool in international trade that provides security and protection to both the importer and the exporter, although it also has its disadvantages.

How can the artificial intelligence (VER+ TIP) with the documentary credit?

As a language model, I can provide you with general information on the use of documentary credit in international trade and how the process of issuing and using credit works.

I can help you understand the different types of documentary credits, the fees and costs involved in their use, and the steps necessary to complete a successful commercial transaction using a documentary credit.

In addition, I can help you understand the specific requirements of each country and how to comply with the regulations and rules related to the use of documentary credit in international trade. Please note that my role is to provide you with general information and I cannot give you personalised or specific advice for your particular situation.

If you need detailed advice on how to use a documentary credit in your trade transactions or any other international trade-related issue, we recommend that you seek the help of an international finance expert or a qualified professional in the field of international trade.