Export Letter of Credit

Export Letters of Credit Key Features

• An Export Letter of Credit, which is also referred to as documentary credit, is a contractual agreement on the part of the the issuing bank, on behalf of an importer, promising to pay the beneficiary or exporter provided conditions specified in the Letter of Credit have been satisfied.
• The issuing bank will typically use intermediary banks to facilitate the transaction and make payment to the exporter.
• The Letter of Credit is a separate contract from the contract for the transaction on which it is based. Thus the banks are not concerned with the quality of the underlying merchandise or whether either party fulfills the terms of the sales contract.
• The issuing bank’s obligation to pay is solely conditioned on seller’s compliance with the terms and conditions specified in the Letter of Credit.
• In Letter of Credit transactions, banks are only concerned with documents, not goods.

Using Letter of Credit Financing

• Letters of credit are a highly recommended method of funding international trade, especially for high-risk situations, for transactions with new or less-established trade relationships and for transactions where the exporter is satisfied with the creditworthiness of the issuing bank.
• When Letters of Credit are used to finance trade, the transaction risk is fairly balanced between exporter and importer, assuming that all terms and conditions specified in the Letter of Credit are performed.
• Payment in Letter of Credit transactions is only made after the goods are shipped by the exporter. A variety of payment, financing and risk mitigation options available to both the importer and exporter with Letters of Credit.
• Letters of Credit are a tremendously popular and effective method of financing international trade. They are, however, labor intensive and are a relatively expensive method of financing international transactions.

Letter of Credit Process

• The importer arranges for the issuing bank to open an LC in favor of the exporter.
• The issuing bank transmits the LC to the nominated bank, which forwards it to the exporter.
• The exporter forwards the goods and documents to a freight forwarder.
• The freight forwarder dispatches the goods and either the dispatcher or the exporter submits documents to the nominated bank.
• The nominated bank checks documents for compliance with the LC and collects payment from the issuing bank for the exporter.
• The importer’s account at the issuing bank is debited.
• The issuing bank releases documents to the importer to claim the goods from the carrier and to clear them at customs.

Special Letters of Credit

Letters of credit can take many forms. When they are made transferable, the payment obligation under the original letter of credit can be transferred to one or more second beneficiaries. With a revolving letter of credit, the issuing bank restores the credit to its original amount each time it is drawn down.

A standby letter of credit is not intended to serve as the means of payment for goods but can be drawn in the event of a contractual default, including the failure of an importer to pay invoices promptly when due. Similarly, standby letters of credit are often posted by exporters in favor of an importer to pay invoices when due. Standby letters of credit are often posted by exporters in favor of importers because they can serve as bid bonds, performance bonds, and advance payment guarantees. In addition, standby letters of credit are often used as counter guarantees against the provision of down payments and progress payments on the part of foreign buyers.