Here at Trade Finance Global, we speak to many organizations and institutions regarding their Letters of Credit. From looking at possible modifications to (and variations of) existing Letters to the trade and researching of options for new Letters, we deal with clients such as Funders, Banks, and Businesses.
Our vast experience within the export community has gone into a comprehensive Top 10 FAQ guide:
How long can a Usance Letter of Credit be Open for?
Usance Letters of Credit, meaning the payment can be deferred. Thus, giving more time to the buyer to inspect or even sell the product on, have no explicit time limit. For example, the UCP 600 or ISBP have no official guideline on how long the Letter can be used for.
This does mean, however, that the time period which the letter will adhere to is often defined by the local laws of the issuing bank’s country.
For more information on different types of Letters of Credit available, and see what options are available for your business, see our Article here
Can a Bank Guarantee be issued for services and goods such as commodities?
In short, yes they can. However, the contractual wordings of the financial instruments – be that Bank Guarantee (BG) or Letter of Credit (LC) – is far more important than the instrument itself.
As a general rule, Standby LC’s are the cheaper option, as they cover less contractually, and have a costlier process involving issuance protocols and document examination fees. Because of this, LC’s are the more popular option among traders.
The way in which the instruments are used in real-world Trade is the key difference between Letters of Credit and Bank Guarantees. We tend to see merchants involved in the regular import and export of goods will use Letters of Credit to ensure delivery and payments. Whereas contractors bidding for infrastructure projects will use Bank Guarantees to verify their financial credibility.
For more on the differences, and similarities between BG’s and LC’s, see our article here:
3. What is Deferred Payment and how does it differ from a Usance Letter of Credit?
There is not a huge difference between a Deferred Payment and a Usance LC. Both of the terms technically mean that the payment is deferred which does allow for more time in a transaction.
The main parting difference between the two Letters is the absence of a draft. In the Usance Letter, a draft included which technically, has no significance to the document or the transaction. A Deferred Letter does not include this draft, however, it really makes no difference to either party.
4. Letter of Credit Requirements
Although each letter has specific requirements, as they cover specific aspects of the transaction, there is a general spread of documents that are likely to be required:
- Commercial Invoice
- Packing List
- Bill of Landing
- Proof of Insurance
- Generalized System of Preferences (GSP)
- Beneficiary Certificate (including contact information)
- Phytosanitary & Fumigation certificate
- Shipping Company Certificate
These are examples of overseas shipment criteria. If the goods are being transported internationally over borders rather than the sea, then the documentation will be different. For example, you may need to provide a Road or Rail Consignment Note, which acknowledges that the goods have been received by the carrier and are ready for transport.
How many Times can a Letter of Credit be amended?
Currently, there is no limit to the number of amendments can be made to a Letter of Credit under any published ICC rule. This being said, in practice, it may not be wise to amend it too many times.
There were once revocable Letters of Credit. This Letter could be subject to cancellation or amendment at any time by either the buyer or the issuing bank. This time, however, it does not require any form of notification. However, because of the complications, this caused the UCP600 removed revocable letters from anywhere within their jurisdiction.
Unless all three parties involved can agree to terms, Irrevocable Letters cannot be canceled, amended or reversed. This may add time and possible confusion to the transaction, and unless absolutely necessary is probably not a wise move.
For more information on Revocable Letters of Credit, see our article here:
How relevant is a Letter of Credit when most of our Trade is done under ‘Open Account’ terms?
Open account terms mean the buyer opens a credit account with the seller. This therefore allows the goods to be produced and shipped before payment is due. So yes, this does hold similarities with the Letter of Credit, and in some markets, the competition is so high, that buyers are able to demand this.
However, that level of competition is not always present, nor is the possibility of a credit account always technologically possible. Meaning then, the Letter of Credit is a vital tool in the securing of payment and the transport of goods.
Furthermore, within the realms of international trade, there are many variables which can contribute to the non-payment in a transaction. Although an open account allows for deferred payment terms, it does not necessarily guarantee the transaction whereas the Letter of Credit does.
There is undoubtedly the hot topic of Blockchain right now, and its possible applications to trade finance. The high demand for the need for securing transactions and providing proof to both parties is a reason Letters of Credit are so popular. As market complexity increases, the speed and efficiency should increase also and we can see a potential set of opportunities there.
7. What is Avalization?
Avalization is defined as the endorsement of a bill of exchange. It is the involvement of a third party whose role is to guarantee the obligations of the buyer as per the contract. By ‘Avalizing’ the document, they are acting as a co-signer on the contract, and thus share liability.
When companies are trading overseas, the provision of an AVAL may be often necessary to make the instrument eligible for discount.
One example of a document that utilizes the Avalization process is Promissory notes. Technically, a promissory note is a signed document that contains a promise of payment on a specified date. Promissory notes are used to source methods of finance that do not include a banking institution. Although this is generally true, Banks do also issue them. This third party can be an individual or a company, the only requirement is they are willing to bear the liability.
Since anyone can issue the Promissory Note, Avalization instils a lot of confidence in the transaction.
Factoring vs. Reverse Factoring
Standard invoice factoring allows a business to unlock cash that is tied up in future income. It includes a company selling its accounts receivables to a third party – the factor – at a discount. This allows the business access to money that would have not otherwise been accessible in the short-term.
Reverse factoring, however, is the process of a third party putting itself between the buyer and the seller. The third party commits to paying the company’s invoices to the suppliers at an accelerated rate in exchange for a discount.
The buyer will pay the provider at the agreed invoice due date, and the supplier receives a much-discounted payment from the Factor.
What currency can the issuing bank pay within a Letter of Credit?
Officially, the currency that the issuing bank uses to pay the beneficiary should be the currency specified in the Letter. This being said, there is no law or regulation that prevents parties negotiating about a different currency.
Marine Insurance: What does it cover?
Although each policy and coverage will be different, Marine insurance will cover the loss or damage of the following:
The Marine Insurance Documents should reflect whether the contract specified warehousing of goods also. However, if delivery is at the port then the standard insurance will terminate there.