A Guide to Letter of Credit for Exporters

A Guide to Letter of Credit for Exporters

70% of documents presented as letters of credit are declined upon initial presentation to the bank! How accurate are the letter of credit documents that you present? 

Here is some guidance for preparing complying documents. We aim to provide an overview with the main groups of documents commonly required under a letter of credit.

Note: This is not intended as an exhaustive guide as contractual terms will determine varying degrees of complexity in terms of requirements.

 

Documents requesting payment

Bill of Exchange (Draft)

“An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of a specified person, or bearer”  

In simple terms, it is an “you owe me” that is  addressed to a buyer by a seller. In the context of a Letter of Credit, a Bill of Exchange is referred to as a ‘Draft’ and is used as an instrument of payment and/or finance. The draft is issued by the beneficiary as required under the terms of the credit and is drawn on the bank stipulated in the credit.

The obligation of the banks involved exists regardless of the drawee bank. There are 3 type of payable drafts

  1. The draft may be payable on sight 
  2. A Term draft which can be a fixed date or number of days after sight e.g., 31st Jan or 30, 60, 90 days
  3. A Usance Draft which can be a fixed number of days after the bill of lading date. e.g. 30, 60, 90 after bill of lading date.

Invoice 

The invoice provides details and price of the goods that form the basis of the trade transaction. It is made out by the seller (beneficiary under a Letter of Credit), on his own headed paper, in the name of the buyer (applicant), unless a Letter of Credit instructs otherwise.

The description of the goods must correspond exactly with the description stated in the Letter of Credit. Banks will check solely that the reference in the credit is shown in the invoice presented. Unless otherwise stipulated, neither the proforma invoice nor the contract will form part of the letter of credit.

In certain cases invoices may need to be authenticated by a Chamber of Commerce and / or the Consulate of the importer’s country.

If you would like a copy of the Uniform Customs & Practice for Documentary Credits (UCP 600), here is a link to the International Chamber of Commerce document.

http://store.iccwbo.org/icc-uniform-customs-and-practice-for-documentary-credits


Transport Documents Required

Transport documents, however named, must indicate the name of the carrier and be signed by the carrier or a named agent for or on behalf of the carrier.

The requirements for different types of transport documents presented under Letters of Credit are laid down in UCP 600 (Articles 19-25). These articles describe precisely how each type of document should be issued and by whom / how it should be signed. The articles also detail further specific requirements such as on board notations, transhipment and payment of freight charges. 

Here is a list of common transport documents:

Ocean Bill of Lading

A Bill of Lading is the traditional document used in connection with sea shipments. It has three key functions:

  1. A receipt given by a shipping company upon shipping of goods
  2. Evidence of a contract of carriage, the terms and conditions of which are stated on the reverse.
  3. Most importantly, a Bill of Lading is a ‘document of title’ and as such is required by the importer at the port of destination in order to take possession of the goods. Bills of Lading are normally issued in sets of two or three ‘originals’ or ‘negotiable copies’, any one of which can give title to the goods.

The Bill of Lading must show that the goods are on board a named vessel and signed as ‘clean’, meaning that there is no clause recording a defective condition in the state of the goods or packaging.

The goods are often consigned ‘to order of the shipper (exporter)’ in which case the Bill of Lading will be ‘blank endorsed’ (signed on the reverse) by the exporter. This has the effect of rendering the Bill of Lading transferable and the goods will be released to the bearer (or holder) of the document.

If the consignee on the Bill of Lading is specifically named then the goods will normally only be released to such named person / persons, upon production of suitable identification.

Air / Sea Waybills 

A Waybill is a document issued by the carrier of the goods or its agent.  It acts as a receipt for the goods and provides evidence of a contract of carriage. Unlike Bills of Lading, Waybills are neither negotiable nor documents of title. The goods will be released to the named consignee/importer upon application and production of suitable identification.

Road Consignment Note (CMR) 

Issued for carriage by truck or lorry, a Road Consignment Note evidences that the goods have been received by the carrier for onward transportation by road. It is not a document of title and the goods will be released to the consignee upon application and production of suitable identification. The document should show the name of the consignee, date of dispatch and bear the stamp of the issuing authorities.

Rail Consignment Note (CIM) – Issued by a railway authority it acts the same as a CMR in function

Courier or Parcel Post Receipt – Issued by a courier it acts the same as a CMR in function

Multimodal Transport Document or Combined Transport Bill of Lading can be issued to cover all stages of the journey.


Accompanying documents if required

 

Insurance Documents

If goods are to be insured for an amount exceeding the value of the goods, a Letter of Credit must state the relevant percentage. If the credit does not stipulate an amount or percentage, the minimum insured value is deemed to be 110% of the CIF or CIP value (UCP 600 Article 28). The credit should also stipulate the risks to be covered by the insurance.

There are two type of Insurance for moving cargo

  1. Insurance Policy 

An Insurance Policy is issued by an Insurance Company. The Policy states the amount of the insurance, the goods insured, the risks covered and all the conditions of the insurance. If a Letter of Credit calls for an insurance certificate, a policy is acceptable. A policy will generally be taken out by exporters to cover all exports over a given period rather than per individual shipment.

2. Insurance Certificate

An Insurance Certificate is issued by the Insurance Company by reference to a comprehensive Insurance Policy and its conditions. The Insurance Certificate stipulates the amount of insurance, the goods insured and risks covered per shipment.

 

Other Common Documents

Certificate of Origin –  A Certificate of Origin is a signed declaration stating the country of origin of the goods. If a trade agreement is in place. it is required by the customs authorities of the importer to assess import duty rates, verify place of manufacture for trade stats and political reasons.

Unless otherwise stated in a Letter of credit, this document may be issued by the beneficiary, generally Certificate of Origin are to be authenticated by a local Chamber of Commerce.  Depending on the destination of the goods it may also be legalized by the local embassy of the importing country.

Packing List – The packing list is usually drawn up by the exporter and it provides a detailed inventory of the goods, including the contents of each packing unit together with weights and dimensions.

Inspection Certificate  – An independent third party is that resides in the exporter’s country may be required to inspect the goods prior to shipment / dispatch.

Once inspection has taken place an Inspection Certificate may be issued. The certificate should state that the exported goods conform to a required standard or have achieved a ‘clean report of findings’.

Beneficiary’s Certificate / Declaration – The buyer may require the seller to undertake certain obligations such as the dispatch of copy documents directly following shipment. Under UCP 600 rules, banks require documentary evidence to support such conditions. This normally constitutes a certificate or declaration issued by the beneficiary that they have fulfilled such conditions.

We hope you have found this informative, if you have any questions regarding letters of credit, please do not hesitate to contact Logicom Hub on 0800 177 7871.

 

 

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