What are letters of credit
Acceptance Draft - payable at a fixed or determinable future date, upon the
face of which the drawee has acknowledged in writing his or her obligation to
pay at maturity. See also "banker's acceptance" and "trade acceptance".
Account Party - The party instructing the bank to open a letter of credit and on
whose behalf the bank agrees to make payment. In most cases, the account
party is the importer/buyer, and is also known as the applicant.
Advice of Fate - Notification of the status of a collection that is still outstanding.
When a draft bears this phrase, the time begins to run from its date. The date of
maturity is therefore fixed and does not depend on the date of acceptance of the
Advising Bank - A bank that accepts a letter of credit from the issuing bank,
verifies its authenticity, and forwards it to the beneficiary. The advising bank
does not take on any payment obligations.
After Sight - When a draft bears this phrase, the time begins to run from the
date of its acceptance.
Air Waybill (of lading) - A signed receipt and a contract to deliver goods by
air. Such bills are non-negotiable and do not convey title to the goods as do “To
Order” bills of lading used by ocean and land carriers. The title passes to the
party to whom the goods are consigned (the Consignee).
Amendment - Change to terms of a letter of credit. Beneficiary has the right to
refuse the amendment under an irrevocable letter of credit.
Applicant - See "account party".
Assignment of Proceeds - A request by the beneficiary to pay all or part of the
funds due to him to a third party. This instrument does not transfer rights in the
letter of credit nor the title to the goods.
Back-to-Back Letter of Credit (L/C) - Letter of credit issued for the account
of a buyer who is already holding an L/C in his or her favor. The back-to-back
L/C is issued in favor of the supplier to cover the same shipment as stipulated in
the credit already held by the buyer. Terms of both L/Cs, except for the amount
and expiration date, are so similar that the same documents presented under the
back-to-back credit are subsequently applied against the credit in favor of the
buyer. However, the buyer/beneficiary of the first credit substitutes this draft
and invoice for those presented by the supplier. See also “letter of credit”.
Banker’s Acceptance - Form of credit created when a bank “accepts” a time
draft typically drawn on the bank by a seller of goods. By accepting a draft, the
bank is obligated to pay the face amount at a specified time in the future, usually
six months or less after acceptance. A seller of merchandise can sell the banker's
acceptance for an amount less than face value and have immediate use of funds.
See also “acceptance”.
Bank Draft - A check drawn by a bank on another bank payable to the seller at
the request of the buyer. The check may be denominated in U.S. Dollars or most
Beneficiary - The party who receives payment as stipulated in a letter of credit.
This party is usually the seller/exporter.
Bill of Exchange - Formal written order addressed by one person (drawer) to
another (drawee), signed by the drawer, and directing the drawee to pay on
demand or at a fixed or determinable future time, a certain sum in money to the
order of a specified person (payee).
Bill of Lading (Air, Ocean, Railroad, Truck) - A document of title issued by
the carrier (transport company) or its agent. Bill of lading is a receipt for the
merchandise in transit, as well as a contract for delivery to a specified party at a
“BLANK ENDORSED” - A negotiable bill of lading in which the title to the
merchandise is passed on to another party by means of an endorsement. The
holder of the “blank endorsed” bill of lading is entitled to take possession of the
“CLEAN BILL OF LADING” - One in which the goods are described as having
been received by the carrier in “apparent good order and condition” and without
qualification. “LATE PRESENTATION” (STALE): A bill of lading is presented to
a bank for payment or negotiation after the stipulated date in the letter of credit,
or later than 21 days after the date of its issuance.
“NEGOTIABLE OR ‘TO ORDER’” - A bill of lading in which the merchandise is
consigned directly “to order” or “to the order of” a designated party, usually the
shipper or a bank. The phrase “to order” or “to the order of (a designated party)”
signifies negotiability permitting the title of the merchandise to be transferred
many times by means of appropriate endorsements.
“NOTIFY” - This phrase requires the carrier to notify a designed party upon
arrival of the merchandise, but does not transfer title of the merchandise to that
“STRAIGHT OR NON-NEGOTIABLE” - A bill of lading in which the
merchandise is consigned directly to a designated party, generally the buyer, but
not to his “order”. Delivery of the merchandise is made only to the designated
party, usually without surrendering the bill of lading.
Cash in Advance (CIA) - A term of trade in which the exporter does not ship
goods until payment is received; offers the least risk to sellers and the most risk
Clean Draft - A sight or time draft (bill of exchange) which is not accompanied
by additional documents. Also referred to as "Clean Collection".
Collecting Bank - Bank that acts as an agent for a remitting bank that wishes to
have its collections handled. The collecting bank demands payment from the
buyer and handles the funds received as instructed; generally the funds are sent
back to the remitting bank.
Commercial Invoice - A written and signed list of merchandise and/or services
with associated quantities, prices and expenses. It contains the terms of the sale
and is prepared by the seller to show the total amount owed by the buyer.
Confirmed Credit - A letter of credit in which the issuing bank’s obligation to
pay is backed (confirmed) by a second bank.
Deferred Letter of Credit (L/C) - Letter of credit that calls for payment at a
future date, but does not require a draft. See also “letter of credit” and “usance
letter of credit”.
Direct Collection - Method of payment for goods in which the seller sends a
draft drawn on the buyer,
the shipping documents, invoices, insurance
certificates, other appropriate documents directly to the buyer’s bank for
collection. Only an information copy of the advice is sent to the exporter’s bank
to establish and monitor the collection transaction for the seller.
Discrepancy - Any deviation from the terms and conditions of a letter of credit
or from the documents presented under the letter of credit.
Documentary Credit - A letter of credit issued to support the movement of
merchandise supported by shipping documents presented by the beneficiary to
the Issuing Bank for payment or acceptance.
Documents Against Acceptance (D/A) - Instructions given by a shipper to his
or her acceptance bank that the documents attached to a time draft for collection
are deliverable to the drawee/payer against his or her acceptance of the draft.
Documents Against Payment (D/P) - Instructions given by a shipper to his or
her bank that the documents are deliverable to the drawee/payer only against his
or her payment of the draft.
Draft - A draft is a formal demand for payment. It is an unconditional order in
writing, addressed by one party (drawer) to another party (drawee), requiring
the drawee to pay, at a designated or determinable future date, a specified sum in
lawful currency (either in dollars or other currency) to the order of a named
party (the Payee). In international trade, drafts are also known as “Bills of
Eurodollars - A term used for U.S. dollars held on deposit or traded anywhere
else in the world except in the USA.
Eximbank (Export-Import Bank of the United States) - A U.S. government
agency that offers insurance/guarantees of commercial or political risks
associated with U.S. export transactions. These programs encourage U.S.
exports by reducing the exporter’s risk.
Expiry or Expiration Date - The date on which the draft and documents drawn
under a letter of credit must be presented to the negotiating, accepting, paying,
or issuing bank in order to effect payment. The issuing bank’s obligation ceases
on that date if the letter of credit is a “straight credit.” If the letter of credit is a
“negotiable credit,” the issuing bank must honor the credit, provided the
complying documents were submitted prior to the expiry (or expiration) date.
Foreign Exchange - The process of trading the currency of one country for
that of another.
Foreign Exchange Exposure - A situation in which a U.S. company,
selling/purchasing in a currency other than U.S. Dollars, runs the risk of
receiving a reduced dollar amount or paying an increased dollar amount due to a
fluctuating exchange rate.
Forward Transactions - Foreign exchange transactions settling between three
business days and one year (and sometimes longer).
Freight Forwarder - An independent business that arranges for the shipment of
export cargo and completes the necessary export documentation on behalf of the
Irrevocable Letter of Credit (L/C) - Letter of credit that cannot be changed or
cancelled without the consent of all parties involved. Almost all L/Cs are
irrevocable unless otherwise stated on L/C. See also “letter of credit”.
Issuing Bank - Bank that draws up and issues the letter of credit and that
makes payment according to the conditions
Letter of Credit - An instrument issued by a bank, at the request of the
applicant, promising to pay the beneficiary upon his presentation of stipulated
documents in accordance with the terms and conditions of the credit.
“CONFIRMED”: A letter of credit issued by one bank to which another bank
added its irrevocable confirmation to pay, thereby obligating itself in the same
manner as the opening bank.
“STAND-BY”: A letter of credit that generally guarantees payment due for an
unfulfilled obligation on the part of the applicant or another party. It is payable
Negotiate - Take action to verify that the documents presented under an L/C
conform to the requirements in order to release funds to the seller.
Negotiating Bank - The bank that reviews the documents required in the letter
Opening Bank - See "Issuing Bank".
Paying Bank - Bank that effects payment of documents negotiated under a letter
of credit, customarily the buyer's bank. It is usually also the negotiating bank,
unless the L/C allows another bank to negotiate or the paying bank is unable to
negotiate. See also "negotiating bank".
Presentation - Presentation for acceptance or payment on a collection or letter
Proforma Invoice - An invoice sent in advance of shipment, to enable the buyer
to obtain an import permit or exchange permit or both. The proforma invoice
gives a close approximation of the weights and values of the intended shipment.
Protest - Legal process of demanding payment of a negotiable item from the
maker who has refused to pay.
Red Clause - Clause in a letter of credit that authorizes the advising/negotiating
bank to make an advance payment to the beneficiary before presentation of
shipping documents, usually against a simple receipt.
Reimbursing Bank - The bank names in a letter of credit as the bank authorized
by the issuing bank to honor claims presented by the paying, accepting, or
Revocable Letter of Credit (L/C) - A letter of credit that can be modified or
canceled by the issuing bank without the beneficiary’s consent unless the
negotiation of complying documents has already taken place. The issuing bank
must honor the draft(s) negotiated before the notice of revocation has been made.
Spot Transaction - Foreign exchange transaction in which foreign currency is
bought at the current rate of exchange and delivered within two business days
after the transaction date.
Spread - The difference between the buying (bid) rate and the selling (offer) rate
of any foreign currency for any particular period.
Standby Letter of Credit (L/C) - Letter of credit issued to back an obligation
of the applicant, but typically not intended to be the primary method of payment.
Usually payable against drafts and statements, but not against commercial
documents. See also “letter of credit”.
Trade Acceptance - Draft drawn by the seller of goods on the buyer and
accepted by the buyer for payment at a specified future date. See also
Transferable Letter of Credit (L/C) - Letter of credit that permits the
beneficiary to transfer all or some of the rights and obligations under the credit to
a second beneficiary. See also “letter of credit”.
UCP - Uniform Customs and Practices for Documentary Credits. Publication
issued by the International Chamber of Commerce (2007 revision, ICC
Publication No. 600, or “UCP 600”) that outlines the rules and guidelines
involved in a letter of credit transaction.Source: www.creditmanagementworld.com