Before deciding to effect payment by letter of credit, an importer should consider the following:
- Will my bank be prepared to issue a letter of credit and what will be the impact on my banking facilities?
- Will I have to pay upon presentation of documents (ie: at sight) or can I negotiate an extended credit period?
- Will my own bank offer a financing facility covering the period from payment under the L/C up to receipt of funds from my own debtors? (Check out our previous article – Tips for Importers – How to Ask your Bank for Finance)
- When does the letter of credit need to be issued? Does the supplier require the L/C prior to manufacture / sourcing of raw materials in which case what is the lead time up to shipment / dispatch following issuance?
- As banks deal in documents and not with the goods, services or performance to which they relate (article 5, UCP600), have I taken steps to ensure that the goods shipped will be of the required quality?
- How reliable is the supplier? Do they have a good track record?
- Should I arrange for inspection of the goods prior to shipment either by an independent inspection party or myself / an agent acting on my behalf?
- Will the goods be adequately insured for transit? Who is responsible for arranging insurance and where are claims payable?
- In return for issuing a letter of credit, can I negotiate any benefits for myself:
- A discount on the price of the goods
- Obtain a longer credit period – will any additional interest costs be incurred?
- Who will pay the bank charges? It is most common for importers to pay the issuing bank charges whilst suppliers will bear the costs of the advising / confirming bank.
- In the event that an amendment to the letter of credit is required, who will pay the associated bank charges? If the fault of my supplier, can I insist that he pays ALL amendment charges including those of the issuing bank?
- How quickly will the issuing bank process my application for a letter of credit? Do I need to fill in a paper application form or does the issuing bank have the facility for me to issue L/Cs online (subject to sanction of a credit facility)?
- If the currency of the letter of credit is other than my domestic currency, should I protect myself against possible adverse exchange rate fluctuations?
The Import L/C Application
Once it has been agreed that a letter of credit is to be issued (both between importer and supplier and the importer and issuing bank), the first step to be taken is the completion by the importer of a letter of credit application. This may be a traditional ‘paper based’ or pdf form, however most major banks now offer the facility for L/Cs to be set up via an online portal.
This application is the basis for issuance of the Letter of Credit. The form will contain all the terms and conditions including the documents to be presented by the supplier following shipment.
In summary, the application form should include:
- Names and addresses of importer (Applicant) and supplier (Beneficiary)
- Latest date of Shipment
- Period for presentation of documents to the bank following shipment
- Expiry Date (latest date for presentation of documents to the bank)
- A description of the goods
- Delivery Term (as per Incoterms® 2010, eg: FCA, FOB, CPT, CFR, CIP, CIF)
- Port / Airport / Other place of shipment / despatch
- Port / Airport / other place of destination
- Documents to be presented
- Additional conditions
- Charges instructions
- Account to be debited
Care should be taken to ensure that the importer states all documents he requires and in particular those required in order to access / clear the goods.
It may also be important to state who is to issue the documents required, together with their wording and data content, particularly if an inspection certificate is called for. Failure to state an issuer will allow the bank to accept the specified document(s) as issued by any party, including the supplier.
On the other hand, the importer needs to ensure that no excessive demands are made of the supplier, who may refuse to accept the credit or insist on costly amendments.