We have produced the following guide for importers required to issue letters of credit for the purchase of goods from overseas suppliers. Please note that whilst all the common terms and documents are listed below, the order in which they appear on application forms or online facilities may vary between banks.
For context and a full understanding of letter of credit procedures, book our popular training course:
The Essential Guide to Letters of Credit for Importers
Once it has been agreed that a letter of credit is to be issued (both between importer and exporter and the importer and issuing bank), the first step to be taken is the completion by the importer of a letter of credit application form.
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 exporter.
In summary, the application form should include:
- Names and addresses of importer (applicant) and exporter (beneficiary)
- Expiry date (calculated as the latest shipment date plus the number of days for presentation of documents – see below) and place of expiry (country of the supplier / beneficiary)
- Amount (figures and words)
- Drafts required drawn on issuing bank* (select ‘at sight’ or alternative payment term, eg: ‘90 days after date of bill of lading / air waybill etc’). *Please note that whilst this option continues to be included on application forms, the International Chamber of Commerce (ICC) actively discourages issuing banks from incorporating this as a requirement within L/Cs as it is considered as unnecessary in modern trade practice.
- Partial Shipment (allowed / not allowed)
- Transhipment (allowed / not allowed)
- Latest shipment date
- Shipment / dispatch / taking in charge from: (place/ port / airport of export)
- To destination (place / port / airport of import)
- Documents to be presented within: (the default period is ’21 days after date of shipment’, however importer may request an alternative up to 21 days, eg: 10, 14 days)
- Goods description (brief summary including quantity, avoiding excessive detail)
- Delivery Term (as per Incoterms® 2020*, eg: FCA, FOB, CPT, CFR, CIP, CIF) *Importers are advised to check that the application makes reference to the current revision of the ICC Incoterms® Rules as many financiers have out-of-date forms referencing earlier versions.
Documents required:
- Invoice (state number required, eg: duplicate, original plus two copies)
Transport Documents:
- Sea shipments: Full set (3 x originals) of clean ‘on board’ marine bills of lading made out to the shipper’s order, blank endorsed and marked ‘freight prepaid’ (‘C’ or ‘D’ Incoterms only) or ‘freight collect’ (‘E’ or ‘F’ Incoterms only) and notify: (name and address). Specify if “Charter Party Bill of Lading” is acceptable (oil / bulk shipments)
- Air dispatch: Air Waybill marked ‘for the consignor / shipper’ marked ‘freight prepaid’ (‘C’ or ‘D’ Incoterms only) or ‘freight collect’ (‘E’ or ‘F’ Incoterms only) and notify: (name and address) bearing reference to this documentary credit, showing actual date of dispatch of goods, including flight number and evidencing goods consigned to: (name and address)
- Road transport: Original CMR / Truck Waybill marked ‘freight prepaid’ (‘C’ or ‘D’ Incoterms only) or ‘freight collect’ (‘E’ or ‘F’ Incoterms only) evidencing goods consigned to: (name and address)
- Other modes of transport: Select for alternative methods, eg: rail, parcel post, courier)
Insurance: (CIF / CIP Incoterms)
- Insurance certificate / policy for full CIF / CIP value plus: (select 10% unless otherwise agreed), blank endorsed, covering Institute Cargo Clauses ‘A’, war, strikes, riots & civil commotions etc.,
Additional documents (as required by importer), eg:
- Packing List (in number required eg: duplicate, 1 original and 2 copies etc)
- Weight List (in number required eg: duplicate, 1 original and 2 copies etc)
- Certificate of Origin (unless specifically stated this document can be issued by any party, including the supplier. If a third party document is required, eg: Chamber of Commerce this should be specifically stated)
- Inspection / conformity certificate (unless specifically stated this document can be issued by any party, including the supplier. If a third party document is required, eg: SGS or a named agent on behalf of the importer this should be specifically stated)
Additional conditions may include additional data content such as reference numbers to be quoted on all documents etc.
L/C charges will typically read: “all charges outside the country of issuance of for account of the beneficiary”, however if so (exceptionally) agreed, the applicant should select either “all charges for account of applicant” or “all charges for account of beneficiary.”
Care should be taken to ensure that the applicant states all documents required and in particular those required to access / clear the goods.
As stated above, 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.
On the other hand, the importer needs to ensure that no excessive demands are made of the exporter, who may refuse to accept the credit or insist on costly amendments.
Finally, importers should ensure that they provide clear instructions regarding which account funds are to be taken from eg: Euro, GBP, US Dollar account etc., Also if any special arrangements such as a forward exchange contract is in place, quote the related reference and instructions to the bank.
Issuing Letters of Credit Online
It has become more common in recent years for importing companies issuing high volumes of letters of credit and receiving import collections to utilise the banks’ online trade services facilities.
This service provides the importer with the ability to issue letters of credit online using supplier templates, thus minimising the use of paper and reducing administration times.
A typical facility will also include:
- Viewing and tracking of L/C transactions, including amendments, documentary presentations and discrepancies
- Ability to communicate with the bank via email to approve discrepancies, initiate amendments etc.,
- View the status of documents remitted by suppliers on ‘collection’ terms.
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