Payment & trade finance L/C

Letter of credit (L/C)

A documentary payment method in which the buyer’s bank (issuing bank) undertakes to pay the seller against timely presentation of complying documents specified in the credit – bill of lading, invoice, certificate of analysis, certificate of origin and so on. Banks deal only with documents, not goods, so the credit terms must match the sales contract exactly and be achievable. It is the most common secure payment method for large raw material deals and first-time counterparties.

Related terms

Confirmed letter of credit

A letter of credit to which a second bank, usually in the seller’s country (the confirming bank), adds its own payment undertaking on top of the issuing bank’s. It protects the seller when the issuing bank’s credit risk or the buyer country’s transfer and country risk is high. The confirmation fee is usually an annual percentage reflecting the risk, and the contract should say who pays it.

Usance (deferred-payment) letter of credit

A letter of credit under which payment falls due at a set time after complying presentation – for example 90 or 180 days after the bill of lading date. It finances the buyer, who can process and sell the goods before paying, while the seller can obtain cash early by having the bank discount the accepted claim (forfaiting). The interest for the usance period and the discount cost should be built into the price.

UCP 600 (Uniform Customs and Practice for Documentary Credits)

The ICC rules in force since 2007 that govern almost every letter of credit worldwide. They set the banks’ examination period (five banking days after presentation), the standard for compliant documents, the ±10 % tolerance implied by the word “about”, a ±5 % quantity tolerance for bulk goods, and the presentation period (no later than 21 days after shipment unless stated otherwise). The eUCP supplement covers electronic presentation.

L/C discrepancy

A conflict between the documents presented and the credit terms, between documents themselves, or with UCP 600 – typos, late shipment or late presentation, missing endorsement, a different description of goods, or a bill of lading that is not “clean”. With discrepant documents the bank is released from its obligation and payment depends on the buyer waiving the discrepancy, which weakens the seller’s position. Checking the draft credit before issue and pre-checking documents are the best defences.

Bill of lading (B/L) B/L

The key document of sea transport, issued by the carrier to show that it has received or loaded the goods. It has three functions: a receipt for the cargo, evidence of the contract of carriage and, when issued “to order”, a document of title. Because whoever presents an original can take delivery, it is the backbone of letters of credit and cash-against-documents deals. A “clean on board” B/L shows the goods were loaded in apparent good order.

Explained in the trade handbook

Trade handbook