Understanding Payment by Letter of Credit

An Import LC is one of the most secure methods of importing goods and it allows you to control shipping dates or facilitates a shipment schedule.  Many Exporters will not provide goods unless they receive payments in advance or are guaranteed payment by a bank. An LC is a conditional payment guarantee provided by an Importer's bank to the Exporter. The payment guarantee is conditional upon the Exporter providing documentary evidence of the shipment of goods in accordance with the terms of the LC. Import LCs are subject to credit approval.

 

How Does The Process Work?

The Importer's bank will guarantee the payment to the Exporter either immediately upon receipt of the correct documents or at some future determinable date e.g. 60 days from sight (by the bank) of the shipping documents or 90 days from Bill of Lading date. LCs are issued subject to the Uniform Customs and Practice for Documentary Credits issued by the International Chamber of Commerce.

Steps 1-4 (Issuance)



Steps 5-10(Negotiation)



TRADEACCESS

High volume users of LCs can benefit from our online TradeAccess portal.This is designed to assist Importers in the convenient, efficient and secure management of their LCs online. With the streamlining and automation of International Trade activities, this will ultimately deliver greater control over country, commercial or performance risks.

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    Benefits

    • The Importer's bank takes on the responsibility of paying the Exporter, reducing the administration of the accounts payable function in the Importer's office.
          
    • The Importer's bank is only authorised to effect payment for documents that comply with the terms and conditions of the LC. In the event that documents do not comply with the terms and conditions the bank must refer to the Importer before payment is effected.
          
    • The provision of a bank guarantee of payment may enable the Importer to negotiate extended trade credit terms.
          
    • Using LCs with extended credit terms may be a relatively cheap source of credit when compared to overdrafts.
          
    • Multiple payments can be effected under one LC.

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    Restrictions/Disadvantages

    • It is necessary for the Importer to have a line of credit with a bank before the bank is able to issue a Letter of Credit. The amount outstanding under each Letter of Credit issued is applied against this line of credit from the date of issuance until final payment.

    • The Importer cannot cancel an LC or change it without the agreement of all parties involved.

    • The decision to pay is in the hands of the issuing bank, not the buyer.

    • LCs do not guarantee the quality or quantity of the goods.

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For further information please contact your Relationship Manager or our Trade Finance team.

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