Letters Of Credit
A Letter of Credit (LC) is a mode of payment used for the importation of visible goods.
It is a written undertaking given by a Bank (issuing Bank) at the request of it's customer (applicant), in which the Bank obligates itself to pay the exporter (seller/beneficiary) up to a stated amount within a prescribed time frame upon presentation of stipulated documents that conform to the terms and conditions of the documentary credit.
The major participants in an LC transaction are:
- The Buyer/Importer/Applicant i.e the customer requesting LC to be issued.
- The Seller/Exporter/Beneficiary i.e the Recipient of the LC.
- The Issuing Bank - which gives the written undertaking.
- Advising Bank/Seller's Bank i.e the bank that advises the LC to the beneficiary.
Common Types of LCs
The common types of LCs are:
- Unconfirmed LC
- Confirmed LC
Any LC that has only the payment obligation of the issuing bank.
Any LC that carries the payment obligation of at least two banks being the issuing bank and any other bank i.e the confirming bank.
The seller may either request a named bank to confirm the credit or just ask for confirmation by any reputable bank.
Confirmation comes at a cost since it is a service rendered by the confirming bank. The cost of confirmation can be borne by either the applicant or the beneficiary depending on the agreement between them and the instruction given to the opening bank.
For an LC payable at sight, payment would be made upon presentation of credit compliant documents while for deferred payment LC, payment is made at a later date (in accordance with the agreed date stated in the L/C e.g 60 days from bill of lading date or invoice date e.t.c).
Bills for Collection (Documentary Collection)
Bills for Collection is also a mode of payment used for the importation of visible goods.
A Bill for Collection is defined according to Uniform Rule for Collection (URC 522) as the handling of documents (financial and/or commercial) by banks in accordance with instructions received from the exporter in order to:
- Obtain payment or acceptance or
- Deliver documents against payment and/or acceptance or
- Deliver documents on other terms and conditions.
The major participants of a Bill for Collection transaction are:
- The Buyer/Importer/Applicant
- The Seller/Exporter/Beneficiary
- The importer's bank/Collecting bank
- The exporter's bank/Remitting bank