Letter of Credit

We have the capability to assist you in your trade deal by providing a Documentary Letter of Credit – DLC MT700 from European Banks, on behalf of your company, to help you finalize imports and exports.

LC Issuance process to open LC MT700 at Minimal Cash Margin

Submit your LC or DLC request with the signed proforma invoice or contract of your trade deal. Also, inform the quantity and therefore the tenure of your required LC.
We examine the trade details and inform you about the approval or rejection of your LC request.
Once approved, we’ll send you a service agreement and inform you about the service charges to start your LC transaction.
Once we sign the agreement and receive the service charges, we’ll commence work on your transaction. First, we’ll block our bank limit; then, we’ll provide the MT700 draft for your perusal and approval.
After receiving the documents, draft approval, and LC issuance fee, we’ll request our bank to issue the specified MT700. Normally it won’t take more than 2 banking days to conclude the deal.
In some high-value SBLC transactions, we also issue pre-advice MT799/MT199 upon the mutual consent of the instrument provider and the beneficiary. In some cases, the beneficiary must provide evidence of a credit line sanction letter from its receiving bank where he wants to receive this instrument.

 

What is a Letter of Credit?

A Letter of Credit can be defined as a written undertaking issued by a bank guaranteeing that the buyer will fulfil his payment commitment towards the vendor after he submits the shipping documents. Letter of Credit or LC is available in following formats – Irrevocable LC, Import LC, LC at Sight, LC MT700, DLC MT700. 

Because of the nature of international trade dealings and the concerned risk factors including distance, varying laws of each nation and trust issues between traders, the Letter of Credit has become an important part of global trade. When a buyer and a seller from two different parts of the planet decide to try to conduct business, there is always an issue of uncertainty of trust and payment. To close the gap between the traders and to create trust, LCs are important tools. 

Usually, Letters of Credit or LC at Sight are valid for 90 days and 180 days respectively. And they are always irrevocable. It means a bank provides an irrevocable commitment that the vendor will get paid once they complete the terms stated within the issued irrevocable Letter of Credit. Also, it assures that just in case of some unforeseen crisis, if the customer is unable to issue the payment or the customer goes bankrupt, then the bank will take the responsibility to satisfy the payment commitment as agreed within the contract. Hence, this is often an irrevocable commitment made by the bank on behalf of the customer towards the vendor. LCs are mostly preferred as the payment term in international trade. 

How Does a Letter of Credit Work?

When it involves global trade, buyers face the danger of not receiving goods from the supplier even after the payment is made. And sellers run the risk of non-payment by the customer for the supplied goods. Therefore, MT700 was introduced by the International Chamber of Commerce (ICC). This secures the interests of both parties involved in trading. 

While using LC payment term, the buyer’s bank assures to pay the vendor for the supplied goods; upon complying with all terms and the submission of documents as stated within the issued DLC. In case, if the vendor fails to submit the documents before the deadline, the LC is going to be expired. Then the bank returns the funds to the buyer’s account which they deposited while opening the LC. This eradicates the risks for both the buyer and the vendor. 

Parties Involved in LC Issuance

In general, the following are the parties involved in Letters of Credit.
Applicant: The Applicant or the customer who requests the bank to issue the DLC MT700 in favor of their supplier.
Beneficiary – The supplier who receives the MT700 in their checking account, called LC Beneficiary.
Issuing Bank – The bank that issues the MT700 on behalf of their customer, called LC Issuing Bank.
Advising Bank – The advising bank receives the MT700 from the issuing bank and advises the LC towards the seller’s bank.
Negotiating Bank – The seller’s bank that receives the LC works also as a negotiating bank on their client’s behalf.

Letter of Credit Benefits

Not just the importer, but the exporter also gains many benefits by using Import LC as a payment term. And it includes:

For Exporter

 

• The buyer cannot cancel or alter an order without the approval of the vendor. Hence, the assembly risk becomes zero.
• The buyer’s bank must buy the shipped goods.
• The buyer cannot refuse to buy the supplied goods once the vendor complies with the terms of credit.
• Payments are secured if the customer opts for a credit.

 

For Importer

 

• The bank is responsible for the payment of products or services on a precondition that the vendor would offer all the documents required, consistent with the terms of MT700.
• Through an LC, the importer is indeed proving their solvency.
• In most cases, the customer can control the shipping of products.
• If the vendor provides a credit option, it means the vendor has been granted a credit period for the payment.
• Prepayments become negligible under import LC.

Types of Letters of Credit

Irrevocable Letter of Credit

These can’t be amended or changed without the consent of all parties involved. Most of the traders prefer Irrevocable LCs. This is often because Irrevocable LC gives the safety that the majority of suppliers want. 

Transferable LC

This will be transferable to the principal supplier upon request of the first beneficiary. This is because, in some cases, the primary party is playing the role of a middle party under this sort of Letters of Credit. 

Confirmed LC

In some cases, sellers might not trust issuing bank that gives LC on behalf of the customer. So, they require a bank in their home country to verify the LC. 

LC at Sight 60 Days/LC 90 Days After Sight

These types of LC are usually utilized in domestic and global trade. This guarantees that the bank will release the payment, once the vendor submits all the documents as mentioned within the credit. 

Back-to-Back Letter of Credit

This type is normally issued against the Master LC. Firstly, the LC is opened in favor of an exporter from an importer’s bank. After that, as per the Master LC, the credit facility available within the exporter’s account, the exporter’s bank will open a replacement LC, in favor of their principal supplier. 

Letter of Credit Cost

The cost of Letters of Credit depends on the quantity and its tenure. Usually, the value may include bank commission, processing fee and swift charges. Further, the value is borne by the applicant (buyer). And it should be clearly stated on the issued LC. For more info on the value, get in touch with us. 

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