LETTER OF CREDIT

WHO IS RESPONSIBLE FOR ISSUING A LETTER OF CREDIT?

• ADVISING BANK

• ISSUING BANK

• CONFIRMING BANK

• THE APPLICANT

WHAT IS THE ROLE OF THE ADVISING BANK IN AN L/C TRANSACTION

• ISSUES THE L/C ON BEHALF OF THE IMPORTER

• CONFIRMS THE PAYMENT IN CASE THE ISSUING BANK FAILS

• NOTIFIES THE EXPORTER OF THE L/C & FORWARDS DOCUMENTS

• SHIPS GOODS TO THE IMPORTER

WHICH PARTY RECEIVES THE PAYMENT UNDER AN L/C?

• THE APPLICANT (BUYER)

• THE BENEFICIARY (EXPORTER)

• THE ISSUING BANK

• THE ADVISING BANK

WHAT HAPPENS AFTER THE EXPORTER SUBMITS THE SHIPPING DOCUMENTS TO THE ADVISING BANK?

• THE ISSUING BANK IMMEDIATELY PAYS THE IMPORTER

• THE IMPORTER DIRECTLY RECEIVES THE GOODS WITHOUT ANY VERIFICATION

• THE ADVISING BANK FORWARDS THE DOCUMENTS TO THE ISSUING BANK FOR VERIFICATION

• THE ADVISING BANK DESTROYS THE DOCUMENTS

WHY MIGHT A CONFIRMING BANK BE INVOLVED IN AN L/C TRANSACTION?

• TO PROVIDE ADDITIONAL SECURITY IN CASE THE ISSUING BANK FAILS TO PAY

• TO APPROVE THE CONTRACT BETWEEN THE BUYER AND THE SELLER

• TO HELP THE IMPORTER NEGOTIATE BETTER TERMS WITH THE EXPORTER

• TO PHYSICALLY INSPECT THE GOODS BEFORE SHIPMENT

WHAT IS THE MAIN DIFFERENCE BETWEEN A SIGHT & A USANCE L/C?

• SIGHT L/C IS REVOCABLE, WHILE USANCE L/C IS IRREVOCABLE

• SIGHT L/C REQUIRES IMMEDIATE PAYMENT, USANCE ALLOWS FOR DEFERRED PAYMENT

• SIGHT L/C REQUIRES CONFIRMATION, USANCE DOES NOT

• SIGHT L/C IS ONLY USED FOR SMALL TRANSACTIONS

WHAT IS THE KEY BENEFIT OF A CONFIRMED L/C?

• ALLOWS THE ISSUING BANK TO REVOKE THE CREDIT AT ANY TIME

• ELIMINATE THE NEED FOR SHIPPING DOCUMENTS

• PROVIDES ADDITIONAL GUARANTEE FROM ANOTHER BANK

• EXTENDS THE PAYMENT PERIOD INFINITELY

A RED CLAUSE L/C IS BENEFICIAL BECAUSE IT:

• PROVIDES AN ADVANCE PAYMENT TO THE SELLER

• EXTENDS PAYMENT TERMS FOR THE BUYER

• REQUIRES MULTIPLE BANKS TO APPROVE TRANSACTIONS

• PREVENTS EXPORTERS FROM USING THIRD-PARTY SUPPLIERS

WHICH TYPE OF L/C ALLOWS AN EXPORTER TO PASS CREDIT TO ANOTHER SUPPLIER?

• RED CLAUSE L/C

• BACK-TO-BACK L/C

• STANDBY L/C

• TRANSFERABLE L/C

HOW DOES A BACK-TO-BACK L/C HELP AN EXPORTER?

• ENSURES IMMEDIATE PAYMENT FROM THE BUYER

• ALLOWS THEM TO USE THE ORIGINAL L/C TO SECURE A SECOND L/C FOR PURCHASING SUPPLIES

• PROVIDES AN ADVANCE PAYMENT BEFORE SHIPPING GOODS

• ELIMINATES THE NEED FOR DOCUMENTATION