Griska: What is a letter of credit in foreign trade?

Letters of credit are one of the most reliable payment tools for foreign trade-related activities; While there are various means of payment by which the importer and/or exporter of the letter of credit may opt is the safest method, as it is a document issued by the buyer's bank by which it agrees to pay the exporter , a certain amount as long as all the terms and conditions stipulated are met.

Who is the letter of credit for?

  • Mexican exporting companies.
  • Mexican import companies.
  • Companies buyers or sellers of goods and/or services.

Parties involved in a letter of credit

 

Orderer: Person or entity requesting the opening of credit to your bank, committing to make the payment. It is usually the importer or an agent.

 

Issuing bank: Bank chosen by the buyer that makes and proceeds to open the credit. Make payment of the credit if the conditions required in the same are met.

 

Notifying bank: Correspondent bank of the issuing bank in the country of the exporter. Notifies the beneficiary of the opening of the credit without making any commitment other than that of the notification itself.

 

Beneficiary: Person on whose behalf the credit is issued and who may demand payment from the issuing bank or the paying bank, once it has met the conditions stipulated in the credit.

 

Confirming bank: Bank that guarantees payment by the issuing bank. It is usually used when the security offered by the issuing bank is not considered sufficient (conflicting countries, banks of unknown or doubtful solvency) in most cases it is the notifying bank itself.

 

Bank designated (for payment, acceptance or negotiation): Bank, generally the same country as the exporter that receives the mandate of the issuing bank to pay or commit to payment at maturity against filing of documents in accordance with the terms and conditions credit conditions. For the beneficiary it is as if a delegation from the issuing bank itself was. For the exporter, it is desirable that there be a paying bank in his own country.

 

Contents of a letter of credit

 

The general content of a letter of credit may vary from country to country; However, the minimum points that should be contained are listed below:

 

The date of issue

Expiration date and place

Credit type (irrevocable, stand by, transferable etc.)

Full payer and payee data

Currency and amount of trade

Tolerance (% of credit amount)

Correspondent bank

Payment method

Shipments and transfers (allowed or not)

Place of boarding

Destination

Deadline to board

Incoterms

Description of goods

Documents to be required for collection

Special conditions

Overseas expenses (discrepancies and others)

 

 

Letter of credit payment process

 

In general, a letter of credit works basically as follows:

 

The buyer fills out the current forms of application, asking his bank to accept his credit in favor of the exporter (the beneficiary); The buyer's bank (issuing bank) issues the letter of credit in accordance with the applicant's instructions. This constitutes an independent commitment of the bank and is enforceable against this bank even if the buyer is not able to reimburse its cost to the bank.

The bank issuing a letter of credit usually asks a bank in the exporting country to notify the beneficiary of the credit.

The credit can be paid at the offices of a bank in the exporter's country. In some cases, the bank of the exporter's country adds its own payment obligation by confirming the credit.

The exporter dispatches its goods and submits its documents to the bank to demand payment. The credit may provide for payment to be made immediately or at a later date. It may also require the beneficiary to submit a bill of exchange together with the commercial documents.

The paying bank sends the documents to the issuing bank and gets the refund. You may have been required to make a prior cash deposit at the bank.

 

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