Key points
- Main parties: the applicant (usually the buyer), the issuing bank and the beneficiary (usually the seller), plus the advising bank, the nominated bank (negotiating or accepting bank) and the confirming bank.
- Documents, not goods: banks examine only whether documents appear on their face to comply with the credit, UCP 600 and international standard banking practice (ISBP 745); they do not examine the goods themselves, and the credit is independent of the sales contract.
- By method of availability, credits are available by sight payment, deferred payment, acceptance or negotiation.
In practice
For exporters, the value of a letter of credit is that it replaces the buyer’s credit with the bank’s – provided the documents comply. In practice, most refusals stem not from problems with the goods but from flaws in the documents: an invoice description that differs from the credit, a bill of lading dated after the latest shipment date, late presentation, or data that conflict between documents. Exporters therefore examine a credit as soon as it arrives, ask promptly for amendments to terms they cannot meet or that contain a soft clause, and check every item against the credit when preparing documents.
For importers, opening a credit uses bank facilities and may require a cash deposit, and the application must match the contract terms. Once documents arrive, the importer must decide within the set time whether to accept any discrepancies, then arrange payment or acceptance to take up the documents.
How Tranexio supports it
Tranexio covers import L/C applications, comparison of issuance advices and amendments, as well as receipt, examination, presentation and settlement of export credits, discrepancy handling and a soft-clause library. Letters of credit are linked to contracts, shipments, receipts and payments. See Letters of credit and collections.