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| What is a Letter of Credit? |
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- A conditional undertaking
- Given by a bank
- On behalf of an applicant (buyer)
- In favour of an exporter (seller)
- Covering payment to the exporter in exchange for export of goods
- Against production of specific documents
- In full compliance with credit terms
- Evidencing satisfactory shipment
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| What is a Confirmed Letter of Credit? |
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A confirmed letter of credit goes one step further. Should the exporter remain unsatisfied with the payment risk from the importer's bank, (whether it is the country risk or the standing of the issuing bank that is unattractive), he can request a second payment undertaking from a local bank in his own country. This is termed a confirmation.
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| What are the Payment Terms? |
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Sight Credit
Payable immediately, upon sighting of a correct set of documents by the paying bank.
Term, Usance or Acceptance Credit
Payable after a stipulated period of time, e.g. 90 days from shipment. Normally evidenced by acceptance of a bill of exchange.
Deferred Payment
Payable after a stipulated period of time, but no bill of exchange accepted as evidence of debt.
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| What are the advantages of L/C Confirmation? |
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- Covered by UCP 500 ("ICC Uniform Customs and Practice for Documentary Credits" ICC Publication No.500 - the international rule-book for all documentary credits including letters of credit)
- Gives the beneficiary a "paymaster" in his own country
- Eliminates country risk for the beneficiary
- Finance may be obtained by negotiating documents or by discounting drafts
- Concise and straightforward documentation
Click HERE for an example of a trade finance transaction involving a letter of credit confirmation.
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