• The issuing bank:
is the buyers bank (generally located in the buyer’s country) which issues the documentary credit.
• The advising bank:
is the issuing bank's agent (generally located in the seller’s country) which forwards or advises the documentary credit to the beneficiary without making a commitment in favour of the latter.
• The confirming bank:
is generally the advising bank which undertakes to pay the beneficiary rather than waiting for the issuing bank to pay.
• The beneficiary:is the seller (exporter) to whom the documentary credit is issued. Process
• Conclusion of commercial contract The seller and the buyer come to an agreement and sign the commercial contract: the settlement will be carried out by documentary credit.
• Initial request for documentary credit
The buyer requests his bank to open a documentary credit in favour of the seller.
• Issuance of the documentary credit
The buyer's bank (issuing bank) issues the DC and sends it to a correspondent bank in the seller's country.
• Notification or confirmation of the DC
The correspondent bank (advising or confirming bank) authenticates and advises the DC to the seller.
• Shipment of goods
The seller ships the goods.
• Availability of DC
The seller presents documents to the correspondent bank for payment /negotiation/ acceptance. The correspondent bank checks the documents and pays the seller if the documents conform to the terms and conditions of the documentary credit.
• Sending of documents
The correspondent bank sends the documents to the issuing bank and claims the payment.
• Delivery of documents to the applicant and reception of goods
The issuing bank delivers the documents to the buyer after settlement. The buyer presents the documents for the delivery of goods.Types of documentary credit• Revocable documentary credit:This can be amended or cancelled without prior notice to the exporter. It provides a relative guarantee of payment and is rarely used.
• Irrevocable documentary credit:
This ensures the firm commitment of the issuing bank to pay the beneficiary, for the account of the importer, against submission of documents in conformity with the terms and conditions of the credit. It cannot be amended or cancelled without the agreement of all the parties involved. Thus it covers only the commercial risk (buyers insolvency), not the bank or country risks (non transfer or banking risks on the issuing bank).
• Irrevocable and confirmed documentary credit:The issuing banks, as well as the confirming bank, undertake to pay the beneficiary against submission of documents in conformity with the terms and conditions of the credit, whatever the issuing bank and political or economical situations of the buyer's country. It provides the seller high security coverage against commercial, country and bank risks.Availability under documentary credits• By sight payment:The payment is made against presentation of documents in conformity with the credit.
• By deferred payment:
The seller grants a term of payment to the buyer (payment after a period specified in the documentary credit without any draft required).
• By acceptance:
This mode of payment is similar to the deferred payment but the beneficiary issues a draft that must be drawn on the advising/confirming or issuing bank. The exporter receives the acceptance of the draft from the advising/confirming or issuing bank undertaking that the payment will be effected at maturity.
• By negotiation:Negotiation means the giving of value by the nominated bank or every other bank to the beneficiary against drafts and/or the stipulated documents.Special types of documentary credits• Red-clause documentary credit:This includes a special clause which authorizes the notifying or confirming bank to make an advance payment to the beneficiary against his commitment to dispatch the goods and to present the specified documents later. This clause is added at the applicants request and specifies the amount of the authorized advance.
• Revolving documentary credit:
This is a credit that is automatically reinstated after each drawing or upon receipt of authorization, from the DC issuing bank, with limits as to the duration of the facility and as to the amount involved for each drawing. This technique is used when a purchaser wishes to have certain partial quantities of the ordered goods delivered at specified intervals (multiple delivery contract).
• Transferable documentary credit:
This documentary credit permits the original beneficiary (first beneficiary or transferor) to transfer all or some of the rights and obligations under the credit to a second beneficiary or to several beneficiaries. It can only be transferred once to a second beneficiary.
• Back to back documentary credit:A documentary credit known as a master documentary credit whose recipient is generally a company acting as an intermediary which in its turn opens a second credit in favour of the supplier of goods.Advantages
• By securing your commercial transactionYou choose the list of documents representing the goods you want to obtain against payment. These documents will permit you to clear the goods through customs as stipulated on the contract (methods, term of delivery, quantities, quality). We undertake to pay your supplier against submission of documents in conformity with the documentary credit.The interpretation of the documents is carried out following the UCP 500 of the ICC, recognized worldwide.
• By paying cash or at term in the best conditionsWe can issue sight credits, or else deferred payment or acceptance credits. In the latter cases, you can benefit from a term of payment.The standby letter of credit is an international bank guarantee upon first demand and is issued under a letter of credit to secure the good performance of a contact. It is subject to the uniform customs and practices (UCP). The standby letter of credit is a simple and flexible means of payment that offers you commercial coverage.Principle of the SBLC
The standby letter of credit is an international bank guarantee "upon first demand" and a document issued under a letter of credit to secure the good performance of a contract or an obligation. It is subject either to the UCP 500 or to the ISP 98, effective since January 1, 1999.The ISP 98 are international rules and practices stemming from the ICC uniform customs and practices relative to the documentary credits (UCP), recognized worldwide as the code of practice governing commercial letters of credit. The ISP 98 condenses the expertise of bankers, traders, rating agencies, companies, treasurers, credit managers, governmental institutions and banking control authorities, and is considered as an international norm for standby letters of credit.The standby letter of credit is similar to the documentary credit since documents stipulated on the credit must be presented for a claim.
Difference from the documentary credit:The documentary credit is an instrument and a guarantee of payment while the standby letter of credit is only a guarantee of payment.Parties involved
• The applicant:Is the buyer or the seller depending on the type of standby letter of credit.
• The issuing bank:
Is the applicant's bank which issues the standby letter of credit.
• The advising bank:
Is the issuing bank’s agent which notifies the standby letter of credit to the beneficiary without making any commitment in favour of the latter.
• The confirming bank:
Is the bank which undertakes to pay the beneficiary.
• The beneficiary:Is the seller or the buyer depending on the type of standby letter of credit.Process
• Conclusion of commercial contract The buyer and the seller agree and sign the commercial contract.
• Initial request for standby L/C
The buyer (applicant) requests his bank to issue a standby L/C in favour of the seller (beneficiary).
• Issuance of the standby L/C
The buyer's bank (issuing bank) issues the standby L/C and sends it to its correspondent bank in the seller's country or directly to the seller.
• Advising or confirmation of the standby L/C
The correspondent bank (advising or confirming bank) authenticates and advises the standby L/C to the seller.
• Shipment of goods and paymentThe seller ships the goods to the applicant. The applicant then pays the seller in return.Types of SBLC
• Bid/Tender bond standbySupports an obligation of the applicant to execute a contract if the applicant is rewarded a bid.
• Advance payment standby
Supports an obligation to account for an advance payment made by the beneficiary to the applicant.
• Good performance standby
Supports an obligation to perform other than to pay money, including for the purpose of covering losses arising from a default of the applicant in completion of the underlying transactions.
• Commercial standby
Supports the obligation of an applicant to pay for goods or services in the event of non-payment by other methodsAdvantagesThe standby letter of credit is an instrument adapted to continuous transaction flows which permit you to:• Facilitate the management of your operationsFew documents are needed when a claim is made under the guarantee: a draft, a payment demand, and a beneficiary signed authorization are generally sufficient. The beneficiary will appreciate this.
• Optimize your financial charges
The standby letter of credit is a guarantee. It is not supposed to be claimed, so you and your supplier will have lighter document handling charges.
• Retain entire control of the reception of your goods As documents are addressed directly to you, you can take delivery of your goodsfaster and note their condition and conformity.Principle of a bank guarantee
The commitment delivered by the bank (guarantor) is a personal guarantee by which the bank undertakes to pay, for the account of its client (the principal), a defined percentage of the commercial contract. The guarantee will permit the buyer or the seller (the beneficiary) to receive compensation in the event that the principal defaults on certain specified obligations.There are two types of guarantees: contractual guarantees (subject to URCB 325) and demand guarantees (subject to URDG 458).Moreover, guarantees can be:- Direct, if the principal's bank issues the guarantee directly in favour of the beneficiary.- Indirect, if the principal's bank instructs another local bank (correspondent) to issue a guarantee under its counter guarantee.Parties involved
• The principal:Is the client (exporter or importer).
• The guarantor bank:
Is the principal's bank.
• The beneficiary:
Is the foreign importer or exporter.
• Conclusion of commercial contract:
The seller and buyer agree with each other and sign the commercial contract.
• Request for guarantee issuance in favour of the buyer:
The seller (applicant) requests his bank to issue a guarantee in favour of the buyer (beneficiary).
• Issuance of the guarantee (direct guarantee):
The seller's bank (guarantor) issues a guarantee in favour of the buyer.
• Issuance of the first guarantee:
The correspondent bank issues a guarantee in favour of the beneficiary (buyer).Types of bank guarantee
• The Tender Bond:Permits the exporter to make a tender for a contract and the importer to be sure of the financial quality of the tendered.
• The Down Payment Guarantee:
Enables the exporter to receive a down payment from the importer to be delivered.
• The Good Performance Guarantee:
Secures any claims by the buyer to the seller in case of default in delivery or performance of the contract terms.
• The Retention Money Guarantee:
nables the exporter to receive advance payment of the last term of the contract and the importer to be covered in the event of a problem during that period.Conditional and unconditional bank guarantee• The conditional guarantee:Is in addition to the commitment it guarantees (subjected to the URCB 325).
• The unconditional guarantee:
Is independent from the contract. It can also be called the guarantee on first demand (subject to the URDG 458).
The differences between those two guarantees are the following:
• Conditional guarantee:
The text of the guarantee does not include the terms: "on first demand" or "payment without objection".
• Unconditional guarantee:The text of the guarantee includes obligation to pay on first demand or any synonymous phrase such as "unconditional payment" or "payment without objection".Advantages
• You are an exporterYour buyer is sure that your contractual obligations are guaranteed by the issuing bank.
• You are an importer
You ask your supplier for one or several guarantees from his bank to cover every step of your Contract. In this case he is also covered for payment of all his exports.
All international transactions are conducted according to the terms and conditions negotiated between you and your buyer. By negotiating terms you secure the deal, minimize risks and protect your company in case of possible trade disputes, claims and/or legal actions. Terms of trade are usually stipulated in the trade contract and clearly indicate your responsibilities and those of the buyer'.
There are no standards regulating trade contracts as such. You'll find that sometimes it may be just a one-page document and sometimes a very complicated 10+ page booklet including several appendices, additional conditions, etc. In some cases a contract may even be made based on words alone. It really depends on the goods you are selling, your relationship with the buyer and your personal preferences. Also, in different jurisdictions, there may be different requirements that must be met for a contract to be effective according to its terms.
In order to be effective and to promote certainty in your business relationship with your buyer, it is a good idea to provide for the following details of your deal in any trade contract:
• Date of Contract
• Seller's and Buyer's Names
• Product Name
• Product Description
• Packaging
• Quantity
• Unit Price
• Terms of Delivery (Incoterms)
• Terms of Payment
• Delivery Date
• Validity
The contract should be signed by all parties directly involved in the contract. For example, if some responsibilities in the contract fall to a middleman, agent or another third party, this party should sign the contract together with you and the buyer.
The CIB Trade Finance & Advisory department consists of International Lawyers as well as experienced bank officers.
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