BelleLaVie knows that Importing and exporting involves risks. One way of reducing these risk is to use a letter of credit – also known as a ‘documentary credit’. This can offer as a guarantee to the seller that they will be paid, and the buyer can be sure that no payment will be made until they receive the bill of lading.
A letter of credit is basically a guarantee from a bank that a particular seller will receive payment due from a particular buyer. The bank guarantees that the seller will receive a specified amount of money within a specified time. In return for guaranteeing the payment, the bank will require that strict terms are met.
The main advantage of using a letter of credit is that it can give security to both the seller and the buyer.
By asking for an appropriate letter of credit a seller is reassured that they will receive their money in full and on time. A letter of credit is one of the most secure methods of payment for exporters as long as they meet all the terms and conditions. The risk of non-payment is transferred from the seller to the bank (or banks).
When a buyer uses a letter of credit they get a guarantee that the seller will honour their side of the deal and provide documentary proof of this.
BelleLaVie takes these matters seriously;
- The customer’s creditworthiness – do they have a track record with you?
- Risks associated with the country you’re exporting to – is it politically stable with a good reputation as an international trading partner?
- Available advice and guidance – banks may recommend the use of a letter of credit in certain trading situations regardless of other factors, while credit insurers sometimes insist on it.
Give some thought to alternative arrangements, such as credit insurance, export factoring or cash in advance terms.
BelleLaVie prefer an irrevocable letter of credit which cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.
When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid.
For extra security, the seller may require the letter of credit to be ‘confirmed’ by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one.
To standardise terms and procedures and avoid misunderstandings, a set of international rules for letters of credit have been developed by the International Chamber of Commerce (ICC).
Most commercial letters of credit are governed by these rules, which are referred to as Uniform Customs and Practice for Documentary Credits (UCP). The current version of the rules is UCP 600, which came into effect on 1 July 2007.
The UCP standards give definitions of important terms that are used in letters of credit. When referring to letters of credit, banks and others involved in international trade will generally use the UCP definitions of key terms and phrases.
UCP also sets out general documentary requirements and standard practices for handling letters of credit.
Because UCP 600 standards are internationally recognised it’s always best to use letters of credit that are covered by them. If you’re an importer you may well find that sellers require you to use UCP letters of credit.
If a letter of credit is subject to UCP it will state this somewhere on it. It might include a statement like ‘This letter of credit is subject to the latest version of Uniform Customs and Practice for Documentary Credits published and updated by the International Chamber of Commerce’.
Be aware that in some instances the definitions and procedures set out in the UCP standards may differ from the laws of a particular country.