Letters of credit

A documentary letter of credit

is an obligation of the bank that issues an LC (Letter of Credit) to pay the LC amount to the seller of the goods if he submits to the issuing bank the documents listed in the LC in compliance with the terms and conditions of the LC.

  • It helps to reduce risks.
  • It helps to avoid payment in advance.
  • It allows the user to obtain financing.
  • It allows the user to do business in riskier regions.
  • International rules are observed in the transaction.

Types of letters of credit

  • Confirmed letters of credit

    Sellers who want to avoid the possible risks of the issuing bank or its country of location should always ask for the confi rmation of the LC by his own bank. By confirming LC the confirming bank undertakes to effect payment in case letter of credit complying documents are presented to the bank, no matter if payment is effected by the LC issuing bank.
  • Transferable letters of credit

    A transferable LC gives the intermediary the opportunity to apply to the nominated bank for the transfer of the LC for the benefit of its supplier. Thus, the intermediary buys the goods using the same LC under which it resells goods to the buyer. By transferring the LC intermediary releases it‘s rights to the part of received LC amount to the second beneficiary of the LC. When transferring letter of credit, intermediary is only allowed to make following changes to the original LC:

    • may lower LC amount and unit price of goods;
    • may shorten shipment date and date of presentation of documents;
    • may increase insurance value;
    • may show it‘s name and address instead of the LC applicant, i.e. may become an LC applicant.

    The transferable LC allows for intermediating major goods transactions with minor investments. The supplier (= the second beneficiary) has to fulfil the terms and conditions of the LC and submit the documents. The intermediary (= the first beneficiary) replaces only the invoice and bill of exchange of the second beneficiary (increase by its commission/profit) upon the arrival of the documents at the transferring bank. If the terms and conditions of the LC allow for partial consignments, the LC can be transferred to several second beneficiaries (not exceeding the initial amount or quantity of goods).

  • Standby letters of credit

    A standby letter of credit is, in essence, a guarantee. This means that the benefi ciary demands money only if the applicant fails to perform its obligation, e.g. does not pay for the goods if the applicant is the buyer. In order to receive payment under standby letter of credit it is usually sufficient to present a copy of unpaid invoice and the seller’s claim for payment to the bank. Transport documents are rarely requested. More information on standby letters of credit can be found in the guarantees section.

Advantages and opportunities

  • To the Buyer

    • Bank effects payment for shipped goods only upon presentation of letter of credit complying documents;
    • Buyer is enabled to control good‘s shipment dates;
    • Letter of credit proofs buyer‘s solvency (important when signing new contracts);
    • Letter of credit with deferred payment undertaking is an opportunity for the buyer to sell the goods first and than pay to the seller, i.e. seller gives a credit to the buyer.
  • To the Seller

    • Buyer‘s bank undertaking to pay for delivered goods or performed services;
    • Buyer‘s bank may not refuse payment in letter of credit terms are fulfilled;
    • Possibility to control payment date;
    • Possibility to take advantage of discounting under received letter of credit. Further information on discounting could be found here.

Course of the letter of credit

  1. Buyer and the seller agree that letter of credit will be used for payment;
  2. Buyer contacts his bank and requests to open documentary credit in seller’s favor;
  3. Buyer’s bank advices letter of credit to the seller’s bank, who notifies the seller about issued letter of credit;
  4. Seller ships the goods and submits to it’s bank the documents required by letter of credit;
  5. Seller’s bank sends the documents to buyer’s bank. Buyer’s bank checks the compliance of the documents against letter of credit terms, effects payment under letter of credit and hands the documents over to the buyer. In case documents do not comply with letter of credit terms, payment under letter of credit is effected only after receipt of the buyer’s approval for payment.

You can also read more about documentary credit in the Swedbank brochure Documentary Credit, Collection and Bank Guarantees.

Documents

Conditions

  • Main conditions for issuing letters of credit

    • Letter of credit may be issued upon depositing company’s funds in a special account or using credit line/loan granted to the company;
    • Credit line/loan may be granted upon pledging immovable and movable property (land, buildings, etc.);
    • Land, buildings and other immovable property pledged must be evaluated by independent property assessors acceptable to the bank;
    • Pledged property (except land) must be insured.
  • Frequently asked questions

    1. What is letter of credit?

      – buyer‘s bank obligation to pay letter of credit (LC) amount to the seller of goods after he ships the goods and submits to the bank the documents required by LC in compliance with the LC terms and conditions.
    2. What documents must be submitted to the bank for LC issuance?

      – buyer has to submit to the bank filled in and duly signed application to issue LC, has to provide pledge and pay LC issuance fee.
    3. How long does it take for a bank to issue LC?

      – bank issues LC within one working day after filled in and duly signed LC application is submitted to the bank, pledge is provided and customer has enough funds to pay LC issuance fee in his bank account.
    4. Is there a possibility to cancel issued LC?

      – LC is an irrevocable payment instrument (if not stated othervise), therefore may not be cancelled without beneficiary‘s written concent.
    5. What kind of documents must be submitted to the LC issuing bank for payment?

      – seller (exporter) has to present documents required by the LC. Before the issuance of the LC buyer and seller have to agree on the documents to be required by the LC. Usually LC askes for the commercial documents such as: commercial invoice, shipping document, various certificates (origin, quality etc.).
    6. When payment under LC is effected?

      – payment under LC is effected as soon as seller (exporter) ships the goods and presents to the issuing bank documents required by the LC which are in strict compliance with LC terms and conditions. In case issuing bank finds any discrepancies in presented documents payment is effected only upon buyer‘s (importers) consent with such discrepancies. Payment under LC may be effected upon presentation of documents (at sight) and on certain deferred payment date set for by the LC.
    7. How can seller (eksporter) receive LC issued by the buyer‘s bank?

      – seller (exporter) should indicate his bank swift code to the buyer. As per buyer‘s (importers) request, buyer‘s bank issues LC and advises it to the seller (exporter) through seller‘s bank via swift. „Swedbank“, AB swift code - HABALT22.
    8. What are LC related costs? Which LC party is liable for those costs?

      – usually LC related costs are split between the seller and the buyer so, that each party covers their bank related costs. In case of agreement all LC related costs may be covered by one the the deal parties.

      Link to „Swedbank“, AB LC related fees and comissions.

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When replying to queries submitted in this form, we will be able to provide only general information about bank guarantees. If you have any questions related to financial information of your company, please login to the internet bank or contact us by phone 1633. If calling from abroad, please call +370 5 268 4422.

We will reply to your questions from 8 a.m. to 6 p.m. on business days. If you need urgent information, please call us by phone 1633. If calling from abroad, please call +370 5 268 4422.

Information regarding potential risks

Payment under letter of credit is effected upon presentation of documents asked for by letter of credit to the bank and does not have any connection with underlying goods, therefore (i) pay attention when setting up letter of credit terms, and (ii) there is always a risk that seller could ship goods of different kind or quantity. Letter of credit is not bound by the underlying contract, therefore in case there are any changes in contract, respective changes in the letter of credit terms are to be made as well.

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