Letter of Credit
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Learning objectives:
The students are required to
1. understand the definition and features of L/C;
2. master the contents and the types of L/C;
3. know the procedures of payment by L/C;
4. can read, check and amend L/C.
5. master the useful words and sentences
Letter of Credit
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Ability objectives:
Understand L/C.
Master the skills of checking and amending L/C.
Job projects:
Check and amend L/C.
Warm-up activities (1-1)
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Revision:
What kinds of Contract do we often have?
There are two kinds:
1) Sales Contract/Purchase Contract
2) Sales Confirmation and Purchase Confirmation
What are the contents of contract?
Contract usually includes three parts:
Warm-up activities (1-2)
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(1) head of the contract
(2) body of the contract
(3) signature
What is letter of Credit?
It’s a kind of written document issued by a bank on
application of the importer in which the bank promises
to pay on certain conditions.
Warm-up activities (1-3)
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What is the relationship between L/C and the Contract?
L/C is opened against a contract. Upon it is accepted, it
becomes an independent document and will not be
subject to the contract any more.
Letter of Credit (1-1)
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How many kinds of L/C are they? And what are they?
There are 12 kinds of letters of credit mentioned here.
1. Revocable L/C/irrevocable L/C
2. Confirmed L/C/unconfirmed L/C
3. Sight L/C/usance L/C
4. Banker’s acceptance credit
Letter of Credit (1-2)
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5.transferable L/C (or) assignable L/C (or)
transmissible L/C /non-transferable L/C
6.Divisible L/C/indivisible L/C
7. Revolving L/C
8.L/C with T/T reimbursement clause
9. L/C without recourse / L/C with recourse
Letter of Credit (1-3)
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10. Documentary L/C/clean L/C
11. Deferred payment L/C/anticipatory L/C
12. Back to back L/Reciprocal L/C
13. Usance L/C payable at sight or Buyer’s usance L/C
Letter of Credit (1-4)
The Procedures of payment by L/C
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How many parties involved in the operation of L/C?
(Six)
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Buyer/applicant
contract
Seller/beneficiary
inform apply to …
check/amend
to buy for opening …
inform effect shipment
make out
Issuing Bank issue … and send
Advising Bank
check … against
present … for
reimburse
Paying Bank
send… for …
Negotiating Bank
check … against
(Reimbursing Bank)
comply with
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Letter of Credit (1-5)
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1. Both the seller and the buyer sign the contract and
agree to pay by L/C.
2. The buyer, the applicant, applies to a bank in his
place to establish an L/C in accordance with the
contract. The bank is called the issuing bank or the
opening bank.
The opening bank opens an L/C and sends it to a bank
in the seller’s place. This bank is called the advising
bank. The advising bank notifies the seller, the
beneficiary, of the arrival of the L/C.
Letter of Credit (1-6)
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The seller checks the L/C against the contract and
amends the L/C if necessary. If the L/C is found in
accordance with/comply with the contract/in good
order, the seller will effect shipment and get all the
shipping documents ready/make out all the shipping
documents and presents them to a bank for negotiation.
This bank is called the negotiating bank.
Letter of Credit (1-7)
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The negotiating bank checks the documents against
the L/C. If all the documents are in compliance with
the terms of the L/C, the bank negotiates the
beneficiary.
After negotiation, the negotiating bank sends the
documents to the issuing bank or a bank appointed by
the issuing bank for reimbursement. This bank is
called the
Letter of Credit (1-8)
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paying bank or reimbursing bank. The paying bank
checks the documents against the L/C and reimburse
the negotiating bank.
6. Finally, the issuing bank asks the buyer, or the
applicant to buy the shipping documents.
Letter of Credit (1-9)
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What is the basic content of an L/C?
Basic content of an L/C:
1. Parties concerned in an L/C
1) applicant / for account of / accountee or derer /
opener/in the name of/at request of/you are authorized
to draw on 2) issuing/establishing/opening bank
advising bank
notifying bank
Letter of Credit (1-10)
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2. advised through…bank advised by airmail / cable
through…bank / be advised through / transmitted
through
3. negotiating bank / available with
(Usually it’s the correspondent bank of issuing bank)
3) beneficiary/in favor of / in one’s favor /favoring
4) reimbursement bank / reimbursing bank
5) paying bank / accepting bank
Letter of Credit (1-11)
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4. L/C Clause：
1) Drawn Clause
2) Shipping Documents Clause
3) Shipment / shipment Clause
4) Goods Description
5) Instruction to Negotiating Bank
6) Banking Charges
Letter of Credit (1-12)
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7) Discrepancy Clause
8) Undertaking Clauses
5. Details of the L/C itself
1) Categories / form / kinds of the L/C: irrevocable
/documentary/sight L/C
L/C No. / Our Ref. No
Letter of Credit (1-13)
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3) Amount of the L/C
L/C amount / credit amount/amounting to / for
amount of / for a sum of / for amount RMB￥…
amount not exceeding / up to an amount of / to the
extent of / maximum amount
/up to an aggregate amount of / for amount
about …/USD5000+ 5%（more or less 5%，plus or
minus 5%）
Ability Training
Task (1-1)
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1. Translate the following into English:
1) 金额为…
2) 累计金额最高为港币……
3) 总金额不得超过5英镑……
4) 金额为36500港币
5) 金额为10万美元……
6) 金额的总数不得超过85000日元
Ability Training
Task (1-2)
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Suggested answer:
1) amount RMB￥…
2) up to an aggregate amount of Hongkong Dollars…
3) for a sum (sums) not exceeding a total of
GBP50,000
4) to the extent of HKD36,500
5) for the amount of USD100,000
Ability Training
Task (1-3)
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6) for an amount not exceeding total of JPY85000
Try to tell if the following expiry place is in our favor
or not.
a) Drafts drawn under this credit must be presented
for negotiation in China before 5th May, 2006.
Ability Training
Task (1-4)
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b) This credit remains valid until May 5, 2006 for
negotiation in London.
c) Draft(s) accompanied by the documents specified
herein must be presented to the drawee bank not later
than May 5, 2006.
d) Documents must be presented to us within 15 days
after date of B/L date.
Letter of Credit (2-1)
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3. Drawn clause
The drawn clauses stipulate what kind of draft is
required.
1) The credit is available with any bank by negotiation,
against presentation of beneficiary’s draft(s) at sight,
drawn on us in duplicate and accompanied by the
following shipping documents:
Letter of Credit (2-2)
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2) This credit is available by beneficiary’s draft(s),
drawn on issuing bank, in duplicate, without recourse,
at sight, for 100% of the invoice value. Draft must
indicate the number and date of this credit
4. About Shipping Documents
Have a clear idea about the required title of the
documents including the copies and the requirements
for making.
Letter of Credit (2-3)
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3) We hereby establish our irrevocable L/C in your
favor up to an aggregate amount of 35,900.00 (in
words) available by your draft drawn at sight on us for
100% invoice value.
5. About Shipping Documents
Have a clear idea about the required title of the
documents including the copies and the requirements
for making.
Letter of Credit (2-4)
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Clean On Board Bill of Lading, Signed Commercial
Invoice, Packing List, Insurance Policy, Certificate of
Origin, Certificate of Inspection etc. (See the examples
on P16-17)
The documents should give clear indication of the title
of the documents and copies, such as：
in duplicate/in two copies
in triplicate/in three copies
Letter of Credit (2-5)
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in quadruplicate / in four copies
in quintuplicate
in sextuplicate
Signed commercial invoice in duplicate
Full set of (two originals and one copy)
Clean on board ocean B/L (“clean” means no remarks
on the B/L)
3/3 or 2/3 B/L
Letter of Credit (2-6)
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Made out to order To order of the shipper / xxx Bank
To bearer
Delivery / Consigned to … only blank endorsed /
endorsed in blank / blank endorsement marked
“Freight Prepaid / paid / collect / to collect / to be
collected”
(according to the price terms: CIF “Freight Prepaid
or Paid”)
Letter of Credit (2-7)
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To bearer
Delivery / Consigned to … only blank endorsed /
endorsed in blank / blank endorsement marked
“Freight Prepaid / paid / collect / to collect / to be
collected”
(according to the price terms: CIF “Freight Prepaid
or Paid”)
notify applicant / opener /… Corp.
Letter of Credit (2-8)
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6. Insurance Policy / certificate
7. Certificate of Chinese origin / GSP Form A
Certificate of Origin
8. About description of goods：
DESCRIPTION OF GOODS; SHIPMENT OF
GOODS;COVERING THE FOLLOWING
GOODS; EVIDENCING SHIPMENT OF;SHIPMENT
OF;COVERING THE FOLLOWING GOODS
Letter of Credit (2-9)
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BY(STEAMER);CONSIGNMENT;COVERING SHIPMENT;
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MERCHANDISE etc.
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9. About shipment/shipment clause
Terms of shipment often includes the port of loading
and port of destination, and partial shipment and
transshipment allowed or not.
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Letter of Credit (2-10)
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Examples:
SHIPEMNT FROM …TO …
SHIPMENT FROM … TO … W/T/VIA HONGKONG
TRANSHIPMENT ALLOWED OLY IN
HONGKONG
TANSHIPMENT IS ALLOWED ONLY GOODS IN
CONTAINER
LATEST SHIPMENT DATE; LATEST DATE OF
SHIPMENT; SHIPMENT LATEST; SHIPMENT
NOT LATER THAN
Letter of Credit (2-11)
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10. About banking charges
Banking charges usually refers to the charges of
negotiation , notifying , amendment and postage：
a) All your banking charges are for beneficiary’s
account.（unacceptable）
All banking charges outside issuing bank’s country are
for account of beneficiary.（acceptable）
Letter of Credit (2-12)
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11. Discrepancy clause
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a) AN ADDITIOANL CHARGE OF USD15.00 FOR US
DOLLARS L/C, CAD20.00 FOR CANADIAN DOLLARS
L/C OR EQUIVALENT OF CAD 20.00 FOR L/CS IN
OTHER CURRENCEIES IS PAYABLE BY THE
BENEFICIARY FOR EACH PRESENTING
DOCUMENTS WHICH DOES NOT STRICTLY
COMPLY WITH THE TERMS OF THIS L/C. AND
RELATIVE AMOUNT WILL BE DEDUCTED FROM
PROCEEDS AT TIME OF REIMBUSEMENT.
Letter of Credit (2-13)
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b) IF DOCUMENTS CONTAIN DISCREPANCIES, A SPECIAL
DISCREPANCY HANDLING FEEOF HKD200.00 WILL BE
CHARGED.
c) A USD30.00 (OR EQUIVALENT) FEE SHOULD BE
DEDUCTED FROM THE REIMBURSEMENT CLAIM FOR
EACH PRESENTATION OF DISCREPANT DOCUMENTS
UNDER THIS DOCUMENTARY CREDIT. THIS CHARGE
SHOULD FOR THE ACCOUNT OF BENEFICIARY.
Letter of Credit (2-14)
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What is the reimbursement clause?
Reimbursement clause
a) We shall reimburse the negotiating bank as per their
instructions upon our receipt of documents in strict
compliance with the credit terms.
b) We hereby engage with the drawers, endorsers and
bona-fide holders of draft(s) drawn under and in
compliance with the terms of the credit that the same
shall be duly. The amount of each draft must be
Letter of Credit (2-15)
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endorsed on the reversed of this credit by negotiation
bank.
What are the ways to pay if the issuing bank has the
correspondent account with the negotiating bank?
1） Authorize to debit the account of issuing bank
In reimbursement, we hereby authorize you to debit
our account with your bank (your head office Beijing)
upon negotiation under your
Letter of Credit (2-16)
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advice to us.
2) Authorize to credit the account of issuing bank.
In reimbursement of your payment made under the
L/C, we shall credit your account with us under your
telex advice to us.
12.Soft conditions
1、 This credit is not operative only after having
obtained the
Letter of Credit (2-17)
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import license and in any case only after our telex
advice to you.
2、 The merchandise is subject to a subsequent
inspection in Panama. If the specification of
merchandise is not in conform with our standard,
payment should be refused.
Ability Training
Task (2-1)
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Go over the L/C on P20 and find out the needed
information.
1.What is the issuing bank?
2.What kind of L/C is it?
3.Who is the beneficiary?
4.Who is the applicant?
5.When is the L/C opened?
Ability Training
Task (2-2)
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6. What is the L/C No.?
7. What about the date and place of expiry of the
L/C?
8. What is the amount of the L/C?
9. When is the latest date of shipment?
10. How many original B/L are required?
Letter of Credit (3-1)
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What are the ways to issuing an L/C?
There are two ways of issuing way:
1. L/C is issuing by letters and sent by ordinary mail,
air mail or express
2. L/C is issuing by cable.
1）Brief cable advice: preliminary advice
The beneficiary should not ship the goods with
Letter of Credit (3-2)
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the brief cable advice, because banks will not accept it
and negotiate with it. Usually the cable states clearly
with Full details to follow or Operative instrument
mailing or Mail confirmation to follow. Brief cable
advice is just for the beneficiary to get the goods ready.
2）by full cable/telex
It’s a legal L/C with all necessary details.
3）Swift
Letter of Credit (3-3)
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3）Swift
Explanation
Sample of an L/C by telex.
The credit is available with any bank by negotiation.
The credit is available with freely negotiable by any
bank.
By negotiation/acceptance/payment.
Letter of Credit (3-4)
 Sample of an L/C by SWIFT
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Basic header
Applicant header
User header:
(additional reading material)
M/O M=mandatory O= optional
How to get to know whether the L/C is operative
instrument or not?
Letter of Credit (3-5)
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1) Seek whether there is any “primary key or test key”
in the L/C.
2) Seek whether there are any sentences like as “No
confirmation instrument to follow” “No mail
confirmation to follow” etc.
Code Currency and amount.
Letter of Credit (3-6)
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Questions for discussion:
Is it the maximum amount of the L/C?
How do we do when we make out the invoice?
The amount of the invoice should not be more than
that of the L/C
What is the date of expiry and what is the latest
shipment?
When should we present documents for negotiation?
Ability Training
Task 3
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Read and understand the L/C on P113. Try to answer
the following questions:
What kind of L/C is it?
Which bank is the opening bank?
Is it a sight L/C or a time L/C? Why?
What is the advising bank?
Who is the drawee?
Letter of Credit (4-1)
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Supplementary Material:
Swift L/C
Example
BASIC HEADER
APPL. HEADER
USER HEADER
MT: 700 ISSUE OF A DOCUMENTARY CREDIT
SEQUENCE OF TOTAL
FORM OF DOCUMENTARY CREDIT
DOCUMENTARY CREDIT NUMBER
Letter of Credit (4-2)
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DATE OF ISSUE
DATE AND PLACE OF EXPIRY
CURRENCY CODE, AMOUNT
AVAILABLE WITH …BY…
G.S.P CERTIFICATE OF ORGIN FORM A IN 3 COPIES
INSURANCE POLICY OR CERTIFICATE IN DUPLICATE
ENDOSED IN BLANK WITH CLAIM PAYABLE IN JAPAN IN THE
CURRENCY
OF THE DRAFT COVERING 110 PERCENT OF INVOICE VALUE
INCLUDING
INSTITUTE WAR CLAUSES INSTITUTE CARGO CLAUSES(ALL
RISKS)
Letter of Credit (4-3)
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INSTITUTE S.R.C.C. CLAUSES
BENEFICIARY‘S CERTIFICATE STATING THAT
ONE SET OF ORIGINAL
SHIPPING DOCUMENTS INCLUDING
CERTIFICATE OF ORGIN FORM A HAS
BEEN SENT DIRECTLY TO THE APPLICANT
（ATTN. OSALM SECTION）
WITHIN TWO DAYS AFTER SHIPMENT BY AIR
COURIER.
Letter of Credit (4-4)
ADDITIONAL CONDITIONS
 THIS CREDIT IS SUBJECT TO UNIFORM CUSTOMS AND
PRACTICE OF
 DOCUMENTARY CREDITS （1993 REVIDION）I.C.C.
PUBLICATION NO 500.
 T.T. REIMBURSEMENT：
 UNACCEPTABLE
 THE GOODS MUST BE CONTAINERIZED
 A COPY OF CABLE ADVISING SHIPPING DETAILS FAX TO
THE ACCOUNTEE
 WITHIN 2 DAYS AFTER SHIPMENT.
Letter of Credit (4-5)
CLEAN ON BOARD COMBINED TRANSPORT B/L OF ITOCHU
EXPRESS CO.，LTD IS ACCEPTABLE.
 ALL BANKING CHARGES AND COMMISSIONS INCLUDING
REIMBURSEMENT
 COMM. OUTSIDE JAPAN ARE FOR A/C OF BENEFICIARY.
 PERIOD FOR
 PRESENTATIONS：
 DOCUMENTS TO BE PRESENTED WITHIN 10 DAYS AFTER
THE DATE OF
 SHIPMENT BUT WITHIN THE VALIDITY OF THE CREDIT
Letter of Credit (4-6)
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CONFIRMATION INSTRUCTION：
WITHOUTINSTRUCTION TO BANK
ALL SHIPPING DOCUMENTS TO BE SENT DIRECT
TO THE OPENING
OFFICE BY REGISTERED AIRMAIL IN ONE LOT
UPON RECEIPT OF THE DRAFTS AND DOCUMENT
IN ORDER， WE WILL
REMIT THE PROCEEDS TO YOUR ACCOUT WITH
THE BANK DESINATED
BY YOU.
TRAILER
Letter of Credit (4-7)
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Homework
Review what have learnt today.
Read L/Cs on page 110 ,116. Try to understand
all the terms and conditions in the L/C.