An Export Letter of Credit is a written document that replaces the credit of the buyer with the credit of their bank. It provides the payment mechanism covering the shipment of goods between buyer and seller, in accordance with certain terms and conditions. The buyer is assured that you will comply with the documentary requirements in order for you to receive payment.
The benefits of an Export Letter of Credit are:
- It ensures prompt, complete payments.
- It eliminates foreign buyer credit risk.
- Enhanced business opportunities by selling to buyers you might otherwise avoid.
This diagram and description outline a letter of credit, assuming that you are the seller.
- You negotiate the sale of goods as well as payment terms with a foreign company.
- The buyer applies for a merchandise letter of credit from their bank, whereby the bank agrees to pay against documents conforming to the terms and conditions of the credit, independent of the buyer’s ability or willingness to pay. As beneficiary you want to ensure that the letter of credit is acceptable, so you can provide our form, Instructions for the Buyer in Opening a Letter of Credit to your customer.
- The buyer’s bank issues a letter of credit to National Penn Bank.
- National Penn Bank can either act as the advising bank or the confirming bank. We become a confirming bank when the obligation is accepted as our own. We then authenticate the transmission and notify you that a letter of credit has been received in your favor.
- You examine the letter of credit and, if acceptable, ship the goods to the buyer in accordance with the shipping terms specified in the contract. The shipping terms dictate where you must deliver the goods and who has responsibility for the cost and risk. This is done using one of the 13 INCOTERMS that were developed by the International Chamber of Commerce.
- The documents are presented to National Penn Bank. Typically documents may include the following:
- Bill of Lading / transport document
- Commercial Invoices
- Certificate of Origin
- Insurance policies or certificates
- Optional documents, which may include packing lists, certificates of inspection, etc.
- National Penn Bank examines the documents to ensure that they conform to the letter of credit. The documents are forwarded to the issuing bank and payment is requested.
- The issuing bank reviews the documents to ensure that the terms and conditions have been met. The applicant is advised of their receipt and payment is requested.
8a. Simultaneously, the issuing bank remits the payment to National Penn Bank and transfers the title documents to the buyer upon receipt of the payment.
8b. National Penn Bank remits the payment to you.
- The buyer uses the title documents to take possession of the goods at the agreed upon port.
Letter of credit amendments can also be provided if both parties agree. This allows your transaction to have the necessary flexibility. Simply agree on any changes with your customer and have them contact their bank to prepare the amendment.
Please note that letters of credit are governed by the most recent version of the International Chamber of Commerce (ICC) publication "The Uniform Customs and Practice for Documentary Credits." In addition, you must comply with Article 5 of the Uniform Commercial Code which is a statutory law. Together these guidelines represent a comprehensive set of rules governing letters of credit.