Ozgur Eker (CDCS) – Page 28 – Letter of Credit Consultancy Services

How Much Does It Cost to Open a Letter of Credit?

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees 8 May 20187 April 2019Issuance Fee, Letter of Credit Fees

On this page, I will try to explain the letter of credit issuance costs, and the main factors that are effecting them.

Letter of credit is a secure payment method comparing to other payment options in international trade.

However, letter of credit has one clear disadvantage. It is expensive.

There are multiple banks in action in a letter of credit transaction, and each bank demands a fee for its each action.

Typical letter of credit fees demanded by banks are as follows:

Letter of Credit Issuance Fee: This is the amount demanded by the issuing bank to open a letter of credit.
Advising Fee: A type of letter of credit fee, which is demanded by the advising bank to advise the credit to the beneficiary.
Discrepancy Fee: The issuing bank discount a certain sum of money from the proceeds of the letter of credit, if the beneficiary has presented discrepant documents.
Confirmation Fee: This is the fee, that is taken by the confirming bank to adding its confirmation to the credit.
Amendment Fee: If the letter of credit is amended, the issuing bank and/or the confirming bank may demand amendment fees.
Handling Fee: Handling fees are collected by banks for a variety of reasons, such as sending swift messages, holding documents, set of photocopy documents not presented etc.
Reimbursement Fee: Reimbursement bank’s fee to settle the credit amount between issuing bank and the confirming bank or the nominated bank.

Letter of credit opening cost change case per case, as the costs associated with the letter of credit issuance are effected from various factors.

What are the Main Factors Effecting Letter of Credit Issuance Costs?

Issuing Bank Charges: Issuing a letter of credit is a commercial act and banks open L/Cs in order to make profit.
Letter of Credit Amount: Banks determine letter of credit issuance charges in percentage of the letter of credit amount. Higher the L/C amounts, higher the charges.
How Letter of Credit is Financed? Importers can finance the letter of credit amount either via cash or trade finance loans. Cash backed letter of credit is expected to be cheaper than the loan backed letter of credit.
Payment Term: As the payment period is getting longer, the letter of credit issuance fees are getting higher. The longer the payment due, higher the fees.
How Letter of Credit Charges are Shared Between the Importer and the Exporter: How total letter of credit cost is shared between the importer and exporter may differ from one letter of credit to another.

How Much Does It Cost to Open a Letter of Credit?

Example: A German food importer wants to import cacao from Ivory Coast via an at sight letter of credit.

The German importer applies his bank, which is Deutsche Bank, to open a letter of credit in favor of the exporter.

Deutsche Bank’s import letter of credit issuance cost can be found on this document.

Letter of credit amount is 100.000 Euro and the time between the issuance of the letter of credit and the payment to the exporter is 3 months.

The letter of credit is issued in irrevocable format and all fees outside of the Germany will be paid by the exporter.

Minimum letter of credit issuance cost to the importer for this example is 625 Euro. (Irrevocability fee 200 Euro + Issuance of a letter of credit fee 125 Euro + Acceptance of documents fee 300 Euro)

Pre-Export Verification of Conformity (PVoC) Certificate

Ozgur Eker (CDCS) Conformity Certificate, Letter of Credit Documents 7 May 20187 April 2019Conformity Certificate, Letter of Credit Documents

Pre-Export Verification of Conformity (PVoC) Programme

PVoC is a conformity assessment programme lunched by some African states with the aim of controlling the quality of imported goods in order to minimize the risk of unsafe and substandard goods entering into their markets.

Pre-Export Verification of Conformity or Conformity Assessment Programmes are put into action in accordance with the Article 5 of World Trade Organization’s Technical Barriers to Trade agreement.

Pre-Export Verification of Conformity or Conformity Assessment Programmes are administered by The Standards Body of each country on behalf of so called country’s Government.

All inspections and tests are carried out by the appointed independent verification partners on regulated goods in the country of supply.

Some well-known independent international inspection companies are Bureau Veritas, Intertek, Société Générale de Surveillance (SGS) etc.

What are the Benefits of Pre-Export Verification of Conformity Programmes:

Only good quality products will be imported by eliminating the unsafe ones.
Importation of poor quality and sub-standard products is prevented. This will lead to a more fair competition between local manufacturers and the global ones.
Pre-Export Verification of Conformity Programmes are usually compensated by exporters. This means that costs are not borne by the government, or importers.
If local standards are not existed international standards are utilized. This means that the reputable manufacturers will be able to comply with a very little effort.

Which Countries are Using Pre-Export Verification of Conformity or Conformity Assessment Programmes:

As of November 2014 below countries are found to be using Pre-Export Verification of Conformity Programmes. Please keep in mind that this list may have been changed.

Kingdom of Saudi Arabia
Nigeria
Kuwait
Tanzania
Uganda
Kenya

How Does a Pre-Export Verification of Conformity Programme Work Under Standard Circumstances?

Each country’s Government instructs its local National Standards Body to apply Pre-Export Verification of Conformity Programme on imports and defines the list of products which must comply.
National Standards Body appoints independent inspection companies to handle the testing.
These approved independent inspection companies provide test services to exporters, and issues certificates of conformity for products that pass the tests.
Certificate of Conformity is a mandatory document required by the customs of the countries stated above which apply Pre-Export Verification of Conformity Programme.

How Does a PVoC Certificate Work in Letters of Credit?

Letters of Credit deal with the documents only, not the actual work:

There is a very clear distinction exists between the letter of credit and other payment methods in international trade:

Letter of credit transactions are executed by banks according to internationally accepted rules. When banks handle letter of credit transactions they deal with the documents only.

As an example, banks are not interested in an actual shipment, but they check the transportation documents in order to determine whether shipment has been made according to the letter of credit terms or not.

This example is also true for PVoC programme.

Banks deal with the Certificate of Conformity, which is issued by an approved independent inspection company after carrying out necessary tests.

Understanding Certificate of Conformity Under PVoC Programmes:

“Certificate of Conformity” which is also known as “Type Approval” is granted to a product that meets a minimum set of regulatory, technical and safety requirements.

Generally, type approval is required before a product is allowed to be sold in a particular country. In order to get the Certificate of Conformity you should follow these steps :

Step 1: Make sure that Certificate of Conformity (COC) is a must on your export. You have to verify that you are exporting to one of the countries that apply PVoC programmes and your product is covered by these regulations. In simple words you have to make a country and product verification to understand whether or not you have to supply a Certificate of Conformity.
Step 2: Apply to one of the independent inspection companies which is authorized to carry out tests under PVoC programmes by the importer country’s National Standards Body.
Step 3: If your product pass the required tests, the independent inspection company will be issuing the Certificate of Conformity.

Understanding Letter of Credit Rules Regarding the Certificate of Conformity Under PVoC Programmes:

Certificate of Conformity is explained in ISBP 745 under the title “Analysis, Inspection, Health, Phytosanitary, Quantity Quality And Other Certificates (“Certificate”)”.

Here are the important points of consideration;

According to ISBP 745 title of the document is not important. ISBP states that “…titled as called for in the credit, or bearing a similar title or untitled…”. According to ISBP 745 the important point is the function of the document as ISBP states “…that fulfills its function by certifying the outcome of the required action…”.
Inspection of goods must take place before shipment and this must be indicated on the certificate one of the following methods,
- issuance date of the certificate is no later than the date of shipment
- even if the issuance date of the certificate is after the date of shipment a statement must indicate that inspection took place before shipment or similar effect.
- title of the certificate must be indicating the event, for example, certificate titled as “Pre-shipment Inspection Certificate”.
A certificate is to be issued by the entity stated in the credit.
When a credit does not indicate the name of an issuer, any entity including the beneficiary may issue a certificate.
When a credit makes reference to an issuer of a certificate in the context of its being “independent”, “official”, “qualified” or words of similar effect, a certificate may be issued by any entity except the beneficiary.
The consignor or exporter indicated on the certificate may be an entity other than the beneficiary of the credit or the shipper as shown on any other stipulated document.

Insurance Documents

Ozgur Eker (CDCS) Insurance Policy, Letter of Credit Documents 7 May 20187 April 2019Insurance Certificate, Insurance Coverage, Insurance Policy, Letter of Credit Documents

Insurance defined by merriam-webster dictionary as “a coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.”

Insurance can cover a wide range of activities including but not limited to agricultural insurance, health insurance, life insurance, vehicle insurance etc…

On this page, the focus is on the cargo insurances.

Cargo insurance can be defined as an insurance policy taken up to protect insurance policy holder/assured against loss of or damage to the goods during the transportation.

Cargo insurance is one of the most important elements of the international trade transactions.

Details of the cargo insurance should be determined under the sales contracts.

Who is Going to Arrange and Pay for the Cargo Insurance:

Under CIF (Cost Insurance Freight) and CIP (Carriage and Insurance Paid to a named place of destination) trade terms, the cargo insurance premium must be paid for and arranged by the exporter.

Otherwise parties can freely determine the insurer party.

What Kinds of Cargo Insurance Policies are Available for Export / Import Purposes:

There are 3 main cargo insurance types available for sea and road shipments.

Institute Cargo Clauses (A),
Institute Cargo Clauses (B) and
Institute Cargo Clauses (C).

Institute Cargo Clauses (A), which is also known as all risk insurance, has the widest protection coverage.

Institute Cargo Clauses (C) has the minimum insurance coverage.

Institute Cargo Clauses (Air) used in air shipments.

* Institute Cargo Clauses (A) 1/1/09
* Institute Cargo Clauses (B) 1/1/09
* Institute Cargo Clauses (C) 1/1/09
* Institute Cargo Clauses (Air) (excluding sending by Post) 1/1/09

Which Additional Clauses Should be Included in to the Cargo Insurance Policy:

Under the letters of credit transactions, the issuing banks demand some additional clauses on the cargo insurance policies together with all risks coverage for more security.

Some of the most frequently used additional cargo insurance clauses are,

* Institute War Clauses (Cargo)
* Termination of Transit Clause (Terrorism) Amended
* War and Strikes Cancellation Clause (Cargo)

Starting and Ending Points of the Cargo Insurance Coverage:

Normally the cargo insurance covers the losses that is occurred between the starting and ending point of the main carriage.

For example, a cargo insurance covers the losses that is occurred between the port of loading and the port of discharge on a port-to-port sea shipment.

But sometimes issuing banks may demand an extended coverage.

The most frequently used clause for these kinds of extensions is “warehouse to warehouse” insurance coverage.

How to Use Insurance Documents in Letters of Credit Transactions:

An insurance document, must appear to be issued and signed by an insurance company, an underwriter or their agents or their proxies. Any signature by an agent or proxy must indicate whether the agent or proxy has signed for or on behalf of the insurance company or underwriter.
An insurance policy is acceptable in lieu of an insurance certificate or a declaration under an open cover.
Cover notes will not be accepted.
The date of the insurance document must be no later than the date of shipment, unless it appears from the insurance document that the cover is effective from a date not later than the date of shipment.
The insurance document must indicate the amount of insurance coverage and be in the same currency as the credit.
An insurance document indicating that it covers Institute Cargo Clauses (A) satisfies a condition in a credit calling for an “all risks” clause or notation. (ISBP 2007)

Insurance Policy Sample:

Insurance Certificate Sample:

Health Certificate

Ozgur Eker (CDCS) Health Certificate, Letter of Credit Documents 6 May 20187 April 2019Health Certificate, Letter of Credit Documents

All food products that will be subject to international trade, whether of animal or non-animal origin, must be fit for human consumption and comply with all relevant food legislation such as hygiene, pesticides, genetic, labeling, contaminants, use of additives etc.

A health certificate is a document used in export import transactions, issued by the governmental organizations at the countries of origin, to certify that a food shipment is fit for human consumption, and meets safety standards or other required legislation for exporting.

As indicated by its name, this certificate gives evidence of the health condition of the goods and is usually issued by a veterinary surgeon, by veterinary authorities or the agricultural ministry. (1)

What is the Function of a Health Certificate in Export / Import Transactions?

Certifying that governmental body of the exporting country has been examined this particular food consignment.
Certifying that food of animal origin or non-animal origin subject to exporting is fit for human consumption.
Certifying that the food consignment has been produced according to required food legislation.
Certifying that the food consignment has been produced by one of the legitimate manufacturing companies.

Which Organizations Issue Health Certificates?

Health certificates are government to government declarations (exporting country’s government to importing country’s government), for this reason these certificates are issued by the authorized governmental organizations such as Department of Agriculture etc…

Examples of Health Certificate Requirements:

Saudi Arabia: The health certificate is required for all exports to Saudi Arabia of all kinds of meat (including poultry and seafood), meat products, livestock, vegetables, fruits, human blood, etc., attesting that they are free from pests and/or diseases.
(Source: link)
European Union: Each consignment of meat and meat products, fishery products etc. that import into EU from a Non-EU member state must come from an approved non-EU country and be accompanied by appropriate signed health certification.

How to Use Health Certificate in Letters of Credit Transactions:

Health certificates do not cover under specific articles in the letter of credit rules. As a result, issuing banks must define the characteristics of the health certificates when they issue the letters of credit.
If no special requirement has been attached to the letter of credit, which demands presentation of a health certificate, this will be satisfied by the presentation of a signed document titled as called for in the credit.
Health certificate must fulfill its function by certifying that the goods are fit for human consumption with the help of required action, such as, the results of the analysis, inspection, health, phytosanitary, quantity or quality assessment.
Health certificate must be issued by the party stated in the letter of credit.
If the letter of credit does not indicate by whom the health certificate must be issued, any party including the beneficiary may issue the health certificate.

Health Certificate Samples:

References:

Documentary Credits, Nordea Trade Finance, Page:175

Inspection Certificate

Ozgur Eker (CDCS) Inspection Certificate, Letter of Credit Documents 5 May 20187 April 2019Inspection Certificate, Letter of Credit Documents

On this page, I will try to explain “Quality Control Inspections”, “Inspection Certificates” and their applications in letters of credit.

A letter of credit transaction is all about the documents, but not the actual goods or services.

The banks reach to payment or non-payment decisions under the letters of credit only by controlling the documents presented by the beneficiaries.

The banks have no connection with the actual goods or the services.

Above explanation put importers to a serious fraud risk related to quality of goods such as:

non-delivery of goods or,
goods shipped with inferior quality.

A third party inspection, that is carried out by a reputable independent inspection company, could eliminate or at least limit the fraud risk related to quality of goods considerably.

Depending on the type and value of the goods, the inspection may be commenced when the goods are in process of being manufactured or packed and until they are on board the means of transport concerned. (1)

Place of inspection can be set either in the country of origin (at the time of loading) or in the country of destination (at the time of unloading or at the warehouses where the imported goods are received).

Types of Quality and Shipment Inspections in International Trade:

Third party inspection services can be grouped under two main categories.

Previous Shipment Inspections, which are performed before the goods are shipped from the exporter’s factory and
Post Shipment Inspections, which are performed after the goods are shipped from the exporter’s factory. (2)

Previous Shipment Inspections are as follows:

Pre-Production Inspection (PPI)
During Production Inspection (DUPRO)
Pre-Shipment Inspection (PSI)
Container Loading Inspection (CLI)

Post Shipment Inspections are as follows:

Post-Shipment Inspection

The most frequently used inspection type in international trade is the pre-shipment inspection, PSI, is a reliable quality control method for checking goods’ quality.

What is an Inspection Certificate?

An inspection certificate, sometimes called as certificate of inspection or pre-shipment inspection certificate, is a trade document used in international trade transactions, issued generally by an independent inspection company after conducting a related inspection, certifying whether or not the goods are in question are in conformity with the specifications stated on the sales contract. (3)

What are the Types of Inspection Certificates:

The certificates delivered by the inspection companies are basically of two different types:

Clean Report of Findings (CRF): This is a document required by the importing (sometimes, exporting) country, as some developing countries have a large part or all of their imports (exports) inspected prior to shipment in the country of origin, as to quantity, quality and price (Pre-Shipment Inspection – PSI). These PSI schemes, entrusted to international inspection agencies, have been established by the authorities for custom, fiscal or foreign exchange control purposes and are compulsory.
Commercial Certificate of Inspection: Stating the quantity and quality ( any measurable quality parameter requested by the principals). These Certificates are issued by an inspection agency acting as a neutral third party assessing the actual condition of a traded cargo between a seller and a buyer. A commercial certificate of inspection is necessary to build up a long-term relation between buyers and sellers. Bad quality of goods in trade can lead to loss of market share in the long run.

What are the Benefits of Inspection Certificates:

Main objective of the inspection certificate is to satisfy the importer or the government body that the goods are in conformity with the indicated specifications on the sales contract or proforma invoice.

Inspections are important tools to reduce trade risks and avoid fraud.
Shipment of low quality goods prevented.
Non-delivery fraud with fake bill of lading or any other transport document prevented.
Another fraud risk factor is the possibility of replacement inspected goods with the fraudulent ones after the inspection: basically the cargo inspected would not go into the shipment. This can be prevented by adding a numerical link on the inspection certificate to the transport document. For example, inspection certificate that is indicating the container number can prevent such a fraudulent action.

How to Demand an Effective Inspection Certificate in a Letter of Credit Transaction?

Add at least one original copy of an inspection certificate to field 46-A Documents Required as one of the necessary documents under the letter of credit.
Make sure that inspection certificate is issued by one of the well known inspection companies around the world. The most well known inspection companies are : SGS, Bivac/Bureau Veritas, Cotecna, Intertek.
Clearly indicate on the letter of credit text that inspection certificate is complying with the specifications indicated on the sales contract or proforma invoice.
Make sure that values indicated on the inspection certificate does not conflict with the values indicated on the letter of credit or other documents.
Do not forget to add a numerical link on the inspection certificate to the transport document.

References:

Documentary Credits, Nordea Trade Finance, Page:175
What is a Pre-Production Inspection (PPI)?, www.advancedontrade.com, Retrieved: 05.May.2018
What is an Inspection Certificate or Certificate of Inspection?, www.advancedontrade.com, Retrieved: 05.May.2018

Packing List and Weight List

Ozgur Eker (CDCS) Letter of Credit Documents, Packing List, Weight Lİst 3 May 20187 April 2019Letter of Credit Documents, Packing List, Weight List

Packing list, is an international trade document, used to identify details of the shipment in terms of packaging.

The packing list is a detailed listing of the contents of the shipment and acts as a supporting document.

The packing list may provide a means of quickly identifying merchandise required for customs inspection, give a means of determining accurate weights and measurements, and give a means for inspectors to unpack quickly to check a piece count of the contents.

As a supporting document, the packing list is essential in the event of pilferage and/or
damage, to support an insurance claim. (1)

Packing list normally should not disclose any financial information regarding the shipment such as total amount of the cargo, unit price of the items or payments terms.

The weight list may contain the same details as the packing list but must, as a minimum, indicate the weight of the goods and usually the weight of each packing unit.(2)

Contents of the Packing List

There is no standard format exists for preparation of a packing list. However, a packing list that will be used in an international trade transaction should cover below points;

Name of the Exporter, address and contact details. : “consignor”
Name of the Importer, address and contact details : “consignee”
Title of the document, packing list number, packing list date : “Packing List Date : 26.June.2012”, “Packing List No : PL 26062012”
Definition of goods : “Crushing and Screening Machine” etc…
Delivery term : “FAS ANTWERP PORT, Incoterms 2010”, “FOB PORT OF SINGAPORE, Incoterms 2000” etc…
Quantity : “10Mtons of “Titanium Dioxide Rutile”
The type of package (such as pallet, box, crate, drum, carton, etc.)
Total number of packages (such as pallets/boxes/crates/drums, etc.)
The contents of each package
The package markings, if any, as well as shipper’s and buyer’s reference numbers
Reference to the associated commercial invoice such as the invoice number and date
A purchase order number or similar reference to correspondence between the supplier and importer
An indication of the carrier (sea line, airline, shipping line or road hauler)
Reference to the transport document, bill of lading or air waybill number
Reference to the vessel name, container number, truck plate number or air waybill number according to mode of transport
Signature and stamp (not required under letter of credit rules but it is asked by most of the custom authorities and government institutions.)

Converting a Packing List into a Weight List:

By adding details of the weight, it is possible to use a packing list as a weight list or weight certificate without any problem.

Following details should be added to the packing list to be used it as a weight list or a weight certificate:

Net Weight of the shipment
Gross Weight of the shipment
Weight of the each package (such as pallets/boxes/crates/drums, etc.)

How to Use Packing List and Weight List in Letters of Credit Transactions:

Documents may be titled as called for in the credit, bear a similar title, or be untitled. For example, a credit requirement for a “Packing List” may also be satisfied by a document containing packing details whether titled “Packing Note”, “Packing and Weight List”, etc., or an untitled document. The content of a document must appear to fulfill the function of the required document.
Documents listed in a credit should be presented as separate documents. If a credit requires a packing list and a weight list, such requirement will be satisfied by presentation of two separate documents, or by presentation of two original copies of a combined packing and weight list, provided such document states both packing and weight details.

Sample Packing List:

packing list sample — Image taken from https://www.advancedontrade.com/ with permission.

Sample Weight List:

weight list sample — Image taken from https://www.advancedontrade.com/ with permission.

References:

Transportation Best Practices Manual, PF Collins International Trade Services, 2003, Page:22
Documentary Credits, Nordea Trade Finance, Page:173

Sample Bill of Exchange

Ozgur Eker (CDCS) Bill of Exchange, Letter of Credit Documents 28 April 20187 April 2019Bill of Exchange, Draft, Letter of Credit Documents

On this page, you can find a sample “Bill of Exchange”, which is drawn under a typical letter of credit transaction.

Bill of exchange can be defined as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.

If you need further information regarding the bill of exchange, please read my previous post from this link: “Bill of Exchange“.

Please keep in mind that some banks mention “Bill of Exchange” as “Draft” in letters of credit.

So bill of exchange and draft have the same meaning.

Letter of Credit Details:

An unconfirmed letter of credit has been issued by Commerzbank AG, requires an at sight draft drawn on the issuing bank.

Issuing Bank:
Commerzbank AG D-60261 Frankfurt am Main GERMANY
Documentary Credit Number:
LC304/3610/12IC
Applicant:
Import Hause Herrengraben 54 20459 Hamburg GERMANY
Beneficiary:
Export Handel Po Box 123 Amsterdam Holland
Currency Code/Amount:
EUR100000
Available With … By …:
ABNANL2A (ABN Amro Bank NV, AMSTERDAM BRANCH)…BY PAYMENT
Drafts at …:
Sight
Drawee:
COBADEFF (Commerzbank AG, Frankfurt am Main BRANCH)

Sample Bill of Exchange / Draft

The exporter drawn the draft on the issuing bank. The bill of exchange is payable at sight.

Remaining details of the bill of exchange are:

drawer is the beneficiary, who is also the exporter: Export Handel Po Box 123 Amsterdam Holland
drawee is the issuing bank, who is also the importer’s bank that opened the letter of credit: Commerzbank AG D-60261 Frankfurt am Main GERMANY
payee is also the beneficiary.

Bill of Exchange

Ozgur Eker (CDCS) Bill of Exchange, Letter of Credit Documents 27 April 201821 April 2024Bill of Exchange, Draft, Letter of Credit Documents

On this page, I will try to explain “Bill of Exchange” and its applications in letters of credit.

Banks mention “Bill of Exchange” as “Draft” in some occasions.

Bill of exchange can be used as a supporting financial document in cash against documents and letters of credit payments.

Bill of exchange is one of the most hard-to-understand concepts in trade finance terms.

May be it is why some professionals find it unnecessary and demand its removal from the letters of credit, altogether.

https://www.youtube.com/watch?v=Q6NnhQg3ZnU

Definition: According to UK’s Bill of Exchange Act (1882), the bill of exchange defined as an unconditional order in writing, addressed by one person to another, signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer (payee).

Parties to Bill of Exchange:

There are 3 parties involved in a typical bill of exchange transaction.

Drawer of a Bill of Exchange: Is the party that issues a Bill of Exchange in an international trade transaction; usually the seller or exporter.
Drawee of a Bill of Exchange: Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the importer, the issuing bank or the confirming bank.
Payee of a Bill of Exchange: Is the party to whom the Bill is payable; usually the seller or his bank such as the advising bank. (Source: aib trade finance)

Basic Bill of Exchange Transaction:

Bill of exchange transaction process may vary along with the selected payment method.

Below image illustrates a very basic bill of exchange process under an unconfirmed letter of credit transaction.

Step 1 : The exporter (drawer) draws the bill of exchange on the issuing bank (drawee) and send it to the issuing bank for acceptance through the advising bank.
Step 2 : The issuing bank (drawee) accepts the bill of exchange and makes the payment to the advising bank (payee) at maturity.
Step 3 : The advising bank transmits the payment to the exporter (drawer).

Important Note: The drawee and payee may change from one letter of credit to another. Especially, under confirmed letters of credit the drawee is the confirming bank instead of the issuing bank.

Legal Coverage:

Two major legal traditions, common law and civil law, govern the bill of exchange slightly different as a financial instrument in international trade transactions.

Bills of Exchange Act (1882): Bills of Exchange Act (1882) is valid for United Kingdom, Ireland, commonwealth nations such as Australia, India, New Zealand etc..
Geneva Conventions (1930): Geneva Conventions (1930) is valid for Germany, France, Austria, Belgium, Saudi Arabia, Denmark, Finland, South Korea, Greece, Taiwan, Thailand, Oman, Syria, Iceland, Poland, Italy, Czech Republic, Liechtenstein, Slovakia, Luxembourg, Hungary, Malta, Albania, Netherlands, Bulgaria, Norway, Romania, Portugal, Croatia, Spain, Bosnia-Herzegovina, Sweden, Macedonia, Switzerland, Slovenia, Turkey, Serbia, Indonesia, Lebanon, Japan, Jordan etc…

How to Use Bill of Exchange in Letters of Credit Transactions:

UCP 600 – Article 6 states that “A credit must not be issued available by a draft drawn on the applicant.”
Drafts, transport documents and insurance documents must be dated even if a credit does not expressly so require.
Shipping documents have the following meaning under international standard banking practice; “shipping documents” – all documents (not only transport documents), except drafts, required by the credit.
Even if not stated in the credit, drafts, certificates and declarations by their nature require a signature.
The draft must be endorsed, if necessary.
The draft must be drawn on the party stated in the credit.
The draft must be drawn by the beneficiary.
A credit may be issued requiring a draft drawn on the applicant as one of the required documents, but must not be issued available by drafts drawn on the applicant.

International Sales Contract

Ozgur Eker (CDCS) Letter of Credit Documents, Sales Contract 27 April 201818 April 2021International Sales Contract, Letter of Credit Documents

In international trade transactions, a sales contract defines the roles and responsibilities of the parties to each other.

Without a sales contract, it would not be possible to define the rights and obligations of the exporters and importers.

Definition: Contract of sale is defined as “formal contract by which a seller agrees to sell and a buyer agrees to buy, under certain terms and conditions spelled out in writing in the document signed by both parties.

Also called agreement of sale, contract for sale, sale agreement, or sale contract.” (Source : www.businessdictionary.com)

A sales contract can cover any kind of sales action such as sales of intellectual property rights, sales of real estate etc… On this page, we will be focusing only on international contracts for sale of the goods.

Usage: Under international business transactions, the exporters and importers define their roles and responsibilities to each other with sales contracts.

A sales contract is a legally binding document for both parties.

Proforma Invoices vs International Sales Contracts

There is another document available in international trade, used in the same way as the sales contract. The name of this document is the proforma invoice.

In practice, smaller transactions are handled by proforma invoices, whereas medium and higher volume transactions are covered under sales contracts.

The sales contracts governing bigger trade transactions should be written by the lawyers.

Another point of consideration when deciding to use a proforma invoice or sale contract is the duration of the business.

If business transaction will be not completed comparatively in a short period of time, such as 6 months, then the sales contract should be preferred instead of the proforma invoice.

proforma invoice vs sales contract — Proforma Invoices vs International Sales Contracts : Points of Consideration

Contents of the Sales Contract

Company information of the seller and the buyer (company name, address, contact details, etc.)
Subject of the sale contract
Description of the goods
The unit price of the goods, total contract quantity and total contract amount
Package and shipment details
Delivery date or delivery period
Penalties of late shipment
The delivery terms according to Incoterms
Payment terms (irrevocable documentary credit, cash against documents, electronic fund transfer)
Definition of trade documents that will be supplied by the exporter, how are they completed, how many originals and copies will be supplied
Force Majeure ( Act of God)
Resolution of disputes (arbitration or litigation).
Authorized signatures

Special Hints Regarding the Sales Contract From ISBP (International Standard Banking Practice):

UCP 600 Article 4 states that

“A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from its relationships with the issuing bank or the beneficiary…An issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, proforma invoice and the like.”

Proforma Invoice

Ozgur Eker (CDCS) Letter of Credit Documents, Proforma Invoice 26 April 20182 April 2023Letter of Credit Documents, Proforma Invoice

In international trade, a proforma invoice means a trade document that states a commitment from the seller (exporter) to sell goods to the buyer (importer) at specified conditions.

Proforma invoice can be defined as a compact form of an international sales contract. In other words, it is a lite version of the international sales contract.

Proforma invoice is expected to be issued by the seller, also known as exporter in international trade, at the beginning of the transactions.

Contents of the proforma invoice may change from industry to industry, customer to customer or country to country. There is no fix and single format available. (1)

A proforma invoice is not a valid invoice in terms of accounting. Because the proforma invoice cannot be recorded as an accounts receivable by the exporters, nor can it be recorded as an accounts payable by the importers.

The commercial invoice must follow and replace the proforma invoice as an official document, for importing procedures.

Proforma invoices are widely used in today’s international trade transactions in substitution of sales contracts.

It is easy to create a single-page proforma invoice instead of writing a multiple-page sales contract.

Contents of the Proforma Invoice

A proforma invoice that is going to be used in an international trade transaction should cover below points:

Name of the Exporter, address and contact details.
Name of the Importer, address and contact details.
Title of the document, proforma invoice number, proforma invoice date : “Proforma
Invoice Date : 26.June.2012″, “Proforma Invoice No : PI26062012”
Definition of goods : “Crushing and Screening Machine” etc…
Delivery term : “CIF NEW YORK PORT, Incoterms 2010”, “FOB STOCKHOLM PORT, Incoterms 2000” etc…
Quantity, Unit Price, Currency, Total Price : “10Mtons of “Titanium Dioxide Rutile” from 3.000USD per Mton, Total Amount is 30.000,00 USD CIF HAMBURG PORT, Incoterms 2010.”
Payment Terms : “Irrevocable Letter of Credit payable at 90 Days from Bill of Lading Date”, “Cash Against Documents at Sight” etc…
Delivery Period : “4 weeks after confirmation”, “5 weeks after issuance of the letter of credit”
Bank account details of the exporter and all other additional conditions regarding the sales.

How to Use Proforma Invoice in Letters of Credit Transactions:

After the seller (exporter) and the buyer (importer) agreed upon certain conditions of the transaction, the importer demands a proforma invoice from the exporter.
The exporter prepares the proforma invoice on his company letterhead and completes it with a signature.
The exporter sends the proforma invoice by e-mail to the importer. Alternatively, the proforma invoice can be couriered to the importer. But, in most cases an e-mail copy of the proforma invoice would be sufficient for the importers.
The importer applies to his bank with the proforma invoice to open a letter of credit in favor of the exporter.
Banks will be using the details on the proforma invoice along with the information they gather from the importers via “Letter of Credit (L/C) Application Forms” (Import Documentary Credit Application Forms).
As a common practice banks refer to the proforma invoice, especially the proforma invoice date and number, on the description of goods parts of the letters of credit.

Special Hints Regarding the Proforma Invoice From ISBP (International Standard Banking Practice):

It is not possible present a document titled with “Proforma Invoice” instead of “Invoice” or “Commercial Invoice”. It is forbidden by current international standard banking practice, ISBP 2013.
“A credit requiring an “invoice” without further definition will be satisfied by any type of invoice presented (commercial invoice, customs invoice, tax invoice, final invoice, consular invoice, etc.). However, invoices identified as “provisional”, “pro-forma” or the like are not acceptable.
When a credit requires presentation of a commercial invoice, a document titled “invoice” will be acceptable.
UCP 600 article 4-b : Credits v. Contracts states that “An issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, proforma invoice and the like.”
The sales contract between the exporter and the importer is independent from the letter of credit. Which means that the beneficiary of the letter of credit will be paid by the issuing bank as long as the beneficiary comply with the terms and conditions of the letter of credit.

Proforma Invoice Sample

References:

What is a proforma invoice? How does it work?, www.advancedontrade.com, Retrieved: 24.April.2018