Demand guarantee is an irrevocable undertaking issued by a bank according to instructions received from the principal, to pay the beneficiary any sum that may be demanded by that beneficiary up to a maximum amount specified in the guarantee, upon presentation of complying demand with the terms of the bank guarantee.
Commercial letter of credit, which is used in international export and import transactions, is also an irrevocable and definite undertaking of the issuing bank to honour a complying presentation.
Although these two trade finance instruments share almost identical definitions, there are major differences exist between letters of credit and bank guarantees.
Today I explain the main differences between letters of credit (L/Cs) and bank guarantees (BGs).
Primary Payment Option vs Secondary Payment Option:
One of the main differences between a bank guarantee and commercial a commercial letter of credit is the means of payment.
Under a commercial letter of credit, the beneficiary gets the payment when he completes his duties and makes a complying presentation.
For example, the exporter, who is the beneficiary of a commercial letter of credit, will be getting paid only after he ships the goods to the importer and makes a complying presentation to the issuing bank or confirming bank as per letter of credit terms and conditions.
Contrary to the commercial letter of credit, under a bank guarantee, the beneficiary will be entitled to claim a payment from the guarantor bank only if the applicant defaults on his duties at the underlying contract, which was established between the beneficiary and applicant before the the bank guarantee has been issued.
Bank guarantee is a secondary payment option and can be activated only at unexpected situations, in particular where applicants could not fulfill their contractual obligations.
Commercial letter of credit is a primary payment option and is expected to be utilized by the beneficiary upon completion of his contractual obligations.
Payment under a bank guarantee is an unusual case, whereas payment under a commercial letter of credit is an ordinary act.
Applicable Rules : UCP 600 and URDG 758
Commercial letters of credit are mostly issued subject to UCP 600, whereas bank guarantees are usually issued subject to URDG 758.
UCP 600 are the set of rules, which are prepared by ICC Banking Commission, that apply to commercial letters of credit and standby letters of credit to the extent to which they may be applicable.
URDG 758 are the latest version rules that apply to demand guarantees and counter-guarantees.
URDG (Uniform Rules on Demand Guarantees) are the set of rules that apply to bank guarantees in international scale. URDG have been published by ICC.
Beneficiary Oriented Approach and Applicant Oriented Approach
The commercial letter of credit is a “beneficiary oriented” trade finance tool, whereas the bank guarantee is an “applicant oriented” trade finance facility.
Beneficiary oriented trade finance tool means that the letter of credit mostly protects the interests of the beneficiary of the letter of credit, whom in most cases is the exporter.
Applicant oriented trade finance tool means that, comparing to the commercial letter of credit, the bank guarantee tends to favor the interests of the applicant, whom in most cases is the importer.
This distinction between the letter of credit and bank guarantee becomes more important when the case goes to the court.
Availability of the Bank Guarantee and Letter of Credit
In letter of credit terminology, availability refers to the availability of the documents in exchange for the payment of the amount stated in the letter of credit.
Commercial letters of credit could be issued available by payment, deferred payment, acceptance or negotiation.
On the other hand bank guarantees could be issued only by payment.
It is also not possible to negotiate a bank guarantee, however letter of credit rules allow for a negotiation.
Confirmed Letter of Credit and Counter-Guarantee
Letter of credit rules allow for a confirmation as a result we can talk about a confirmed letter of credit.
On the contrary, bank guarantee rules do not allow for a confirmation. Because of this reason counter-guarantee mechanism has been created under bank guarantee transactions.
Counter-guarantee means any guarantee, bond or other payment undertaking of the instructing party, however named or described, given in writing for the payment of money
Letter of credit control process for exporters can be grouped under 3 main categories.
Preliminary Investigation Stage: You should check your customer’s background and credibility at this stage.
Sales Contract Stage: You should draft and sign a sales contract at this stage.
Letter of Credit Control Stage: You should control the letter of credit draft at this stage.
Stage 1: Preliminary Investigation Stage:
Learn Who Your Customer Really Is: Nothing can protect you against an ill will customer.
As a result, you need to make sure that your customer is a valid company with a proven track of business and has a financial credibility to complete the transactions.
How to investigate your customer?
In order to understand that you are dealing with a genuine customer, who has a financial strength to start and complete the transaction, you should follow below steps:
Check your customer’s country risk: Customer’s country risk is one of the key elements that you should check before entering any contractual relationship with your customer. Be aware of political risks, economic risks as well as risks associated with sanctions, embargoes and anti money laundering regulations.
Check your customer’s references: Check your customer references by asking the potential customer to the other companies that you have been working with, freight forwarders, custom brokers and governmental organizations such as Commercial Counselors.
Buying a credit report: You can buy credit reports from “International Business Intelligence” companies.
Corporate credit reports tell you how much credibility your customer has.
For example, if the credit report suggests you that you could give 20,000 EUR credit to your customer, while your customer is pushing you to enter into a business with a total amount of 200.000,00 EUR, you should be alerted.
Buying a credit report is a wise thing, working with a new customer, especially when the payment will be made via an open account, documentary collection or letter of credit.
Stage 2: Sales Contract Stage:
After you investigate your customer, you can proceed to the sales contract drafting stage.
Letter of credit is not a sales contract. As a result you must have a sale contract regardless of the payment method you will be choosing.
After checking your customer’s credibility and signing a sale contract, now you can proceed to the letter of credit control phase.
Experienced exporters demand a “draft letter of credit” from the importers in order to make the revisions without paying extra costs for the amendments.
A draft letter of credit is prepared by the issuing bank in swift format contains all the aspects of the actual letter of credit with couple of exceptions.
It is not an operative instrument because the issuing bank intentionally indicates so.
Additionally the draft letter of credit does not secure the issuance of an actual letter of credit.
Step 1 – Checking Irrevocable Structure of the Letter of Credit: Irrevocable means that the issuing bank cannot amend or cancel the letter of credit without the written consent of the beneficiary. Ac per UCP 600 all letters of credit are irrevocable unless otherwise explicitly stated in the credit.
Check and Verify:
Make sure that the letter of credit issued subject to the latest version of the uniform rules of documentary credits, UCP 600.
Make sure that there is no indication in the credit that the letter of credit is “revocable.”
Step 2 – Verifying the Date of Issue, Latest Date of Shipment and Date of Expiry: Each letter of credit should contain a date of issue, latest date of shipment and date of expiry.
Check and Verify:
Make sure that the date of issue indicated in the letter of credit. Some letters of credit states that documents must not be dated before the letter of credit issuance date. You must ensure that if such a clause has been inserted into the credit. If so, you should comply with this regulation.
Make sure that you can make shipment before the latest date of shipment.
Make sure that you can present documents before the expiry date of the letter of credit.
Verify the expiry location of the letter of credit. In order to do that you should check following parts of the MT 700 swift message. “Field 31D: Date and Place of Expiry” and “Field 41a: Available With … By …”
If the letter of credit expires at the counters of the issuing bank, but not in your own country, you may require extra time for forwarding the documents to the issuing bank.
Further Reading:
MT 700 Swift Message Field 41a: Available With … By
MT 700 Swift Message Field 31D: Date and Place of Expiry
MT 700 Swift Message Field 44C: Latest Date of Shipment
Step 3 – Verifying the Issuing Bank: According to the letter of credit rules non-bank organizations could issue letters of credit, which leaves exporters vulnerable to fraud risk originated from the non-bank letter of credit issuers.
Check and Verify:
Make sure that the issuing bank is a valid and trustworthy bank whom you are comfortable to work with.
Make sure that the advising bank is a reputable bank located in your country.
Make sure that you have received the letter of credit in swift format through an advising bank in your country.
Step 4 – Checking the Beneficiary’s and Applicant’s Name and Address: Issuing banks usually indicate beneficiary’s name and address with errors.
Check and Verify:
Make sure that the full name of your company and its address are correctly stated in the letter of credit.
Make sure that the full name of the importer’s company and its address are correctly stated in the letter of credit.
Further Reading:
MT 700 Swift Message Field 50: Applicant
MT 700 Swift Message Field 59: Beneficiary
Step 5 – Checking the Letter of Credit Currency and Amount: The letter of credit amount and currency must match the amount and currency stated in the sales contract. Be aware of close currency symbols such as USD, AUD, CAD are being shown by the same USD ($) symbol.
Check and Verify:
Make sure that the letter of credit amount is correct.
Make sure that the letter of credit currency is correct.
Further Reading:
MT 700 Swift Message Field 32B: Currency Code, Amount
Step 6 – Checking the Description of Goods/Services: Description of goods and services is very important article especially when completing the commercial invoice.
According to the letter of credit rules, the commercial invoice must contain an exact description of goods and services that the letter of credit states.
Also it is not possible to write additional goods on the invoice even if you mention them free of charge.
Check and Verify:
Make sure that description of goods and services are corresponding the sales contract.
Make sure that all goods have been covered under the commercial invoice.
Further Reading:
MT 700 Swift Message Field 45A: Description of Goods and/or Services
Step 7 – Checking the Documents Requested by the Letter of Credit: Documentation is the core of the letters of credit. Banks decide to pay or reject the presentation by checking the documents only.
If you have a complying set of documents, you will be paid. If your presentation contains discrepancies you will be waiting for the applicant’s approval.
Please give enough attention to the documents which have been covered specifically under the letter of credit rules and international standard banking practices such as transport documents, insurance documents, bills of exchange, commercial invoices, packing lists and certificates.
Check and Verify:
Make sure that you can provide all documents required under the letter of credit.
Make sure that you can comply with the signature, issuance and authentication requirements of the documents.
Make sure that you can supply documents on time.
Make sure that there is no document should be issued or countersigned by the applicant.
Further Reading:
MT 700 Swift Message Field 46A: Documents Required
Letter of Credit Documents
Complying Presentation
How to Handle a Letter of Credit Which Contains a Joker Clause?
What are the Risks of a Document Which is to be Issued, Signed or Countersigned by the Applicant in a Letter of Credit Transaction?
Step 8 – Checking the Payment Terms: Payment terms in a letter of credit transaction define how sooner the beneficiary can reach to the payment. It is also known as “Tenor”.
According to the latest letter of credit rules all letters of credit must state whether they are available by sight payment, deferred payment, acceptance or negotiation.
The payment term “At Sight” indicates that the exporter will be paid within a reasonable time after documents will be found complying by the issuing bank or the confirming bank.
“Deferred Payment” indicates that the exporter will be paid after certain amount of time indicated in the letter of credit.
For example, if a letter of credit indicates that the payment is available at “90 days after bill of lading date”, the exporter will be paid 90 days after date of shipment, of coarse with the condition that the complying presentation.
The payment term “acceptance” indicates that letter of credit consists of a draft either “sight” or “usance”.
The payment term “negotiation” indicates that the beneficiary could get his payment from the nominated bank before the maturity date.
Check and Verify:
Make sure that payment terms quoted in the letter of credit agree with the sales contract.
Further Reading:
Availability of Letters of Credit
At Sight Letter of Credit
Step 9 – Checking the Incoterms: Trade terms have been grouped into two main categories under the Incoterms 2010 rules: Incoterms that can be used only by sea transportation (FAS, FOB, CFR and CIF) and Incoterms that can be used with all modes of transport (EXW, FCA, CPT, CIP, DAT, DAP and DDP).
As a result Incoterms and shipment mode must match each other in a letter of credit transaction.
Furthermore, “Freight Collect” and “Freight Prepaid” expressions must be used in conjunction with the applied Incoterms.
As an example, keep in mind that you can not use the CIF term with “Freight Collect” expression.
Finally, if Incoterms are stated in the “description of goods and services” part of the letter of credit, the commercial invoice must exactly reflect the stated Incoterms.
For example, if the letter of credit states “FOB New York Port, USA, Incoterms 2010” in the “description of goods and services” part of the L/C, the commercial invoice must show this exact definition as indicated.
Check and Verify:
Make sure that Incoterms and the shipment mode must match each other.
Make sure that “Freight Collect” and “Freight Prepaid” expressions are in accordance with the applied Incoterms.
Make sure that you know your responsibilities under the Incoterms which is stated in the letter of credit.
Further Reading:
Incoterms
Incoterms 2000
Incoterms 2010
What happens if a Letter of Credit Calls for a Wrong Incoterms?
Step 10 – Checking the Port of Loading / Port of Discharge: Port of loading and port of discharge are the two main elements of a marine bill of lading.
According to the letter of the credit rules the port of loading and port of discharge must not be in conflict with the ones stated in the letter of credit.
As a result you must make sure that the port of loading and port of discharge is consistent with your sales contract.
Keep in mind that as an exporter you may benefit from the use of a very generalized port of loading definition in the letter of credit , such as “Any U.S. West Coast Port” or “Any U.S. port” or even “Any North American Port”.
But when you dispatch the goods, you must write the actual port of loading to the bill of lading.
Check and Verify:
Make sure that port of loading and port of discharge stated in the letter of credit is consistent with your sales contract.
Further Reading:
MT 700 Swift Message Field 44E: Port of Loading/Airport of Departure
MT 700 Swift Message Field 44F: Port of Discharge/Airport of Destination
Step 11 – Checking the Letter of Credit Fees: Letter of credit is not a cheap payment option.
If you do not give enough attention to the letter of credit charges as an exporter, your profit margin may be reduced significantly.
As a result you have to understand your approximate cost of working with a letter of credit at the beginning of the transaction.
If possible try to reflect these costs into the goods when you are giving a price offer to your customer.
Now you know that letter of credit costs are high, but you may still wonder which letter of credit costs will be paid by the exporter.
In theory all L/C fees must be paid by the importer. But in reality importers pay only letter of credit issuance costs and force exporters to pay the remaining L/C charges.
As a result, exporter may be facing to pay
“Courier Fee / Postage Fee”,
“Advising Fee”,
“Discrepancy Fee”,
“Handling Fee / Negotiation Fee”,
“Amendment Commission”,
“Confirmation Fee”,
“Reimbursing Bank Charges”.
Check and Verify:
Understand and determine which fees must be paid by the exporter according to the letter of credit conditions.
Try to figure out how much money you have to pay for each sort of letter of credit fees.
Further Reading:
Letter of Credit Fees
How to deal with high banking commissions under letters of credit as an exporter
Advising Fee
Discrepancy Fee
Confirmation Fee
Step 12 – Checking the Presentation Period: Current letter of credit rules gives 21 days to the exporters to make their presentations to the nominated banks.
The 21 days presentation period starts with the date of shipment. You must complete your presentation within this allowed time frame.
In some instances issuing banks arrange special presentation periods for each letter of credit by inserting clauses such as “Documents must be presented for negotiation within 15 days after the on board validation date of the ocean bill of lading and within the validity of the letter of credit.”
If a letter of credit contains a special presentation period clause, the exporter must obey this specific presentation period for the letter of credit, but not the standard 21 day presentation period.
Check and Verify:
Determine the presentation period of the letter of credit.
Make sure that you are able to comply with this presentation stipulation.
Further Reading:
MT 700 Swift Message Field 48: Period for Presentation
Step 13 – Checking the Partial Shipments: The letter of credit rules allow partial shipments.
Able to make partial shipments is a huge advantage for the exporter. As a result you should try to keep the letter of credit in a way that it is allowing the partial shipments.
If your letter of credit is silent concerning partial shipments, it is should be understood that the partial shipments are allowed.
Check and Verify:
Make sure that partial shipments are allowed under the letter of credit and it is what you have agreed on your sales contract.
Further Reading:
What is a partial shipment?
MT 700 Swift Message Field 43P: Partial Shipments
Which one is more important: Partial shipment or transshipment?
Do partial drawings and partial shipments have the same meaning?
What are the consequences of not allowing partial shipments?
Step 14 – Checking the Transshipment: The letter of credit rules allow transshipments.
Actually, transhipments are not controlled by the exporters and almost all the container carriers do practice several transshipments between the ports of loading and ports of discharge.
For example a container vessel carrying cargo between Xiamen Port, China to Ploce Port, Croatia make transshipments at Chiwan Port, China and Gioia Tauro Port, Italy.
These transshipments are arranged by the carrier. The shipper has no influence.
You cannot say to the carrier “Hey, transhipment is prohibited as per my letter of credit terms, you can not make any transshipments!”.
What you can do is to make sure that transshipment is allowed under your letter of credit.
Transhipment should be prohibited only very rare situations in the letter of credit transactions.
Check and Verify:
Make sure that transshipments are allowed under the letter of credit and it is what you have agreed on your sales contract.
Step 15 – Checking the Reimbursement Instructions: Reimbursement instructions can be found either in;
“Field 47-A : Additional Conditions” or
“Field 78: Instructions to the Paying/Accepting/Negotiating Bank”.
Reimbursement instructions are very important to the exporter, as they determine how and when payment will be received.
There are mainly four types of reimbursement instructions used in international documentary credits. These are:
The issuing bank authorizes the nominated bank to debit its account;
The issuing bank instructs the nominated bank to claim reimbursement from a reimbursing bank;
The issuing bank requires the nominated bank to send a swift message notifying the issuing bank that the documents have been received and found to be in compliance with the LC terms, only then the issuing bank remits funds to the nominated bank;
The issuing bank requires nominated bank to send documents to the issuing bank for payment (very rare and slowest reimbursement method of payment).
Check and Verify:
Make sure that reimbursement instructions do not block you to receive payment via unreasonable restrictions.
Further Reading:
MT 700 Swift Message Field 78: Instructions to the Paying/Accepting/Negotiating Bank
URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits – ICC Publication No. 725
Step 16 – Non-Documentary Conditions: A non-documentary condition can be defined as any instruction or condition that is not clearly attributable to a document to be stipulated in a documentary credit.
Non-documentary conditions are great source of confusion and disputes between the issuing banks and exporters.
Documentary Condition Examples:
Certificate of origin issued in 1 original and 1 copy legalized by the local chamber of commerce attesting that goods are of China origin.
Certificate of origin must show that goods are of China origin.
Non-Documentary Condition Examples:
Exported goods must be Australian Origin.
Any of the presented document must not show that goods are originated from a country other than Australia.
Check and Verify:
Make sure that you have identified all non-documentary conditions in the letter of credit.
What are the Risks of a Document Which is to be Issued, Signed or Countersigned by the Applicant in a Letter of Credit Transaction?
Step 18 – Checking the Confirmation: Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.
A confirming bank is requested by the issuing bank to add its guarantee of payment or acceptance to the letter of credit instrument.
You can protect yourselves against various risks under the letter of credit transaction by having the letter of credit confirmed by a prime bank in your country.
Check and Verify:
Make sure that you can have the letter of credit confirmed by one of the prime banks in your country.
Step 19 – Checking the Reimbursement Bank: The reimbursing bank is usually named in “Field 53a: Reimbursing Bank” of a S.W.I.F.T. 700 message.
Check and Verify:
Make sure that reimbursement bank identified in the letter of credit is one of the most reputable banks around the world such as Commerzbank, HSBC Bank, The Bank of America Merrill Lynch etc..
Further Reading:
MT 700 Swift Message Field 53a: Reimbursing Bank
MT 700 Swift Message Field 78: Instructions to the Paying/Accepting/Negotiating Bank
Reimbursement and Reimbursing Bank
URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits – ICC Publication No. 725
Step 20 – Conclusion: Do not assume anything when working with a letter of credit.
Always act with caution. If you do not know a term read the letter of credit rules, ask it to your bank, check reputable online sources before taking any further steps.
Let me finish this part with the sentence I have written just at the beginning of this booklet.
“Both exporters and importers are protected by letters of credit in certain amount, if they act properly.”
Shipping documents, when used as a term in a letter of credit, could create problems between the issuing bank and the beneficiary due to its obscure meaning.
It is not possible to find a “shipping documents” term under the documentary credit rules, as a result ICC Banking Commission discourages banks to use it.
But issuing banks still choose to implement this term in their credits one way or another..
You can find two examples below how shipping documents term is used in the letters of credit by the issuing banks.
Example 1:
Field 47-A Additional Conditions: Shipment date and shipping documents including bill of lading dated prior to letter of credit opening date is not acceptable.
Analysis: Using the shipping documents term in a way, as specified on above example, may create disputes between the issuing bank and the beneficiary.
According to the ISBP 745, which is the latest International Standard Banking Practices published by ICC, “shipping documents” term defined as follows: “all documents required by the credit, except drafts, tele‐transmission reports and courier receipts, postal receipts or certificates of posting evidencing the sending of documents.”
Conclusion: Under normal circumstances, it is expected that even if the drafts, tele‐transmission reports and courier receipts, postal receipts or certificates of posting have been dated prior to the issuance date of the credit, the issuing bank would accept such presentation.
These having been said, in order to be on the safe side, the beneficiary may choose to present all documents under this letter of credit will be dated after the issuance date of the documentary credit to prevent any problem with the issuing bank, because of the fact that the issuing bank’s intention, by using the term of shipping documents, may be referring all the documents that have been requested by the credit, but not just the ones as being described under the ISBP 745.
Example 2:
46-A Documents Required:
Full set of clean on board bills of lading issued or endorsed to the order of Issuing Bank, notify applicant showing freight prepaid.
Field 47-A Additional Conditions: Shipping documents should be prepared in the name of: Applicant Company.
Analysis: Using the “shipping documents” term in a way as exhibited in example 2 would be the most risky situation for the beneficiaries.
Let me try to explain the reason.
On this example, the issuing bank defines how the bills of lading should be completed under the field 46-A: Documents Required.
But the issuing bank puts another indication under the field 47-A Additional Conditions stating that “Shipping documents should be prepared in the name of: Applicant Company.”
The beneficiary may confuse at the document preparation stage as these statements contradict each other.
Under such a circumstances the best advice that can be given to the beneficiary is that applying to the applicant for an amendment to delete the so called phrase which has been inserted in field 47-A by the issuing bank.
Date of shipment is one of the key definitions in a letter of credit transaction. It is used to determine
whether shipment made on time or not (in other words a late shipment has been effected or not)
whether documents presented within the presentation period or not (in other words a late presentation has been effected or not)
maturity date of the time draft
maturity date of a deferred payment letter of credit.
Date of shipment on a bill of lading can be determined in two ways.
In the first scenario, we will face a situation where a bill of lading does not contain any dated shipped on board notation.
In the second scenario, we will be having a bill of lading which contains a dated shipped on board notation.
Option 1 =>There is no shipped on board notation exists on the bill of lading:
The date of issuance of the bill of lading will be deemed to be the date of shipment.
Option 2=>Bill of lading indicates, by stamp or notation, a shipped on board date:
Notation date will be deemed to be the date of shipment as specified below: Date of shipped on board notation/stamp => this date will be deemed to be the date of shipment
Example: On the below figure, you can see a shipped on board notation which is located on the bottom of a bill of lading. As there is a dated on board notation exist on the bill of lading, date of shipment will be deemed to be this shipped on board notation date which is 14.May.2018.
whether shipment made on time or not (in other words a late shipment has been effected or not),
whether documents presented within the presentation period or not (in other words a late presentation has been effected or not),
maturity date of the time draft,
maturity date of a deferred payment letter of credit.
Using Date of Shipment in Order to Determine Whether Shipment Has Been Made on Time or Not:
If a letter of credit calls for an original transport document, it is also expected that the letter of credit indicates a latest date of shipment.
In this regard, it is of paramount importance to clarify which documents are considered as a transport document under the letter of credit rules:
Transport Documents Under the Letter Of Credit Rules: Below you can find the transport documents defined under the letter of credit rules.
Transport Document Covering at Least Two Different Modes of Transport (multimodal bill of lading or combined transport document etc…)
Bill of Lading (marine bill of lading, ocean bill of lading etc..)
Non-Negotiable Sea Waybill
Charter Party Bill of Lading
Air Transport Document (Air Waybill)
Road, Rail or Inland Waterway Transport Documents
Courier Receipt, Post Receipt or Certificate of Posting
If one of the transport documents is requested in the credit, the beneficiary must complete the shipment before the latest date of shipment. Otherwise the issuing bank finds the presentation not complying and raises a late shipment discrepancy.
Using Date of Shipment in Order to Determine Whether Documents Have Been Presented Within the Presentation Period or Not:
A presentation including at least one original transport document, which can be a multimodal bill of lading, combined transport document, bill of lading, non-negotiable sea waybill, charter party bill of lading, air transport document, road transport document, rail transport document, inland waterway transport document, courier receipt, post receipt or certificate of posting, must be made not later than 21 calendar days after the date of shipment.
In any case presentation must be made not later than the expiry date of the credit.
Using Date of Shipment to Determine Maturity Date of the Time Draft:
Letter of credit that has been issued available by acceptance of a time draft may specify a maturity date which will be calculated with the help of the date of shipment.
Let me give you a couple of examples:
at 60 days after the bill of lading date
at 90 days after bill of lading
after 30 days from date of bill of lading
When the tenor of the bill of exchange refers to, for example, 30 days after the bill of lading date, the on board date is deemed to be the bill of lading date.
On this occasion the on board date could be prior to or later than the issuance date of the bill of lading.
Using Date of Shipment to Determine Maturity Date of a Deferred Payment Letter of Credit:
Letter of credit that has been issued available by deferred payment may specify a maturity date which will be calculated with the help of the date of shipment.
Let me give you couple of examples as follows:
deferred payment at 60 days after the bill of lading date
deferred payment at 90 days after bill of lading
deferred payment after 30 days from date of bill of lading
When tenor or maturity date of the deferred payment refers to, for example, 30 days after the bill of lading date, the on board date is deemed to be the bill of lading date.
On this occasion the on board date could be prior to or later than the issuance date of the bill of lading.
On this post, you can find explanations regarding the latest date of shipment and expiry date.
If a letter of credit requests presentation of a transport document and a latest date of shipment indicated in the credit; then the shipment must be completed on or before the latest date of shipment indicated in the credit.
If a letter of credit requests presentation of a transport document but not indicated a latest date of shipment; then the shipment and the presentation must be completed on or before the expiry date indicated in the credit.
According to the letter of credit rules, a presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.
Latest Date of Shipment:
Latest date of shipment is an optional information and not every letter of credit issued in swift format contains a latest date of shipment.
Latest date of shipment can be meaningful only if the letter of credit requests presentation of a transport document. No transport document, no meaning of the latest date of shipment.
If the letter of credit indicates a latest date of shipment, then the beneficiary has to complete the shipment of goods on or before this date.
The beneficiary has to present a transport document showing a shipment date on or before the latest date of shipment in order to prove his compliance with the latest date of shipment.
If the beneficiary presents a transport document showing a shipment date later than the latest date of shipment, then the issuing bank raises a “late shipment discrepancy“.
Expiry Date :
The beneficiary has to present the documents to nominated bank on or before the expiry date of the l/c.
If the beneficiary can not make the presentation on time, the letter of credit will be terminated and will not be valid any more.
Bill of exchange, which is also known as draft, is a financial document commonly used in international trade transactions.
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 (payee), or to bearer”.
Parties to a Bill of Exchange:
Drawer of a Bill of Exchange / Draft: 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 / Draft: Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the importer or importer’s bank.
Payee of a Bill of Exchange / Draft: Is the party to whom the Bill is payable; usually the seller or his bank.
How Does a Bill of Exchange Work in the Documentary Collections?
Documentary Collection (D/C) is a payment method in international trade. Documentary collection is also known as Cash Against Documents (CAD).
There are two payment options available in the documentary collections: Documents Against Payment (D/P) and Documents Against Acceptance (D/A).
Under the documents against payment option, it is not advisable to use a bill of exchange. The importer should make the payment at sight against the documents.
Under the documents against acceptance (D/A) payment option, it is advisable to use a bill of exchange payable at a future date (time draft).
Bill of Exchange Workflow in the Documentary Collections:
The bill of exchange workflow under documents against acceptance (D/A) payment option is as follows:
The exporter issues a bill of exchange payable at a future date (time draft) along with other shipping documents and sends it to the importer via his bank on collection basis.
The importer applies to his bank, accepts the bill of exchange, receives the documents, clears the goods from the customs and makes the payment at the maturity date of the bill of exchange.
How Does a Bill of Exchange Work in the Letters of Credit?
There are four payment options available in the letters of credit: Sight payment, acceptance, deferred payment and negotiation.
It is not possible to use a bill of exchange in the letters of credit, which are available by deferred payment.
On the other hand, every letter of credit that is issued available by acceptance must demand presentation of a bill of exchange along with other shipping documents.
Under sight payments and negotiation, the bill of exchange may or may not be used.
Bill of Exchange Workflow in the Letters of Credit:
The bill of exchange workflow in the letters of credit available by sight payment, acceptance or negotiation is as follows:
Sight Payment:
After making the shipment, the exporter collects all the shipping documents and issues an at sight bill of exchange to make the presentation to the issuing bank or confirming bank or nominated bank, as applicable.
If the bank determines that the presentation is complying, then pays the credit amount to the beneficiary.
Acceptance:
After making the shipment, the exporter collects all the shipping documents and issues a time draft (bill of exchange payable at a future date) to make the presentation to the issuing bank or confirming bank or nominated bank, as applicable.
If the bank determines that the presentation is complying, then accepts the time draft and pays the credit amount to the beneficiary at maturity.
Negotiation:
The letters of credit available by negotiation can be payable at sight or usance.
If the letter of credit requires an at sight bill of exchange, the process will be the same as the sight payment.
If the letter of credit requires presentation of a time draft, the process will be the same as the acceptance.
Conclusion:
Bill of exchange plays an important role in commercial and financial cycles not only as a method of payment or a way of providing credit, but also as security for payments. (1)
Bill of exchange mainly used in documentary collections and letters of credit.
Under the documentary collections, the bill of exchange can be used only when Documents Against Acceptance (D/A) payment option is chosen.
Under the documentary collections, the bill of exchange payable at a future date (time draft) drawn on the importer. The importer accepts the bill of exchange, receives the documents, clears the goods from the customs and makes the payment at the maturity date of the bill of exchange.
If the importer does not pay the bill of exchange amount at maturity, the exporter tries to use his legal rights that is stem from the bill of exchange.
Under the documentary collections, the importer’s banks has no payment obligation unless the bill of exchange has been avalized by the importer’s bank.
Under the letters of credit, the bill of exchange can be used with at sight, acceptance and negotiation payment options.
Under the letters of credit, the bill of exchange can be issued at sight or payable at a future date (time draft).
Under the letters of credit, the bill of exchange must be drawn on a bank that is specified in the credit.
Under the letters of credit, the bill of exchange does not give additional payment guarantee to the beneficiary, whereas the situation will be different for the banks. Bill of exchange may change the payment obligation between the nominated bank and the issuing bank; the confirming bank and the issuing bank etc.
References:
Bills of Exchange, A Guide to Legislation in European Countries, Dr. jur. Uwe Jahn, ICC Publication No 531 (E), 1996, P:3
Partial shipments, partial drawings and partial payments are very closely related terms in letters of credit transactions.
A beneficiary can make partial shipments, if the letter of credit allows partial shipments explicitly; or else it is silent in regards to the partial shipments.
If a letter of credit disallows partial shipments, this means that the beneficiary can not make any partial shipments under that letter of credit.
After reading this article, you should understand the connection between partial shipments, partial drawings and partial payments under letters of credit.
Example:
A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:
Field 45-A: Description of Goods: 3 Pcs of Olive Oil Processing Machinery
Field 46A: Documents Required:
• 1 original signed commercial invoice and 1 copy.
• 1 original packing list and 1 copy.
• Full set of original bill of lading clean on board marked freight collect made out to the order of Issuing Bank, notify applicant.
Analysis:
The beneficiary has to ship 3 olive oil processing machinery under this sample letter of credit.
Shipping only 1 olive oil processing machinery is a partial shipment.
After shipping 1 olive oil processing machinery, the beneficiary collects the shipping documents and makes the presentation to the issuing bank.
The beneficiary demands 100.000,00 USD from the issuing bank. This is the partial drawing as the beneficiary demands not the full credit amount.
The issuing bank checks the documents, and if the documents are complying then the issuing bank pays 100.000,00 USD to the beneficiary, which is the partial payment.
Conclusion:
It is possible to get partial payments under the letters of credit, when partial shipments have been effected. Actually it is why partial shipments exist at the first place.
Partial shipment and partial drawing terms are usually used with the same meaning in export and import transactions.
But this is not necessarily the case especially in standby letters of credit and bank guarantees.
On this post you can find the definitions of both partial drawings and partial shipments, as well as the differences between partial shipments and partial drawing via examples.
Definition of a Partial Drawing: A presentation which is made for less than the full amount available will be defined as a partial drawing.
Definition of a Partial Shipment: If a beneficiary under a letter of credit ships the credit amount in a single lot, which is corresponding to the whole credit amount, loaded with a single means of conveyance; then this can be defined as a complete shipment.
All other shipments, which are not complete and/or loaded with more than one means of conveyance, can be defined as partial shipments.
Example:
A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:
Important Note: The letter of credit is silent about the partial shipments and transhipments.
Field 45A-Description of Goods: Quantity: 2,000 M/Ts Material: Hot Rolled Steel Plates -Size: -20.00MM x 2000 MM x 1000 MM – 500 M/Ts 25.00MM x 2000 MM x 1100 MM – 1500 M/Ts
Field 46A: Documents Required:
1 original signed commercial invoice and 1 copy.
1 original packing list and 1 copy.
1 original forwarder’s certificate of receipt issued to the name of the issuing bank bearing a clause that goods have been assumed control by the named forwarder with irrevocable instructions to be forwarded to the consignee and marked freight payable at destination.
Analysis:
The letter of credit is silent in regards to the partial shipments and partial drawings.
In these kinds of situations, where the L/Cs are silent about the partial shipments and partial drawings, we need to look at the latest letter of credit rules.
UCP 600, which is the latest set of letter of credit rules, tells us that the partial shipments and partial drawings are allowed if the letter of credit is silent in this regard.
According to the letter of credit rules, FCR is not a transport document. It is not possible to make partial shipments under the letters of credit, which do not demand a transport document.
However, it is possible for the beneficiaries to demand partial drawings from the issuing banks.
Conclusion:
Partial shipment is related to the transport documents. If the letter of credit do not request a transport document, then technically you can not make a shipment.
Which means that it is not possible to make a partial shipment under the letter of credit, that do not request a transport document.
However, it is possible to demand less than the full letter of credit amount from the issuing banks under such circumstances. Which is called the partial drawings.
Most of the stand-by letters of credit and bank guarantees do not require presentation of an original copy of the transport document.
Normally the letter of credit rules allow partial shipments.
UCP 600 Article 31 states that partial drawings or shipments are allowed.
If an applicant does not want to permit partial shipments, he must give clear instructions to the issuing bank to this effect, when opening the letter of credit.
Why Would Applicants Prohibit Partial Shipments?
Applicants would like to prohibit partial shipments for technical and commercial reasons:
Technical Reasons to Disallow Partial Shipments: Shipping of goods in partial may not be meaningful.
For example, if an exporter should be dispatching one piece of Offset Printing Machine under a letter of credit, shipping the machine dismantled via partial shipments would be meaningless.
As a result, an importer needs to disallow partial shipment under such a scenario.
Commercial Reasons to Disallow Partial Shipments:Under some circumstances, commercial conditions may make partial shipments unsuitable for the importers.
Generally, importers are not the end buyers in international trade transactions. They are big wholesalers.
They import the goods in to their countries and then they will distribute them to smaller distributors or end customers.
If importers need specific amount of goods within a specific periods of time, they may forced to prohibit partial shipments under the letter of credit transactions.
What are the Consequences of Prohibiting Partial Shipments?
If partial shipments are not allowed under a letter of credit, issuing bank, confirming bank and nominated bank should check the presented documents very carefully in order to make sure that documents do not evidence a partial shipment.
Not allowing partial shipments under letters of credit would result below consequences:
Exporters could not make short shipments, except allowed tolerance limits, if any, under letters of credit where partial shipments are prohibited.
Exporters could not make partial drawings and could not get partial payments from the banks.
Exporters who act on the contrary may face discrepancies and non-payment risks.
Commercial letters of credit are mostly issued subject to UCP 600, whereas bank guarantees are usually issued subject to URDG 758.
The commercial letter of credit is a “beneficiary oriented” trade finance tool, whereas the bank guarantee is an “applicant oriented” trade finance facility.
In letter of credit terminology, availability refers to the availability of the documents in exchange for the payment of the amount stated in the letter of credit.
Letter of credit rules allow for a confirmation as a result we can talk about a confirmed letter of credit.
