Payment Types of Letter of Credit

What is the Meaning of by Payment?

Ozgur Eker (CDCS) At Sight, Payment Types of Letter of Credit , , ,
What is the meaning of by payment?

At sight payment is a payment due on demand.

At sight letter of credit can be defined as a letter of credit that is payable as soon as the complying documents have been presented to the issuing bank or the confirming bank.

Some credit do not mention at sight term, instead issued available by payment.

Is “by payment” the same as “at sight payment” in a letter of credit transaction?

What happens if the letter of credit does not mention at sight but states only by payment?

When should the issuing bank pay to the exporter if credit available by payment?

How long should an exporter wait for the payment when credit states that the payment terms is by payment only?

Let me try to answer all of these questions via case study.

Case Study: What is the Meaning of by Payment?

Dear Sir,

I find your website very useful. I think you have published more than 300 articles and they are very helpful to me. I am working as an export manager in an international steel manufacturing firm in India.

I would like to ask you a question regarding letter of credit payment terms.

A while ago I have received an irrevocable letter of credit, but in the letter of credit there is no specific payment date and also the credit does not mention a sight draft. In the letter of credit issuing bank only put below statement in “Field 41D : Available with… by..” section.

” :41D/AVAILABLE WITH … BY … : ANY BANK IN INDIA
BY PAYMENT “

What I would like to learn is that if the meaning of “BY PAYMENT” and “AT SIGHT” is the same or not?

Some of my friends here suggested that we should amend the “by payment” statement with “at sight”. Is he correct?

Regards
Durai Raj

Answer:

Dear Duraj thanks for your question. Actually “by payment” and “at sight” have the same meaning in letters of credit. Swift rule book states that “When code contains BY PAYMENT, this should be understood to mean payment at sight.”

Issuing banks have 5 banking days to check your documents after day have received your presentation. If they find your presentation complying, then they have to pay the letter of credit amount to you without losing time under at sight letters of credit.

If I were you I would not count too much on confirming banks when a letter of credit is available with at sight payment. In most cases confirming banks do not pay your money until they have been reimbursed by the issuing banks.

How Does a Negotiable Letter of Credit Work?

Ozgur Eker (CDCS) How to Work With a Letter of Credit, L/C Samples, Letter of Credit Basics, Negotiation, Payment Types of Letter of Credit
How Does a Negotiable Letter of Credit Work?

What Does Negotiation Mean?

Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

What Are the Benefits of a Negotiable Letter of Credit to the Exporters?

Exporters can reach the payment sooner with negotiable letters of credit, while offering usance terms to the importers.

With the help of the negotiable letters of credit, exporters can balance their cash flows, and able to propose competitive payments terms to the importers.

Who Should Pay Negotiation Fees?

Negotiation fees generally covered by the exporters, although this is contrary to the letter of credit rules.

How to Understand if a Letter of Credit Negotiable or Not?

In order to understand if a letter of credit is negotiable or not, you need to look at field “41A-Available with/by” field in a MT700 swift message.

If letter of credit is negotiable, it must be mentioned under field 41A that the letter of credit is available by negotiation.

How Does a Negotiable Letter of Credit Work?

How does a negotiable letter of credit work?

  • Step 1: Exporter and importer enter into a sales contract by agreeing on the terms and conditions of the business transaction.
  • Step 2: Importer contacts to the issuing bank for the issuance of the negotiable letter of credit.
  • Step 3: Issuing bank issues negotiable letter of credit in swift format and sends it to the nominated bank, who is also negotiating bank and advising bank.
  • Step 4: Negotiating bank advices the letter of credit to the exporter. Exporter checks the letter of credit conditions, if they are acceptable to the exporter, he starts production of the goods.
  • Step 5: Exporter ships the goods within the validity of the letter of credit and not later than latest date of shipment indicated in the L/C.
  • Step 6: Exporter presents the documents to the negotiating bank within the presentation period allowed under the letter of credit. Remember if presented documents contain a transport document, presentation must be completed within 21 days after date of shipment.
  • Step 7: Negotiating bank checks the documents presented by the exporter and, if determines that they are compliant, advances cash to the exporter. The “negotiation” is effectively the purchase of documents from the exporter at a discount.
  • Step 8: Negotiating bank presents the documents to the issuing bank.
  • Step 9: Issuing bank checks the documents and, if compliant, accepts them to be paid to the negotiating bank at maturity. At the same time, issuing bank gets in touch with the importer and delivers documents to him according to the financial agreement between the issuing bank and the importer.

Sample Negotiable Letter of Credit Swift Message 

————————————- Message Header ——————————————-
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : COBADEFFXXX
COMMERZBANK AG
(HEAD OFFICE)
FRANKFURT AM MAIN DE
Receiver : BOBIHKHH
BANK OF BARODA, HONG KONG
Hong Kong HK
————————————- Message Text———————————————–
27: Sequence of Total
1/1
40A: Form of Documentary Credit
IRREVOCABLE
31C: Date of Issue
140922
40E: Applicable Rules
UCP LATEST VERSION
31D: Date and Place of Expiry
05FEB15 HONG KONG
41A: Available With…By… – BIC
ANY BANK
BY NEGOTIATION
42C: Drafts At
AT 90 DAYS AFTER BL
42A: Drawee
BOBIHKHH

Confirmed L/C at Sight

Ozgur Eker (CDCS) At Sight, Confirmed Letter of Credit, International Payment Methods, Letter of Credit Basics, Letter of Credit Types, Letters of Credit, Payment Types of Letter of Credit , , ,
Understanding the benefits of confirmed lc at sight.

Confirmed L/C at sight covers two definitions: Confirmed letter of credit which is payable at sight.

Letters of credit can permit the beneficiary to be paid immediately upon presentation of specified documents (at sight letter of credit), or at a future date as established in the sales contract (term/usance letter of credit). (1)

Confirmation means “a definite undertaking of the confirming bank , in addition to that of the issuing bank, to honour or negotiate a complying presentation” according to latest UCP rules.

By reading this post, you should understand the responsibilities of confirming banks, benefits of confirmed at sight letters of credit and why in some situations at sight confirmed letters of credit mechanism does not work.

Definition of at Sight Letter of Credit:

Latest letter of credit rules, UCP 600, defines four availability options;

A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation (UCP 600 – Article 6- b).

At sight payment is one of the payment terms in a letter of credit transaction.

At sight letter of credit can be defined as a letter of credit that is payable as soon as the complying documents have been presented to the issuing bank or the confirming bank.

Definition of the Confirmation:

According to latest UCP rules confirmation means,

“a definite undertaking of the confirming bank , in addition to that of the issuing bank, to honour or negotiate a complying presentation”

Confirming Banks’ Responsibilities:

UCP 600 define confirming banks’ responsibilities as follows,

Article 8 – Confirming Bank Undertaking

a. Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

i. honour, if the credit is available by

a. sight payment, deferred payment or acceptance with the confirming bank;
b. sight payment with another nominated bank and that nominated bank does not pay;
c. deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
d. acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
e. negotiation with another nominated bank and that nominated bank does not negotiate.

ii. negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

b. A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

c. A confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank’s undertaking to reimburse
another nominated bank is independent of the confirming bank’s undertaking to the beneficiary.

d. If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.

Benefits of At Sight Confirmed Letter of Credit?

Why exporters pay additional fees to have their L/Cs confirmed?

  • First reason is that the exporters would like to eliminate default risk of the issuing bank.
  • Second reason is that they would like to receive their payment sooner by removing the issuing bank out of the equation.

Why in some Situations At Sight Confirmed Letter of Credit Mechanism Does not Work?

The nominated banks, whom added their confirmations and became the confirming banks, keep sending documents to the issuing banks and wait for reimbursement even under confirmed at sight letters of credit.

Unfortunately even the confirmation couldn’t eliminate typical nominated bank action: wait for reimbursement, then pay to the beneficiary!

Confirming banks should pay the credit amount against confirming documents to the beneficiaries under at sight letters of credit as letter of credit rules dictate.

But in practice they are ready to act in this way only if they have determined that the issuing bank is defaulted.

Sources:

  1. Documentary Letters of Credit: A Practical Guide, Scotiabank International Trade Services, Page:2

Red Clause Letter of Credit Sample

Ozgur Eker (CDCS) Letter of Credit Types, Payment Types of Letter of Credit, Red Clause Letter of Credit , ,
Red Clause Letter of Credit Sample

Letter of credit that carries a provision (traditionally written or typed in red ink) which allows a seller to draw up to a fixed sum from the issuing bank, in advance of the shipment can be defined as a red clause letter of credit.

Red clause letters of credit supply advance payments to the exporters before they actually ship the goods to the importers.

Exporters receive advance payments under red clause letters of credit mostly from the issuing banks inside the letters of credit.

It is also possible that the advance payments are payable outside of the letters of credit from the importers to the exporters.

Normally, the issuing banks make the advance payment under red clause letters of credit against presentation of advance payment guarantees issued by the bankers of the exporters, guaranteeing a refund in the event of failure to ship under the credit.

———————————– Instance Type and Transmission —————————-
Original received from SWIFT
Priority/Delivery : Normal
Message Output Reference : 1225 121016XXXXXXXXX5657939061
Correspondent Input Reference : 1225 121016XXXXXXXXX1178375172

—————————————- Message Header —————————————–
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : ASIATRISXXX
Receiver : PCBCCNBJXXX
————————— Message Text ———————————-
27: Sequence of Total
1/1

40A: Form of Documentary Credit
IRREVOCABLE

20: Documentary Credit Number
ASIAIM00004050

31C: Date of Issue
130722

40E: Applicable Rules
UCP LATEST VERSION

31D: Date and Place of Expiry
131230-TURKEY

50: Applicant
ASIA BANK OF TURKEY TAS
BUYUK HAN MAH. ISMAIL HAKKI BEY
CAD. NO:20 34500
SISLI,ISTANBUL/TURKEY

59: Beneficiary – Name & Address
NINGBO PLASTIC MACHINERY CO., LTD.
PLS SEE FIELD 47A ITEM 7 FOR ADDRESS DETAILS
32B: Currency Code, Amount
Currency : USD (US DOLLAR)
Amount : #327.000,00#

39B: Maximum Credit Amount
NOT EXCEEDING

41A: Available With…By… – BIC
ASIATRISXXX
ASIA BANK OF TURKEY TAS BUYUK HAN MAH. ISMAIL HAKKI BEY CAD. NO:20 34500
SISLI,ISTANBUL/TURKEY
BY MIXED PYMT

43P: Partial Shipments
NOT ALLOWED

43T: Transhipment
ALLOWED

44E: Port of Loading/Airport of Departure
ANY CHINESE PORT

44F: Port of Discharge/Airport of Destination
HAYDARPASA PORT ISTANBUL

44C: Latest Date of Shipment
131209

45A: Description of Goods &/or Services
NEW PLASTIC CUP MAKING LINE QTY:1 SET U/P: USD 327.000 FOR TOTAL AMOUNT: USD 327.000,00 AS PER BENEFICIARY’S PROFORMA INVOICE REF NO: NB130522 DD:04.07.2013
INCOTERMS 2010: CIF HAYDARPASA ISTANBUL TURKEY

46A: Documents Required

  • DULY SIGNED COMMERCIAL INVOICE IN 2 ORIGINALS AND 3 COPIES CERTIFYING IN STRICT CONFORMITY WITH THE BENEFICIARY’S PROFORMA INVOICE REF NO: LL130522 DD:04.07.2013 AND SHOWING QUANTITY, DESCRIPTION , ALSO STATING FOB VALUE OF THE GOODS FREIGHT AND INSURANCE SEPARATELY.
  • CLEAN ON BOARD B/L IN 3/3 ORGS. AND 3 N/N COPIES ISSUED TO THE ORDER OF ISSUING BANK NOTIFY APPLICANT,MARKED: ‘FREIGHT PREPAID’.
  • PACKING LIST IN 2 ORG.S AND 2 COPIES.
  • BENEFICIARY’S CERTIFICATE 1 ORG. STATING THAT SHIPMENT DETAILS INCLUDING DATE AND PLACE OF LOADING,NAME AGE,NATIONALITY,IMO NUMBER OF THE VESSEL,VALUE OF THE GOODS, GROSS AND NET WEIGHTS OF THE GOODS AND THE REF.NO OF THE L/C HAVE BEEN SENT TO OUR BANK’S FAX NO:+90 212 600 50 10 WITHIN 2 DAYS AFTER SHIPMENT DATE FOR INFORMATION PURPOSES.(FAX REPORT AND SHIPMENT DETAILS HAVE BEEN ATTACHED TO THIS DOC.)
  • CERTIFICATE BY BENEFICIARY STATING THAT ‘CE’MARK HAS BEEN LABELLED ON PACKAGES OF THE GOODS AND TECHNICAL DOCUMENTS IN STRICT CONFORMITY CONCERNING LEGISLATION
  • FULL SET INSURANCE POLICY ISSUED TO THE ORDER OF ISSUING BANK FOR FULL CIF VALUE PLUS 10 PERCENT AND STATING THE NAME, PHONE AND FAX NUMBERS OF A CLAIMS SETTLING AGENT IN TURKIYE AND CLAIMS PAYABLE IN TURKIYE COVERING THE FOLLOWING RISKS FROM WAREHOUSE TO WAREHOUSE:
    +INSTITUTE CARGO CLAUSES (A)
    +INSTITUTE WAR CLAUSES (CARGO)
    +INSTITUTE STRIKE CLAUSES (CARGO)
    +RIOTS AND CIVIL COMMOTIONS,
    ALSO INSURANCE TO CERTIFY THAT COVER IS NOT SUBJECT TO A FRANCHISE OR AN EXCESS (DEDUCTIBLE).
  • CERTIFICATE OF ORIGIN IN 1 ORG. AND 1 COPY LEGALIZED BY THE LOCAL CHAMBER OF COMMERCE ATTESTING THAT GOODS ARE CHINA ORIGIN.

47A: Additional Conditions

  • ALL DOCUMENTS MUST BEAR OUR L/C REF.
  • IN CASE OF PRESENTATION OF THE DOCUMENTS WITH DISCREPANCIES, USD 100,00 WILL BE DEDUCTED FROM THE PROCEEDS AS AN ADDITIONAL PROCESS FEE.
  • DOCUMENTS ISSUED BEFORE L/C OPENING DATE NOT ACCEPTABLE.
  • PAYMENTS TO BENEFICIARY UNDER RESERVE AND ANY KIND OF GUARANTEE ARE NOT ACCEPTABLE
  • ALL DOCS MUST BE ISSUED OR FILLED IN ENGLISH
  • BENEFICIARY’S ADDRESS: DEVELOPED AREA OF NINGBO ECONOMIC DEVELOPMENT ZONE NINGBO CITY CHINA

71B: Charges
ALL BANKING CHARGES AND COMMISSIONS OUTSIDE OF TURKEY ARE FOR BENEFICIARY’S ACCOUNT.

48: Period for Presentation
21 DAYS AFTER SHIPMENT DATE BUT WITHIN CREDIT VALIDITY.

49: Confirmation Instructions
WITHOUT

78: Instruction to Paying/Accepting/Negotiating Bank

  • 30 PCT OF L/C AMOUNT SHALL BE PAID IN ADVANCE UPON RECEIVING ADVANCE PAYMENT GUARANTEE,
  • 70 PCT OF L/C AMOUNT SHALL BE PAID UPON RECEIPT OF CREDIT CONFORM DOCS.
  • PLS ADVISE US THE REMITTANCE OF THE DOCS. BY MT 754 MSG. QUOTING OUR REF.

72: Sender To Receiver Information

  • PLS SEND THE DOCS TO FOLLOWING ADDRESS BY DHL IN ONE LOT: ASIA BANK OF TURKEY TAS BUYUK HAN MAH. ISMAIL HAKKI BEY CAD. NO:20 34500 SISLI,ISTANBUL/TURKEY
    ———————– Message Trailer ——————————
    {MAC: 00000000}
    {CHK: XXXXXXXX}

At Sight Letter of Credit

Ozgur Eker (CDCS) At Sight, Payment Types of Letter of Credit ,
At Sight Letter of Credit

According to the current letters of credit rules, UCP 600, credits must state how they are available to beneficiaries in terms of payment type.

UCP 600 – Article 6-b states that “A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation.”

On this article we explain letters of credit issued available by at sight payment.

Definition: 

At sight payment is a payment due on demand. At sight letter of credit can be defined as a letter of credit that is payable as soon as the complying documents have been presented to the issuing bank or the confirming bank.

Payment Time:

When should the beneficiary expect to receive the payment from the issuing bank or the confirming bank under an at sight letter of credit?

If is the issuing bank or the confirming bank finds out that the presentation is complying, then they should transmit the funds to the beneficiary at the earliest convenience.

We know that banks have 5 working days to determine whether a presentation is complying or not.

As a result, under a complying presentation where no additional reimbursement time-frame has been defined, the beneficiary should expect to receive the letter of credit amount from the issuing or confirming bank between 7-10 days after documents received by these banks.

Advantages:

In which circumstances at sight letter of credit can be preferred?

At sight letter of credit can be used in situations where the beneficiary needs funds as soon as the shipment is completed.

At sight letters of credit are mostly used in small to medium size transactions where applicant is located in a relatively high risk country.

Risks:

What are the potential risks in at sight letters of credit?

There is no additional risks associated with at sight letters of credit other than ordinary letters of credit possess.

Swift Usage:

At sight letter of credit is shown in a MT700 swift message under field 41a as below,

MT 700 Issue of a Documentary Credit
Field 41a: Available With … By …

  • BY ACCEPTANCE
  • BY DEF PAYMENT
  • BY MIXED PYMT
  • BY NEGOTIATION
  • BY PAYMENT

Availability of Letters of Credit

Ozgur Eker (CDCS) Acceptance, At Sight, Deferred Payment, Letter of Credit Basics, Negotiation, Payment Types of Letter of Credit , , , , ,
payment types in a letter of credit transaction

Updated on:

Letters of Credit are flexible instruments because they incorporate various payment options.

According to letter of credit rules, a credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. (UCP 600 – Article 6- b)

The credit must explicitly indicate its availability as: (i) immediate payment (sight), (ii) payment at a future determinable date (deferred), (iii) acceptance of a time draft drawn on the issuing, nominated bank, or confirming bank, or (iv) negotiation with or without recourse to the beneficiary.

Sight payment ensuring prompt payment upon document compliance. Deferred payment, allowing for payment at a future date. Acceptance LCs involve the bank’s commitment to pay at a later date via draft acceptance. Negotiation LCs offer the possibility of receiving early payment by discounting drafts.

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