Amendment Fee

Effectiveness Date of an Amendment

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics , , ,
Effectiveness Date of an Amendment

Letter of credit is an irrevocable and conditional payment obligation of the issuing bank.

As the letter of credit is irrevocable, its terms and conditions can not be changed without the consent of the beneficiary.

The beneficiary may find some of the terms and conditions of the credit unacceptable. Under such circumstances, the beneficiary has three options,

  • leaving the deal by not utilizing the letter of credit
  • making shipments with the original letter of credit by taking discrepancy risk
  • seeking an amendment by applying to the applicant.

Amendment in a letter of credit, a change in terms and conditions of the letter (e.g., extension of the letter of credit´s validity period, shipment deadline, etc.) usually to meet the needs of the seller. (1)

But what is the effectiveness date of an amendment?

The question comes from Vincent, who is asking a question regarding the effectiveness date of an amendment.

Here is his question as arrived by e-mail.

If the bank issues an amendment directly to the beneficiary decreasing the letter of credit amount without indicating an effective date for the amendment, is the decrease effective the date the amendment is issued or is the decrease effective the date the beneficiary agrees to the amendment.

What is your opinion, with of course no responsibility for providing such an opinion.

Regards
Vincent

Dear Vincent ,

In order to find the right answer to your question we need to look at the related part of the letter of credit rules.

Amendments are explained at article 10 in UCP 600.

UCP 600 states that “a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.”

UCP 600 article 10 continues to clarify effectiveness date of an amendment for the issuing bank and the confirming bank as follows “an issuing bank is irrevocably bound by an amendment as of the time it issues the amendment.

A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment.”

On the next couple of phrases explains the position of a beneficiary against amendments.

“The terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment.”

As UCP 600 clearly indicates letter of credit will remain in force as is for the beneficiary until the beneficiary communicates its acceptance of the amendment.

But how beneficiaries can communicate their acceptance to amendments. This would be a good discussion topic for a future page.

Is it allowed partial acceptance of amendments under the letter of credit rules?

References:

  1. Dictionary of International Trade, Amendment, https://www.globalnegotiator.com/

How to Deal with High Banking Commissions under Letters of Credit?

Ozgur Eker (CDCS) Advising Fee, Amendment Fee, Confirmation Fee, Discrepancy Fee, Handling Fee, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees , , , , , ,
high letter of credit fees and commissions

No matter how many advantages letters of credit have, they have one big disadvantage. They are expensive.

As a result, you should understand your costs before finalizing a letter of credit deal.

Letter of credit is a secure payment method in foreign trade. But this comfort of security comes with a price.

Letters of credit are one of the most expensive international payment methods available on the market.

As a result, exporters find themselves in a dilemma, when negotiating the terms of the business conditions.

Question is simple but not easy to answer; either choosing an expensive but relatively secure payment method or choosing a risky but less expensive payment method.

What are the Main Letter of Credit Fees That Exporters Have to Pay?

It is really hard to answer this question. Because what rules say is different than what the daily practice dictates.

  • According to the Rules: The issuing bank must pay all banking commissions as per UCP 600, which is the latest ICC rules of documentary credits.
  • Real Life Situations: The applicant pays the letter of credit issuance charges, but all other l/c costs will be collected from the beneficiary.

Bank Commissions That Exporters Normally Have to Pay:

  • Courier Fee / Postage Fee
  • Advising Fee
  • Discrepancy Fee
  • Handling Fee / Negotiation Fee
  • Amendment Commission
  • Confirmation Fee
  • Reimbursing Bank Charges

Real Life Example :

I would like to share a real life bank commissions example below.

These bank fees were collected from a British exporter under a letter of credit transaction. As you can see, the exporter had to pay 487 GBP to the banks as letter of credit fees.

Total transaction amount was only 1890 GBP. Letter of credit fees comprised 25% of all transaction amount, and this is unacceptable.

letter of credit bank commissions
Figure 1 : Real life example of bank commissions under a letter of credit transaction.

Suggestions to Eliminate High Banking Commissions Under Letters of Credit Transactions for Exporters:

  • Suggestion 1: Do not use letters of credit in low value transactions. As a general rule of thumb, transaction amounts below 10.000 USD to 15.000 USD can be considered as a low value businesses. Try to use alternative payment methods, instead of letters of credit on these occasions.
  • Suggestion 2: Try to convince your customer, so that the letter of credit fees will be paid by the applicant. Remember, letter of credit rules are on your side.
  • Suggestion 3: The worst case scenario may be is that, you can not find an alternative payment option and your customer does not want to pay letter of credit charges, except for the l/c issuance costs. If this is the situation, then try to learn approximate bank commissions and make sure that you have included at least some of them on your price offer.

Letter of Credit Fees

Ozgur Eker (CDCS) Advising Fee, Amendment Fee, Confirmation Fee, Discrepancy Fee, Handling Fee, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees , , , , , , ,
Letter of credit fees

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Letters of credit have certain advantages as an international payment method.

If you have enough knowledge and expertise on letters of credit field, then you can use them wisely to get paid where no other payment method works.

No matter how many advantages letters of credit have, they have one big disadvantage.

They are expensive.

As a result, you should understand your costs, before finalizing a letter of credit deal.

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