3.3.1. The essence of settlements under a letter of credit

A letter of credit is an order from the buyer's bank (issuing bank) to the supplier's bank to pay the supplier for goods and services on the terms stipulated in the buyer's letter of credit application against the relevant documents submitted by the supplier confirming the delivery of goods under the contract. A letter of credit is used if the buyer and seller of the goods are remote from each other or need a reliable intermediary to complete the transaction because they have little experience in cooperation. In such a situation, the letter of credit provides the counterparties with:

Flexible payment terms;

Legal reliability;

Obtaining short-term loans.

Settlements under a letter of credit are one of the most frequently used forms of payment for goods (works, services) in foreign economic contracts. When making payments under a letter of credit, the bank acting on behalf of the payer and in accordance with his instructions (the issuing bank) undertakes to make payments to the recipient of funds or pay, accept or honor a bill of exchange. For settlements under a letter of credit, it is typical that the withdrawal of money from the payer’s account occurs in parallel with the dispatch of goods to his address. This distinguishes the letter of credit form from other forms of payment, in particular from collection payments. Payments are made by the payer's bank (recipient of the goods) in accordance with his instructions and at the expense of his funds or the loan received by him against the documents named in the letter of credit and subject to other conditions of the order, which the bank brings to the attention of the party authorized to receive payment. In this case, the money listed on the letter of credit continues to belong to the recipient of the goods and is withdrawn from the letter of credit only after the seller sends the specified goods and submits the relevant documents to the bank.

Advantages of using a letter of credit for the importer (buyer):

Reducing the risks associated with prepayment;

The ability to accurately determine the delivery date of the product, as well as its price;

Possibility of obtaining goods on credit;

The ability to confirm your solvency, which is especially beneficial when establishing new trade relations;

The ability to achieve more favorable terms of delivery and payment for goods;

The buyer will not have to pay the seller until the latter has fulfilled all contractual obligations;

Possibility of obtaining a trade loan when using a letter of credit with deferred payment.

Advantages of using a letter of credit for the exporter (seller):

Reducing risks associated with the buyer’s solvency;

Reducing risks associated with the supply of goods;

Possibility of reducing risks associated with the political situation in the buyer’s country;

Flexible cash flow planning;

Reliability of payment regardless of the buyer, provided that the seller delivers the goods and submits shipping documents in accordance with the terms of the letter of credit;

A documentary credit provides a guarantee that the rules in force in the importer's country at the time the letter of credit is opened will not interfere with the receipt of payment.

So, the use of a letter of credit in calculations is most beneficial for the exporter, who receives an unconditional guarantee of payment before the start of shipment of the goods. At the same time, receipt of payment under a letter of credit (subject to the exporter fulfilling the terms of the letter of credit and submitting the documents specified in it to the bank) is not associated with the buyer’s consent to payment.

However, for exporters, a letter of credit is the most complex form of payment: receiving payment from a letter of credit is associated with strict compliance with its terms, correct execution and timely submission to the bank of the documents specified in the letter of credit. By monitoring compliance with the terms of the letter of credit and the submitted documents, banks protect the interests of the buyer, acting on the basis of his instructions.

The disadvantage of the letter of credit form of payment is the complex workflow and delays in the movement of documents associated with the control of documents in banks and their transfer between banks.

From a practical point of view, all letters of credit are divided into two large groups:

Cash letters of credit

Commercial letters of credit.

A letter of credit is a personal document issued by a bank to a person who has deposited a certain amount to receive it in another bank, city or country within a certain period. A letter of credit is an order from the bank serving the buyer to the supplier's bank to pay the supplier's invoices for shipped inventory items on the terms provided by the buyer and specified in the letter of credit.

In addition, letters of credit are divided into revocable and irrevocable, as well as confirmed and unconfirmed. A revocable letter of credit is a letter of credit that can be canceled both by the bank that opened it and by the buyer during the validity period of the letter of credit. An irrevocable letter of credit is a letter of credit that cannot be canceled during its validity period without the consent of the supplier. A confirmed letter of credit contains a first-class bank confirmation, which is equivalent to an additional guarantee of payment to the supplier of the shipped goods. An unconfirmed letter of credit does not contain a first-class bank guarantee.

The use of a letter of credit is most favorable to the seller of goods (payee). Settlements under a letter of credit are made at its location, which brings the payment closer in time to the time of shipment of goods, helping to accelerate the turnover of the seller’s funds. In turn, the untimely opening of a letter of credit by the payer allows him to delay delivery or even refuse to fulfill the concluded contract, citing the insolvency of the counterparty. The opening of a letter of credit gives him confidence that the goods delivered will be paid for. Payments by letters of credit are carried out in accordance with the scheme shown in Figure 3.2.

Rice. 3.2. Scheme of payments by letters of credit

The exporter and importer enter into a contract between themselves (1), in which they indicate that payments for the delivered goods will be made in the form of a documentary letter of credit. The contract must specify the payment procedure, i.e. the terms of the future letter of credit are clearly and fully formulated. The contract also specifies the bank in which the letter of credit will be opened, the type of letter of credit, the name of the advising and executing bank, the terms of payment, the list of documents against which payment will be made, the validity period of the letter of credit, the procedure for paying bank commissions, etc. Payment terms contained in contract must be contained in the importer’s order to the bank to open a letter of credit.

After concluding the contract, the exporter prepares the goods for shipment and notifies the importer (2). Having received the exporter's notice, the buyer sends an application to his bank to open a letter of credit, which specifies the terms of payment contained in the contract (3). After opening a letter of credit, the issuing bank sends the letter of credit to a foreign bank, usually the bank serving the exporter (4) - the advising bank. The advising bank, having verified the authenticity of the received letter of credit, notifies the exporter about the opening and conditions of the letter of credit (5).

The exporter checks the compliance of the terms of the letter of credit with the payment terms of the concluded contract. In case of discrepancy, the exporter notifies the advising bank of non-acceptance of the terms of the letter of credit and the requirement to change them. If the exporter accepts the terms of the letter of credit opened in his favor, he ships the goods within the time period established by the contract (6). Having received transport documents (7) from the transport organization, the exporter submits them, along with other documents provided for by the terms of the letter of credit, to his bank (8).

The bank checks whether the submitted documents comply with the terms of the letter of credit, the completeness of the documents, the correctness of their preparation and execution, and the consistency of the details contained in them. After checking the documents, the exporter's bank sends them to the exporting bank (9) for payment or acceptance. The covering letter specifies the procedure for crediting the proceeds to the exporter.

Having received the documents, the issuing bank carefully checks them and then transfers the payment amount to the bank serving the exporter (10). The importer's account (11) is debited for the payment amount. The exporter's bank credits the proceeds to the exporter's account (12). The importer, having received commercial documents (13) from the issuing bank, takes possession of the goods.

A documentary letter of credit is a monetary obligation of a bank issued on the basis of an order from its importing client in favor of the exporter.

The issuing bank must make the payment to the exporter or ensure that another bank makes the payment. When issuing a letter of credit, the importer's bank substitutes its creditworthiness for the importer's creditworthiness, fully assuming the credit or financial risk. If the beneficiary's documents comply with the terms and conditions of the letter of credit, then the issuing bank (and possibly the confirming bank) agrees to pay him regardless of the importer's willingness or ability to pay. This obligation is conditional, since its implementation is associated with the exporter’s fulfillment of certain requirements, primarily with the submission to the bank of the documents provided for in the letter of credit confirming the fulfillment of all its conditions.

Thinking for yourself

Name the specific features of a letter of credit that allow it to be characterized not only as a form of international payments, but also as: a) a security; b) method of lending; c) method of securing the transaction.

The use of letters of credit in international payments is governed by the Uniform Customs and Practice for Documentary Credits developed by the ICC. These rules are periodically revised, currently in effect as amended by ICC publication No. 600 (UCP- 600) .

The unified rules define the concepts and types of letters of credit, the methods and procedure for their execution and transfer, the obligations and responsibilities of banks, the requirements for documents submitted under letters of credit and the procedure for their presentation, other issues arising in the practice of settlements under letters of credit, provide an interpretation of various terms. The rules are binding on banks that have joined them and their clients making payments under letters of credit. A documentary letter of credit must include a clause stating that all issues arising under this letter of credit must be regulated in accordance with the Uniform Rules.

According to the Uniform Rules (Article 2), a letter of credit means any agreement, however named or designated, which is irrevocable and represents a firm undertaking by the issuing bank to pay due presentation when due. Payment on time means:

• – payment at sight, if the letter of credit provides for payment at sight;
• – make a payment in installments and pay upon maturity, if the letter of credit provides for payment by installments;
• – accept the bill of exchange (“draft”) issued by the beneficiary and pay when due, if the letter of credit provides for acceptance.

Parties to the letter of credit:

• 1. Applicant or orderer (importer).
• 2. Beneficiary (exporter).
• 3. Issuing bank (issuer) – the bank issuing the letter of credit.

Advising bank verifies the authenticity of the letter of credit and transfers it to the beneficiary.

Executing bank– the bank making the payment. This may be the issuing bank itself, or it may authorize the exporter's bank or any other bank to execute the letter of credit by making payment to the beneficiary, negotiating or accepting his drafts.

Negotiating bank(discount bank) negotiates drafts under the letter of credit, i.e. makes a loan to the beneficiary and becomes the owner of the draft himself.

Confirming bank - a bank that is usually located at the location of the beneficiary and, at the direction of the issuing bank, “confirms” the letter of credit, i.e. undertakes to provide payment to the beneficiary. Thus, the beneficiary receives the obligation of a confirming bank, in addition to the bank that issued the letter of credit, i.e. additional guarantee of receiving payment. Typically the confirming bank is the advising bank.

In international practice, the following main types of letters of credit are distinguished:

• – revocable and irrevocable;
• – confirmed and unconfirmed;
• – transferable;
• – compensation;
• – revolving (renewable);
• – reserve;
• – covered and uncovered.

Revocable letter of credit may be changed or canceled by the issuing bank at any time without prior notice to the beneficiary. In this regard, in international trade, irrevocable letters of credit are usually used, which, accordingly, cannot be canceled or amended without the consent of all interested parties, and revocable letters of credit are chosen extremely rarely.

Letter of Credit Confirmation implies an additional guarantee of payment from another bank other than the issuing bank. The bank that confirmed the letter of credit assumes the obligation to pay for documents corresponding to the terms of the letter of credit if the issuing bank refuses to make payment. In international practice, letters of credit opened by the importer's bank are usually confirmed by the exporter's bank.

Advised letter of credit- this term is used when the issuing bank's obligation to pay or accept drafts or to fulfill a delayed obligation to make payment under a letter of credit extends only to the beneficiary of the letter of credit. In this case, the letter of credit uses the standard phrase “We hereby undertake to pay you drafts issued and presented to us in accordance with the terms and conditions of the letter of credit.”

Negotiated (negotiable) letter of credit- under the terms of which drafts can be negotiated by any bank wishing to purchase them. The issuing bank's obligation to make payment extends beyond the beneficiary.

Transferable letter of credit provides for the possibility of its use in whole or in part by one or more persons other than the beneficiary himself - second beneficiaries. A letter of credit can be transferred only once, and the transfer of a letter of credit is possible only when it is provided for in the text of the letter of credit. Such letters of credit can be used for the supply of complex equipment, when sub-suppliers can act as second beneficiaries.

Assignments of proceeds should not be confused with transferable letters of credit. For a letter of credit to be transferable, it must clearly state that it is “transferable.” However, the fact that a letter of credit is not designated as transferable does not affect the beneficiary's rights to assign any part or all of the proceeds to which it is or may become entitled under such letter of credit. However, this applies to the assignment of proceeds and does not apply to the right to work under a letter of credit.

Back-to-back letter of credit (back-to-back L/C). As in the situation for transferable letters of credit, the beneficiary may be an intermediary between the supplier and the importer. As an alternative to a transferable letter of credit, the exporter may ask the advising bank or third party to issue a second letter of credit in the name of its supplier, using as security the letter of credit issued in its name by the importer.

Revolving (renewable) letter of credit used in payments for regular deliveries, usually carried out according to the schedule fixed in the contract. Revolving letters of credit may provide for automatic restoration of the letter of credit amount after a certain period of time as used, or restoration of the letter of credit to the original amount after each use. When opening a revolving letter of credit, banks usually indicate the quota amount, how many times and to what limit the letter of credit will be renewed.

A revolving letter of credit allows the same letter of credit to be used to pay for various scheduled deliveries over an extended period of time without the need to issue a new letter of credit or amend an existing one.

Renewable letters of credit are either cumulative or non-cumulative.

Example: a letter of credit provides for supplies worth up to $100 thousand within 12 months.

• 1. Cumulative letter of credit If the amount of one monthly supply is less than $100 thousand, then the missing amount can be added to the next month. For example, the schedule is 75 thousand, 25 thousand.
• 2. Non-cumulative letter of credit Any portion not used this month cannot be shipped the next month. Schedule – 75 thousand, 100 thousand.

When opening covered letters of credit the issuing bank first places funds at the disposal of the executing bank - coverage in the amount of the letter of credit for the duration of its obligations with the condition of the possible use of these funds for payments under the letter of credit. Coverage may be expressed by crediting the nominated bank's account with the issuing bank or a third bank, or by granting the nominated bank the right to debit the issuing bank's account opened with it for the amount of the letter of credit.

There is another type of letter of credit that provides for payment for unloaded goods - letter of credit "with red clause". Such a letter of credit can be any type of letter of credit that provides for the payment of advances to the exporter by the nominated bank up to a certain amount. Advances may be needed by the beneficiary for the purchase and payment of goods intended for export (before their shipment to the buyer). Banks issue advances against the exporter's submission of an "undertaking to ship" or similar document. By opening letters of credit with a red clause, the issuing bank undertakes to reimburse the nominated bank for the amounts of advances paid, even if the shipment has not been made since then.

Historically, these letters of credit originated to secure the supply of wool from Australia to Europe, and part of the amount that was provided as an advance to the seller was printed in red ink.

Letters of credit with green clause differ from letters of credit with a “red clause” in that they provide for some security for the funds advanced. That is, such letters of credit contain a condition that allows the nominated bank to pay the beneficiary an advance before shipment against security, for example, in the form of a temporary warehouse receipt confirming the placement of goods in a warehouse before shipment, in the name of the nominated bank or the issuing bank. If the beneficiary does not submit documents within the period specified in the letter of credit, the lender's reimbursement obligations may be repaid using the collateral.

Standby letter of credit (stand-by L/C) is a special type of letter of credit, which is essentially more similar to a guarantee. The practice of using such letters of credit originated in the United States, since US banks, in accordance with law, could not directly issue guarantees. Unlike the documentary letters of credit discussed above, which primarily ensure the interests of the exporter, a standby letter of credit as an instrument for securing payments is more flexible. It can also act as a guarantee for the return of an advance previously paid by the importer or payment of fines in the event of improper performance by the exporter of the contract, i.e. protect the interests of the importer, being an analogue of such contractual guarantees as a performance guarantee or an advance guarantee.

Standby letters of credit generally do not cover the shipment of goods, and banks make payments under them against the presentation by beneficiaries of drafts or statements indicating that the counterparty has defaulted, without the banks being required to verify the validity of such statements.

Calculations in the form of a documentary letter of credit are made as follows (Fig. 17.3).

The parties - the exporter and the importer - enter into a contract (1), in which they determine that payments for the delivered goods will be made in the form of a documentary letter of credit. After concluding the contract, the exporter prepares the goods for shipment and notifies the importer (2). Having received such notice, the importer sends an application to his bank to open a letter of credit (3). The bank opening the letter of credit (issuing bank) acts on the basis of the instructions of the applicant (importer).

After opening a letter of credit, in which the issuing bank usually indicates how funds will be credited, the letter of credit is sent to the exporter in whose favor the letter of credit was opened - the beneficiary. In this case, the issuing bank usually sends the letter of credit to the beneficiary through the bank serving the latter, whose task includes advising, i.e. notification to the exporter of the letter of credit (4). Thus, the beneficiary's bank is called the advising bank.

Having received a notice from the advising bank about the opening of a letter of credit (5), the beneficiary checks it for compliance with the terms of the contract. In this case, special attention should be paid to the following questions: is the letter of credit irrevocable, which bank is it issued by, do the reimbursement instructions of the letter of credit correspond to the payment instructions of the contract, at whose expense the commission is provided? In the event of any discrepancy, the beneficiary informs the advising bank of the conditional acceptance of the letter of credit (or even its non-acceptance) and at the same time sends a request to the applicant for the letter of credit to make the appropriate necessary changes to the terms of the letter of credit. If the beneficiary does not receive any comments, for the bank this means that the beneficiary agrees with all the terms of the letter of credit opened in his favor.

The advising bank must notify the beneficiary of all changes that the issuing bank makes to the terms of the letter of credit previously opened by it. If the letter of credit is irrevocable, any change in the terms of the letter of credit can only take place with the consent of the beneficiary. If the beneficiary does not agree with a particular change, he must inform the advising bank about this.

The exporter ships the goods within the established time frame (6) and, having received transport documents from the carrier (7), submits them, along with other documents required by the letter of credit, to his bank (8). The exporter's bank carefully checks the documents submitted by it to ensure that they comply with each other and the terms of the letter of credit. The Uniform Rules establish certain requirements for documents that are presented and sent under a letter of credit. When preparing and checking documents, you should be guided by the relevant articles of the Uniform Rules.

When an employee of the executing bank checks the documents submitted by the beneficiary for payment under the letter of credit, certain discrepancies may be discovered with the terms of the letter of credit or with each other. The executing bank cannot accept such documents.

If, as a result of the audit, the bank finds discrepancies, the documents are returned to the beneficiary for re-registration, indicating all discrepancies found. The beneficiary makes the necessary corrections to the documents and brings them into compliance with the terms of the letter of credit or with each other. If the necessary corrections cannot be made, the exporter must:

• – ask the buyer to make appropriate changes to the letter of credit or instruct the issuing bank to accept documents with noted discrepancies;
• – contact the advising bank with a request to request appropriate changes from the issuing bank.

The advising bank sends the documents to the issuing bank, listing all discrepancies in the documents. When sending documents for collection, the advising bank asks the issuing bank to issue the documents to the buyer against the latter's consent to pay for the documents.

Having received the documents, the issuing bank checks them and makes a decision on whether to accept the documents or reject them. If the issuing bank decides to refuse to accept documents, it must inform the advising bank without delay. Such a notice shall indicate discrepancies due to which the issuing bank refuses to accept documents.

The advising bank is not responsible for any consequences that may arise due to the submission by the beneficiary of documents containing discrepancies with the terms of the letter of credit, as well as for the issuing bank’s refusal to accept documents due to the presence of discrepancies.

After all submitted documents have been checked and their compliance with each other and the terms of the letter of credit has been found, the documents are prepared for sending to the issuing bank (9).

Having received documents from the advising bank and made sure that they fully comply with the terms of the letter of credit, an employee of the letters of credit department of the issuing bank makes their payment, transfers the payment amount to the exporter's bank (11), debiting the importer's account (10). The exporter's bank credits the proceeds to the beneficiary (12), and the importer receives the documents (13).

Rice. 17.3.

The letter of credit form of payment is most beneficial to the exporter, since it represents a firm and reliable guarantee of payment, usually received before the start of shipment. Making a payment under a letter of credit (if the documents submitted comply with its terms) is not associated with the buyer’s consent to pay for the goods. In addition, the exporter has the opportunity to receive payment under the letter of credit as quickly as possible, in some cases - before the goods arrive at their destination.

Practice issues

The contract concluded by a Russian organization and an Austrian company provided for the obligation of the buyer (the Austrian company) to open an irrevocable letter of credit within the period specified in the contract. It should not contain conditions not provided for by the contract, and the date of its opening, if it contains such conditions, was considered the date of bringing it into full compliance with the contract. Letter of credit, open purchase

telecom, did not fully comply with the requirements of the contract and contained a number of conditions that directly contradict them. These included, in particular, the prohibition of partial shipments, although the contract expressly provided for their permission, and the fact that the delivery was to be made in railway cars, and the volume of deliveries was to amount to thousands of tons of goods; the documents to be presented for payment in the letter of credit were subject to requirements other than those provided for in the contract; the letter of credit was opened for a shorter period. The changes made to the letter of credit by the buyer did not eliminate all of its inconsistencies with the terms of the contract, and therefore it could not be used by the seller. Subsequently, the seller filed a claim in the arbitration court, demanding that the buyer pay a fine.

Send your good work in the knowledge base is simple. Use the form below

Students, graduate students, young scientists who use the knowledge base in their studies and work will be very grateful to you.

Posted on http://www.allbest.ru/

Introduction

Each business entity concluding a foreign economic transaction related to the fulfillment or acceptance of the fulfillment of a monetary obligation faces the problem of choosing a payment method. The concept of payment method, which has developed in international trade, is broader and more complex than the concept of payment form used in domestic financial law. If the latter covers only the formal legal aspects of the settlement transaction (the rights and obligations of the parties, the form of document flow), then the payment method, along with it, also includes the economic side of the foreign trade transaction. As a result of combining legal and economic criteria, all payment methods in international trade can be built in the form of a certain paradigm, at the extreme poles of which there are payment methods that are most beneficial for one of the parties to the detriment of the interests of the other, and closer to the center - those that more balance the balance interests of the buyer (payer) and seller (recipient of funds). One such payment method is a letter of credit.

The concept of letter of credit is used in the broad and narrow sense of the term. In a narrow sense (as a form of non-cash payments and as a specific legal concept), a letter of credit is a conditional obligation of the bank to make a payment to a third party (beneficiary), issued on behalf of the client and on the terms specified by him. The condition for the obligations to come into force is the presentation by the beneficiary of the appropriate documents specified in the terms of the letter of credit and previously determined by the client in the application for opening a letter of credit. In a broad sense (as a payment method), a letter of credit covers the entire complex of relationships between the parties to a foreign economic transaction: the seller and the buyer (or the parties to another main agreement underlying the letter of credit, for example, the contractor and the customer), the issuing bank, the advising bank, the reimbursement bank, and also carriers, insurance companies, etc. From a legal point of view, in addition to the unilateral obligation of the issuing bank, a letter of credit is considered as a comprehensive set of contractual relations between other participants in the transaction arising from a bank account agreement and the client’s application for opening a letter of credit, an agreement on the establishment of correspondent relations between banks, a loan agreement (if the loan is opened at the expense of borrowed funds), purchase and sale agreement or other agreement underlying the opening of a letter of credit, etc.

The use of a letter of credit form of payment opens up wide opportunities for financing one of the parties to the main agreement, both through the use of a commercial and bank loan. A commercial loan to a buyer can be provided using letters of credit with installment payments. Bank credit to the buyer occurs when opening letters of credit at the expense of the bank and uncovered letters of credit, as well as in various types of acceptance credits.

Historically, the primary form of a letter of credit was the so-called. letters of credit, which appeared in the Middle Ages as the simplest form of transferring money for further collection elsewhere. When setting off on a journey, the traveler, not wanting to run the risk of losing the amount, handed it over to his banker, who in return provided him with a letter of credit, which gave him the right, upon arrival, to contact a local banker to receive the amount indicated in the letter of credit. Subsequently, the two bankers independently settled their property claims against each other. In fact, the letter of credit evolved from the same historical form of banking document as the bill of exchange. This can explain the fact that seemingly different payment documents have a lot in common in their features. Letters of credit in their original function (servicing non-trade transactions of individuals) are found, however, infrequently to this day.

1.General overview of the letter of credit system

A letter of credit is a banking document that is drawn up by the buyer of goods at the bank where he has an account. As a rule, when opening a letter of credit, the bank debits the amount for which the letter of credit is opened from the current account. The letter of credit sets out all the buyer’s requirements for the goods and documents for the goods, upon fulfillment of which the bank executing the letter of credit has the right to transfer money to the seller from the buyer’s letter of credit account.

The buyer's bank notifies the supplier's bank of the opening of the letter of credit and its terms. The supplier's bank notifies the supplier that a letter of credit has been opened in its favor and its terms. The supplier ships the goods and presents shipping, title and other documents to his bank. The bank checks the documents for compliance with the terms of the letter of credit and, if there are no discrepancies with the requirements of the letter of credit, credits the money to the supplier's account and sends the documents to the buyer's bank.

If there are discrepancies, the bank returns the set of documents to the supplier. And depending on the nature of the discrepancies between the documents and the terms of the letter of credit, the supplier either corrects the mistakes made and presents the documents again, or negotiates with the buyer to change the terms of the letter of credit so that the existing documents can be accepted by the bank. The latter, of course, is not always possible, therefore, when giving a shipping order to a transport company, you should pay special attention to the preparation of shipping and shipping documents.

The letter of credit form of payment is one of the most complex, but at the same time safe forms of payment for the parties. With the correct wording about the conditions and requirements for documents against which the bank must transfer money to the supplier, a letter of credit provides the exporter with the opportunity to eliminate the risk of refusal of delivery and guarantees timely receipt of payment (subject to the exporter complying with all the terms of the letter of credit), and therefore is a good alternative to an advance payment.

The basic principles for dealing with letters of credit in international trade are set out in the Uniform Customs and Practice for Documentary Credits (as amended in 1993) published by the International Chamber of Commerce. The rules are binding on all parties concerned, provided that reference is made to them in letter of credit.

The need to introduce Unified Rules is due to differences in the legal regulation of different countries, which could lead to differences in the understanding and interpretation of certain settlement conditions. The Unified Rules eliminate many possible disagreements and disputes, as they consolidate international practice in the field of documentary credit.

According to established practice, the Uniform Rules are revised every decade. The International Chamber of Commerce is currently working on a new edition of the rules.

As defined in the Uniform Rules, the terms “documentary credit” and “standby letter of credit” as used therein mean any agreement (however named or designated) by which the issuing bank (the bank issuing the letter of credit) is required to make the following actions:

Payment to a third party or his order (the beneficiary) or must pay or accept bills of exchange (drafts) drawn by the beneficiary. The issuing bank may authorize another bank to make such payment, or to pay and accept bills of exchange (drafts);

Give authority to negotiate (purchase or discount) to another bank against the stipulated documents, if all the conditions of the letter of credit are met. For purposes of the Uniform Rules, branches of such a bank in other countries will be considered a different bank.

In this case, the bank can act at the request and on the basis of instructions from the client (the applicant of the letter of credit) or on its own behalf. All instructions for issuing a letter of credit and amending the letter of credit, as well as the amendments themselves, must accurately indicate the documents on which payments are to be made.

A letter of credit by its nature is a transaction separate from the contract of sale or other contract on which it may be based, and banks are in no way bound or obliged to deal with such contracts, even if the letter of credit makes any reference to such an agreement.

Likewise, the customer, as a result of its relationship between the issuing bank or the beneficiary, cannot make a claim on the bank's obligations to make payment, pay or accept bills of exchange (drafts) or fulfill any other obligations under the letter of credit.

That is, all actions under a letter of credit are performed only between banks. In transactions with letters of credit, all interested parties deal only with documents, but not with goods, services and (or) other types of fulfillment of obligations to which the documents may relate.

According to the Uniform Rules for Documentary Credits, letters of credit can be issued under different conditions. The degree of reliability of letters of credit in terms of the seller receiving proceeds from the buyer depends on these conditions.

2.Forms and types of letter of credit

2.1 Forms of letter of credit

Forms of letters of credit differ in the agreement on the amount of collateral and the moment of risk assumption.

A revocable letter of credit (Revocable L/C) can be changed or canceled at any time by the issuing bank at the direction of the applicant of the letter of credit, even without prior notice to the beneficiary. A revocable letter of credit does not create any legal payment obligation for the bank. Only when the issuing bank or its correspondent bank has made payment according to the documents, the revocation of the letter of credit remains without legal force.

Therefore, a revocable letter of credit usually does not provide the beneficiary with sufficient security. It is never confirmed by the correspondent bank and can be used in business relationships between partners who are known to each other as being mutually trustworthy. Today, revocable letters of credit are used extremely rarely. Therefore, care should be taken to ensure that the opening order clearly indicates the form of the letter of credit, since if there is no corresponding designation, such a letter of credit is always considered irrevocable.

The Uniform Rules do provide for two cases where the issuing bank of a revocable letter of credit “shall reimburse the bank authorized by it to make payment upon sight, acceptance or negotiation under the revocable letter of credit for any payment, acceptance or negotiation made by that bank upon receipt of the notice amendment or cancellation, against documents that appear to comply with the terms of the letter of credit," and will also provide reimbursement to another bank "authorized by it to make installment payment under a revocable letter of credit" if that bank made payment against documents that comply with the terms of the letter of credit (or accepted such documents under the letter of credit) before receiving notification from the issuer about the change/cancellation of the letter of credit.

An irrevocable letter of credit (Irrevocable L/C) gives the beneficiary a high degree of confidence that his supplies or services will be paid as soon as he fulfills the terms of the letter of credit, which, when all the required documents are presented and all its conditions are met, constitutes a firm commitment of payment by the bank - issuer. The benefits of using an irrevocable letter of credit for the beneficiary are undeniable, since the exporter receives a commitment from the bank, and not just a promise from the counterparty under the contract. The seller is well aware that he will receive payment on his demand only if he fulfills the terms of the letter of credit, in particular, submits the documents listed in it within the validity period of the latter. The bank, for its part, is ultimately bound - this means that even if its client fails to fulfill its obligations on time and is unable for one reason or another to make payment on time, the bank is not released from these obligations to the foreign seller.

To change or cancel the terms of a letter of credit under an irrevocable letter of credit, the consent of both the beneficiary and the responsible banks is required. If the seller wishes to change or cancel certain terms of the letter of credit, he must require the buyer to issue a corresponding order to the issuing bank. Partial acceptance of changes contained in the same change notice is not permitted and, as a result, will not be valid.

The beneficiary is informed about the opening of an irrevocable letter of credit through the correspondent bank. The latter issuing bank executing the letter of credit can only instruct the beneficiary to advise the letter of credit or confirm it. From the point of view of additional obligations, irrevocable letters of credit are divided into confirmed (Confirmed) and unconfirmed (Unconfirmed).

With an irrevocable unconfirmed letter of credit, the correspondent bank only advises the beneficiary to open the letter of credit. In this case, he does not accept any obligation to pay and is therefore not obliged to make it according to the documents provided by the beneficiary.

Since the beneficiary can rely solely on the issuing bank abroad, an irrevocable unconfirmed letter of credit is appropriate only when political and funds transfer risk are negligible. If the correspondent bank can rely on a good relationship with the bank that issued the letter of credit, as well as a stable political and economic situation, then it will usually make payment according to documents in order to quickly process transactions in the client's interests.

If the correspondent bank confirms the letter of credit to the beneficiary, then it thereby undertakes to make payment according to the documents corresponding to the letter of credit and submitted on time. Consequently, in this case, the beneficiary, along with the obligation of the bank that opened the letter of credit, has a legally equivalent and independent obligation of the correspondent bank to make payment. Therefore, the degree of security for it increases significantly - in most cases, such a letter of credit is confirmed by a bank in the exporter’s country.

Quite often, confirming banks, insuring themselves against various risks, require upon confirmation the immediate transfer of funds to cover upcoming payments under the letter of credit. Such letters of credit are called covered letters of credit.

Covered letters of credit are considered to be those, upon opening of which the issuing bank previously provides the executing bank with foreign currency funds (coverage) in the amount of the letter of credit for the duration of the obligations of the issuing bank with the condition that they can be used for payments under the letter of credit. Coverage can be provided in several ways:

* By crediting the correspondent account of the executing bank with the issuing bank or another bank with the amount of the letter of credit;

* By granting the executing bank the right to write off the entire amount of the letter of credit from the account of the issuing bank maintained by it at the time of receipt of the letter of credit for execution;

* Through the opening by the issuing bank of insurance deposits or coverage deposits with the nominated bank.

Often in practice, Kazakh banks seek to avoid covered letters of credit and (instead of coverage) issue a confirmed reimbursement obligation, although, unlike coverage, it is necessary to pay a commission for it.

The use of coverage results in the actual freezing of the importer's funds for the period from the opening of the letter of credit until the payment of funds under it.

When opening a covered irrevocable letter of credit, the importer's bank debits its client's current account for the amount of the letter of credit and reserves it in a special account from the moment the letter of credit is opened until its expiration date. After this period, the unused part or all of the unused amount of the letter of credit is restored to the client's account. The importer incurs almost double costs for the letter of credit, since he is forced to pay commission costs to banks when paying for the goods, not to mention freezing funds for the duration of the entire operation. In such a situation, the importer tries to avoid confirming letters of credit, and under normal conditions of foreign trade relations, exporters require confirmation only if they do not trust the issuing bank.

Consequently, letters of credit are also divided according to the method of ensuring payment into covered and uncovered. Therefore, each letter of credit must clearly indicate how it is to be executed.

2.2 Types of letters of credit and methods of their execution

Letter of credit with payment at sight (against documents). Immediate receipt of the amount specified in the documents upon presentation of documents. Cash payment agreed.

A letter of credit providing for the acceptance of beneficiary's drafts. Receipt of the amount specified in the documents upon the due date of payment. The payment term for the bill has been agreed upon. It is possible to receive the amount minus the discount interest (discount) on the bill after the documents are issued.

Letter of credit with installment payment. Receipt of the amount specified in the documents upon the due date of payment. The payment term (without a bill) has been agreed upon. It is possible to receive the amount minus the accounting percentage after submitting documents.

Receiving the amount from any bank, i.e. not only in the advising or specifically designated negotiating bank (for letters of credit in which the issuing bank has identified the negotiating bank; non-free negotiation.

Letter of credit with final payment. Transfer of funds for products supplied and services provided minus a pre-agreed percentage, paid separately, over time, upon receipt by the issuing bank from the importer of documents confirming payment or acceptance for payment.

Letter of credit using proforma invoice. Involves settlement against previously agreed and drawn up documents (seller's guarantee of shipment), confirming that the goods will be shipped.

Letter of credit with a “red clause”. Involves receiving an advance.

Revolving letter of credit. Use within established shares, which are renewed.

Stand-by letter of credit (standby letter of credit). Use as an instrument similar to a warranty.

Transferable letter of credit (transferable). Providing your own suppliers for the purpose of completing a transaction with limited use of their own funds. It is possible for several second beneficiaries to use the letter of credit at once.

Transit letter of credit. Receipt by the issuing bank from the intermediary bank of an advice note or confirmation of a letter of credit.

Transfer letter of credit. Contains reimbursement instructions or a mandate through a third bank to advise the beneficiary directly or through a named bank for transfer without obligation (the advice specifically states that the role of the third bank is limited to this).

If an export letter of credit is executed by a foreign bank (against the submission of the necessary documents), receipt of payment may be delayed for a fairly long period due to the postal travel of documents. Accordingly, when making import payments, it is most profitable to use letters of credit that provide for payment in the issuing Kazakhstani bank against documents received from a foreign exporter, which avoids possible freezing of foreign currency funds for upcoming payments under letters of credit of Kazakhstani organizations and banks in accounts with foreign banks.

The letter of credit form of payment is most beneficial to the exporter, since it represents a firm and reliable guarantee of payment, usually received before shipment. Making a payment under a letter of credit (if, of course, the submitted documents comply with its terms) is not associated with the buyer’s consent to pay for the goods. In addition, the exporter has the opportunity to receive payment under the letter of credit as quickly as possible, in some cases before the goods arrive at their destination. Finally, the beneficiary can receive a preferential bank loan secured by the letter of credit, which is especially important if he is an intermediary.

However, a letter of credit is the most complex payment method for an exporter, since receiving payment is associated with the correct execution of documents and timely submission of them to the bank. By imposing strict requirements for the execution of documents in terms of their compliance with the terms of the letter of credit, banks protect the interests of importers, as they act on the basis of their instructions.

The main disadvantages of the letter of credit form of payment for counterparties are, firstly, certain delays in the passage of documents through banks and, secondly, the high cost of the letter of credit. For carrying out operations (opening, advising, confirmation, acceptance and verification of documents under a letter of credit, etc.), banks charge a commission depending on the amount of the letter of credit.

The commission is collected by banks based on current banking tariffs. When opening a letter of credit, the applicant must clearly and specifically indicate at whose expense the costs of the letter of credit (postal and telegraphic costs, opening commission, advice, confirmation of the letter of credit, payment commission, etc.) should be paid: at the expense of the applicant of the letter of credit or the beneficiary. This is necessary so that the bank employee, when calculating the commission, has the opportunity to attribute it to the account of the party that must pay it according to the terms of the contract and letter of credit.

In international practice, there has been a custom to divide banking expenses between counterparties, each of whom pays banking commissions in their own country.

Conclusion

letter of credit irrevocable installment plan

Importers and exporters are exposed to credit risk to a much greater extent than businessmen operating only in the domestic market. This involves time delays, expensive information, and long distances. To reduce this risk, a fairly effective letter of credit system was developed, from which large multinational banks that provide loans benefit from economies of scale and the ability to finance them and conduct related currency exchanges. In situations where letters of credit are not available, businessmen may resort to other methods.

For the export of large capital investment projects to countries with an underdeveloped market system or where credit and foreign exchange markets are absent, it is useful to use forfeiting. In other situations, purchasing a credit insurance policy or obtaining direct government guarantees may be an appropriate option.

In modern conditions, money is an integral attribute of economic life. Therefore, all transactions related to the supply of material assets and the provision of services are completed in cash settlements. The latter can take both cash and non-cash forms. Organization of cash payments using non-cash money is much preferable to cash payments, since in the first case significant savings on distribution costs are achieved.

The widespread use of non-cash payments is facilitated by an extensive network of banks, as well as the state’s interest in their development, both for the previously noted reason and for the purpose of studying and regulating macroeconomic processes.

Non-cash payments are cash payments by making entries in bank accounts, when money is debited from the payer's account and credited to the recipient's account. Non-cash payments in the economy are organized according to a certain system, which is understood as a set of principles for organizing non-cash payments, the requirements for their organization, determined by specific business conditions, as well as forms and methods of payments and related document flow.

Bibliography

1. Kovalev V.V. Corporate finance and accounting: concepts, algorithms, indicators: Textbook - M.: Prospect, 2013 - 880 p.

2. Kokoreva. M.S. Corporate financial solutions. Empirical analysis of Russian companies (corporate financial decisions in developing capital markets): Monograph - Mu: SRC INFRA-M, 2013. - 281 p.

3. Nikitina N.V. Corporate finance: Textbook/ M.: KnoRus, 2013. -512 p.

4. Richard Braley, Stuart Myers. Principles of corporate finance. - M.: Olimp-Business, 2012. - 1008 p.

5. Teplova T.V. Corporate finance: Textbook for bachelors. M.: Yurayt, 2013. - 655 p.

Posted on Allbest.ru

...

Similar documents

Characteristics of the basic conditions for the supply of goods in international trade: features and procedure for their use (INCOTERMS 2000). The role of studying forms of international industrial cooperation. Responsibilities of the seller and buyer under CIP delivery conditions.

test, added 06/26/2010


The essence and main functions of wholesale trade. Organization and technology of wholesale sales of goods. Wholesale trading enterprises, characteristics of their types and types. Product sales schemes. Forms of sales in wholesale trade, analysis of its effectiveness.

presentation, added 10/26/2016


Operating principles, classification and requirements for commercial refrigeration equipment. Non-store forms of trade services. Studying the rules for selling certain types of goods. Atmosphere and information system of a shopping facility. Organization of labor in trade.

course work, added 06/04/2015


The essence of wages and characteristics of types, forms and systems of remuneration. Personnel bonus system. Analysis of retail turnover, distribution costs, gross income, profit from sales of goods, output per sales employee.

course work, added 10/16/2016


International trading as one of the competitive forms of organized international trade. Characteristics of the organization of control of marketing activities in the production and economic department of an international company. Features of the work of the tender committee.

test, added 04/16/2015


Forms and methods of organizing procurement of agricultural products by an enterprise. Studying consumer demand for agricultural products in the Kolos store. Determining the meaning and role of effective supply of goods in the store's trade in agricultural products.

course work, added 04/19/2010


Analysis of the meaning and functions of retail activities. Methods and forms of sales in retail trade. Study of the formation and development of the merchandising system. Consideration of a practical situation (case study) using the example of the sewing accessories store "Everything for Sewing".

course work, added 04/01/2012


Consideration of ways to introduce Internet technologies into retail organizations. Study of the concept and legal basis for creating virtual stores in the Republic of Belarus. Determination of the state and directions of development of the electronic market in the country.

course work, added 02/06/2010


Meaning, methods of sales promotion in marketing. Advertising and promotion of products to the market. Bringing information about the new brand to the consumer. The use of various types of displays, exhibitions, showcases, discounts and auxiliary aids in trade.

course work, added 11/18/2014


Characteristics of methods for creating a logo for branding an enterprise and product. The role and use of color and shape for the optimal display and presentation of information about the brand, the goals of the advertising campaign, information content and types of artistic techniques.

Letter of Credit – Letter Of Credit (L/C)– the most civilized condition payment, which has become widespread in international payments. From the point of view of protecting the interests of both parties, letter of credit terms of payment are ideal.

Meaning in a nutshell letter of credit form of payment boils down to the following: the buyer's bank gives a guarantee to the supplier's bank that it will pay goods subject to fulfillment of all terms of the transaction. In this case, the buyer’s money remains reserved in the bank until all conditions for the delivery of goods are fulfilled and the relevant documents are provided.

International rules of letter of credit

Avoid double interpretation of terms and conditions of use letter of credit the reference in the contract to the “Uniform Customs and Practice for Documentary Documentary” will help letters of credit» in the original in English – Uniform Customs and Practice for Documentary Credits (UCP). As of today, the current edition of this document is the current edition dated 2007, No. 600.

Types of Letter of Credit

Depending on the form of security for letter of credit, it can be covered (escrowed) - when your bank transfers the amount letter of credit buyer's bank for the entire period and uncovered (guaranteed). Depending on whether the buyer has the opportunity, under certain conditions, to unilaterally cancel the transaction (revoke letter of credit), letter of credit may be revocable or irrevocable.

Since in international payments most often only one is used letter of credit form– simple covered irrevocable documentary letter of credit, we won't focus here letter of credit forms a lot of attention. You can find more detailed information in open sources of information or consult with your bank.

Advantages of the letter of credit form of payment.

Fulfillment of the terms of the transaction

Main advantages payment by letter of credit are clear - this is a guarantee of respecting the interests of all parties international transactions: the buyer is guaranteed to receive money and has a vested interest in fulfilling all formalities for the delivery of goods specified in international contract

Verification of documents

Another positive side terms of payment in the shape of letter of credit is that you can be sure that the transaction will be carried out in full accordance with international legislation. Since control by banks when letter of credit form of payment is strictly regulated, and all documents are necessarily checked for compliance with the standards of their preparation; the possibility of fraud and errors in documents is practically excluded. Consequently, clearance of goods at customs will go more smoothly.

Disadvantages of payment in the form of a letter of credit?

Difficulty in obtaining a letter of credit

First of all, in the complexity of the procedures, since instead of two sides international four transactions appear. In addition to the customer (if letter of credit payment it is already called the Principal or Orderer) and the supplier (Beneficiary, Recipient) will participate in the transaction with the customer's bank (Issuing Bank) and the supplier's bank (Executing, also usually the Confirming Bank). It is not easy for a novice participant in foreign economic activity to understand this.

Requirements for documents and deadlines

Besides, letter of credit form of payment involves strict adherence to deadlines, documentation requirements and increased complexity of the registration procedure. Each change in the deadlines for fulfilling obligations on the part of any participant in the transaction must be documented and signed by all parties. In addition to the contract between the supplier and the customer, additional exchange of documents takes place within banks. Although nowadays all this works electronically and happens quite quickly, nevertheless, it still takes time to control and track these procedures.

Letter of credit cost

Price payment in the form of a letter of credit is another disadvantage. Since opening letter of credit, the buyer freezes his own money in a bank account, forms Coverage letter of credit, or pays for a bank guarantee, in case of Uncovered letter of credit. In addition, if the supplier does not receive money for the purchase of materials for production, he will be forced to raise borrowed funds, the maintenance of which will ultimately have to be paid for. to pay to the buyer. And, of course, all registration operations letter of credit are accompanied by bank commissions.

Afterword

Perhaps after reading this article you will think that letter of credit It is very difficult. Yes, this is partly true the first time, but once you go through the whole procedure step by step, you will understand how convenient and reliable it is. form of payment.

In addition, you will not be alone - choose a reliable bank and it will do most of the work for you. Employees of any self-respecting bank, as a rule, have a structure or separate specialists who deal specifically with letter of credit.

And one more thing, when working with a foreign partner, offering a letter of credit form of payment, you are guaranteed to be able to raise your personal prestige as a specialist and respect for your company, so go for it!

There are certain features that need to be taken into account when using a documentary letter of credit. Let's figure out what concepts need to be studied and what standards to refer to.

Let us determine what nuances of calculation in this form exist in foreign, international trade. Every company wants to have confidence that its rights specified in the contract will not be violated.

Suppliers want to receive payment for goods on time, while buyers strive to receive their products without delays and the quality stated in the contract. And a letter of credit helps a lot with this. Let's figure out how.

Important aspects

It is important to understand the essence of such a form of payment as a letter of credit, as well as what a documentary letter of credit is.

What it is

A letter of credit is a monetary obligation that is accepted by the issuing bank on instructions from payers under the letter of credit.

A letter of credit is considered a method of payment that can provide assurance that payments will be made versus payment upon delivery. The guarantor in this case is banks.

There are several types of letters of credit:

• revocable;
• irrevocable;
• covered;
• uncovered;
• with red clauses;
• confirmed;
• revolver;
• circular;
• reserve;
• cumulative;

A documentary letter of credit is an obligation to make payment by a banking institution upon presentation of an agreed amount to the sellers on behalf of the buyers according to a specified condition.

This is an agreement whereby the bank makes payments to the sellers if the paperwork is submitted on time.

For what purpose is it opened?

Thanks to the letter of credit:

A letter of credit is used as a form of payment in trade transactions, together with collection, open accounts.

In international trade, it is used as a means of financing transactions, similar to bank guarantees.

Letters of credit for exporters have the following meaning:

• minimize the risk that the goods will not be paid for;
• reduce production risk when customers cancel or change orders;
• make it possible to draw up optimal delivery schedules;
• provide a guarantee that buyers will not refuse payments in the event of a complaint about the product.

Advantages of using a letter of credit for an importer:

• the risk that the goods will not be delivered is eliminated;
• a guarantee is given that the goods will meet the agreed quality;
• it is possible to reduce the amount of prepayment under import contracts;
• You can structure the payment scheme taking into account your interests.

Legal basis

There are Uniform Customs and Practice for Documentary Credits that were developed by the International Chamber of Commerce in Paris.

You should rely on them when opening a letter of credit.

Such rules apply to any transaction where a bank makes a payment or accepts a bill against the presentation of documents.

Russian companies may refer to provisions -.

Emerging Features

With the receipt of a documentary letter of credit, the seller receives confidence that parties independent of the buyers will make payments for their goods.

The banking institution transmits the documentation and fulfills other conditions for documentary letters of credit. The buyer can be sure that the amount under the letter of credit is paid against the submission of documents that he has reflected.

A letter of credit can be opened for payment for supplies, services provided, design and installation work.

An irrevocable letter of credit is discussed in. This is a letter of credit that cannot be canceled without the consent of the recipients of funds.

If the issuing bank requests the nominated bank, irrevocable letters of credit may be confirmed. Such confirmations are an additional obligation to make payment in accordance with the terms of the letter of credit.

Irrevocable letters of credit cannot be amended or canceled unless the nominated bank has given such consent. A letter of credit is considered divisible, which can be transferred in parts to one person or several.

Uniform Customs and Practice for Documentary Credits

The Uniform Rules apply to each documentary credit if the text of the letter of credit provides for their application. They must be observed by all parties (Article 1 of the rules).

A letter of credit is a transaction that is separate from a purchase and sale agreement or other. Beneficiaries do not have the right to use bank relationships for their own benefit (Article 4).

In Art. 7-8 spell out the main obligations of issuing banks and confirming banks. The letter of credit can be advised by the beneficiaries through the advising banks.

In this case, satisfaction with the authenticity of the letter of credit, as well as the accuracy of the terms and conditions, will be confirmed. It is possible to contact another bank for advice services.

Reviews can be revoked and canceled at any time. There is no need to notify beneficiaries. Irrevocable ones cannot be revoked before the agreed period of validity of the letter of credit.

Other rules are spelled out in detail in the relevant document. It is worth noting that often the terms of a letter of credit are:

• compliance with the rules of UCP 500;
• providing the consent of the applicants for any insurance;
• providing consent to any mandatory government regulation;
• providing the consent of the applicants to reimburse the issuing bank for any payment that is made under the letter of credit.

In international trade

According to private law, the parties do not have equal rights when making settlements, since one of the parties always bears a greater risk.

Buyers may not receive the goods they paid for, and the seller may not receive money for shipped products. This can be clearly manifested when concluding transactions between residents of different countries.

That is why it is worth paying by letter of credit. This way you can make sure that deliveries are carried out in full and payment will be made.

The letter of credit form of payment allows you to work with a foreign counterparty even in the absence of sufficient information about the company’s reputation. It is also possible to perform a credit function and defer payment.

By varying payment terms, exporters can set low prices and increase sales. The importer may not divert the necessary amounts from turnover.

What is the procedure?

1. Clients ask the bank to issue letters of credit to suppliers.
2. Products are supplied.
3. The banking institution receives documentation that will confirm the fulfillment of obligations by suppliers under the contract.
4. The client's bank transfers the required amount to the supplier's bank.

In foreign trade

In foreign trade, only documentary letters of credit are used, which differs from those used in domestic Russian markets. They have more types and a different document circulation scheme.

Participants in the process are payers, issuing banks, suppliers (beneficiaries) and executing banks. When a letter of credit is opened, a notification is sent to the beneficiary. The letter of credit is advised.

The supplier's banking institution, which confirms letters of credit, undertakes to the beneficiaries to fulfill the terms of the agreement to the same extent as the issuing banks.

Settlement documentation is presented in the same forms as for collection. It is transferred by suppliers to servicing banks.

If there are no complaints, the bank carries out 2 procedures:

Documentary letters of credit can be transferable. In this case, the beneficiary instructs the bank that it is making payments to transfer the letter of credit in full or in parts to the person who cannot transfer it further.

This is necessary to be able to provide money to the subsupplier from the letter of credit. The concept of divisible, fractional, transferable is also used.

Revolving letters of credit, as they are applied, automatically replenish the amounts of letters of credit to the original amount throughout their validity.

This type of letter of credit is used if sales outside the country are not an isolated transaction, and foreign buyers act as regular customers of exporters.

The advantage is that it reduces the time and cost of clerical procedures. If a re-export operation is carried out under a compensation transaction, a counter letter of credit is used.

In this case, the participants issue a letter of credit to each other in one banking institution. The main thing is that the conditions are equal.

We will use a letter of credit with a red clause when an advance amount is specified, which can be allocated to suppliers under the issuing bank.

The English and other banks that work according to its model issue letters of credit as commercial letters of credit. The rules for registration are the same as for opening letters of credit.

A nuance - the letter is sent not to the executing banks, but to the beneficiaries. The executing banks only transfer the funds. The required amount can be obtained from any banking institution when negotiating expenses.

In international payments

Documentary letters of credit are widely used as a form of international payments. Why? This way you can get a guarantee that the interests of each party to the transaction will be respected.

Buyers will receive funds and deliver goods in a timely manner according to . In addition, you can be sure that the transaction will be carried out in accordance with international law.

Bank controls are strictly regulated and all documentation is checked for compliance with the standard of preparation, fraud and errors. As a result, customs clearance of products will take place without problems.

Minus - there are 4 parties to the transaction (they were already mentioned earlier). It is difficult for novice participants in foreign economic activity to understand this. With a letter of credit, deadlines must be strictly observed.

There are strict requirements for documents. The registration process itself will be more complicated. All changes to deadlines by any participant must be supported by documents and signed by each party.

In addition to the agreement between suppliers and customers, additional document flow is carried out within banking institutions.

Another disadvantage is the cost of payment with a letter of credit. When it is opened, buyers freeze funds in accounts, form cover for letters of credit, or transfer funds for a bank guarantee if the letter of credit is not covered.

If suppliers do not receive money, they raise borrowed funds, which the buyer will pay to service. Each operation to open a letter of credit is subject to a bank commission.

Sample filling

The completed form looks like this:

At first glance, letters of credit present many complexities. In fact, once you go through the entire process from start to finish, you will appreciate this form of payment. After all, it is reliable and convenient.

The main thing is to choose a reliable banking institution that will take responsibility for conducting most of the transactions related to letters of credit. Often, normal banks have a specialist who deals with letters of credit.