Page 35 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

International Trade Procedures and Documentation

Notes

Did u know? A letter of credit can be either irrevocable or revocable. A revocable letter of
credit is inadvisable and has no value for an exporter, as the importer can at any time,
cancel the order or alter the terms and conditions of the contract. A letter of credit can be
at sight, meaning that the issuing bank has to make the payments on the presentation of
trade documents, or it can be a time or date letter of credit, which means that the payment
has to be made at a future date as agreed between exporter and importer.

Table 2.4: Tips for a Letter of Credit Transaction
Precautions to be taken on receiving the Precautions to be taken after shipment
letter of credit of goods in the letter of credit
a. Is the letter of credit irrevocable? a. Presenting documents late, after the
b. Is the letter of credit at sight? letter of credit has expired.
c. Do you trust the paying bank? b. Shipping their goods after the
d. Can you convert the currency to your specified date.
currency? c. Making a partial shipment when partial
e. Are the value and quantities correct? shipment is not allowed.
f. Are the shipping terms correct? d. Not presenting the proper documents.
g. Can you provide the required documents? e. Not legalizing the documents.
h. Are the letter of credit fees as you had f. Not obtaining completed bills of lading.
agreed? g. Not obtaining required insurance.
i. Is the merchandise correctly described? h. Submitting copies instead of originals.
j. Is there sufficient time to meet the shipping i. Spelling mistakes.
date and expiration date? j. Mathematical mistakes.
k. Are the shipping terms correct?
l. Specify which documents that are required
for payment

Source: John Michael Pierobon, How to Succeed in International Business.
Sometimes, changes have to be made in the letter of credit after it has been issued. Such changes
are called amendments in L/C. The issuing banks levy charges for making any amendments in
the letter of credit, which have to be paid by either party depending on the reasons and the
request of either side for such an amendment. It is advisable that it must be made clear while
framing the terms and conditions of the letter of credit as to which party will bear the cost for
such changes to be incorporated in the L/C since the transactional charges for such changes are
very high in today’s times.

The exporter may experience some delay in receiving payments as funds are first remitted to
advising/confirming bank and then transferred to exporter account by the advising bank. For
prompt payment, it is advisable that wire transfers shall be used as discussed above, as it is safe,
most secure and the least costly and time-consuming method of receiving payments in
international trade. The exporter must consult an intentional banker for ensuring timely release
of payments as other methods such as discounting of L/C to the bank may increase the exporter’s
overall transactional cost and make the L/C unattractive as a mode of payment in international
trade deals.

Types of Letter of Credit

The following are the types of letter of credit:

1. Revocable L/C: A revocable letter of credit is one that can be amended, altered and cancelled
at any point of time by the importer without seeking the prior consent of the exporter of
submission of documents to the issuing bank by exporter. A revocable L/C is not a safe

30 LOVELY PROFESSIONAL UNIVERSITY