In the article, we will learn more about what is the Letter of Credit? We will show you what are the pros and cons of the Letter of Credit to the importer and exporter.
What is a Letter of Credit?
Letter of Credit It is one of the most common methods used in contracting in the field of international and foreign trade, especially in import and export operations.
In addition to that it enters into many transactions and financial contracts, in this case, the seller and the buyer contract together, but under certain conditions.
The commercial banks are the third party and the guarantor in the implementation of the contract and the terms concluded
between the seller and the buyer to make sure there is no defect, fraud, deficiency, or any problem by one of the agreed parties.
It is a letter of commitment issued by the bank, opening this credit upon the request of one of its importing clients (the buyer) in which the bank undertakes to pay the amount or authorize another bank to pay
or accepts withdrawals for the benefit of the beneficiary, which is the source (the supplier), in exchange for receiving documents and merchandise per the conditions agreed upon in the approval.
Who are the Parties of the Letter of Credit?
The Importer
The person who requests the opening of the credit.
The accreditation is in the form of a contract between him (the buyer) and the bank that is accredited, as well as all points
and the procedures required by the importer from the source.
The Bank Accrediting
It is the bank to which the buyer applies to open the credit, then the bank who opens the credit will study the application and if it is approved and the buyer agrees to the bank’s terms.
The bank opens the credit and sends it to either the beneficiary directly in the case of Letter Of Credit or one of his correspondents in the seller’s country if a second bank participates in the Letter of Credit process.
The Supplier
The party who opened the documentary credit in its favor and implements the terms of the credit in the validity period of this credit and the event that its notification of the credit is reinforced by the correspondent bank in his country.
The notification letter will be a new contract between him and the correspondent bank, and under this contract, the beneficiary will receive the price of the goods if he provides the documents
According to the terms of Letter of Credit, payment is usually made to the issuer through the credit-enhancing bank if credit is enhanced.
The Sending Bank
It is the bank that notifies the beneficiary of the text of the letter of credit received from the issuing bank for approval in cases where more than one bank interferes in the implementation of the Letter Of Credit process
This correspondent bank may add its reinforcement to the credit, becoming obligated to the commitment that the issuing bank has committed to.
What Documents are Required in the Letter of Credit?
Trade Invoice
The commercial invoice is one of the important documents in the documentary credit, and it shows in this invoice the quantity, value, and specifications of the sent and issued by the issuer.
Certificate of Origin
The purpose of the certificate of origin is to know the place of production and manufacture of imported goods. Usually, this certificate is issued by the issuing Chamber of Commerce and must be certified by the competent authorities.
Bill of Lading
It is required in all documentary credits, and therefore the policy determines whether it is marine, air or land, and on their basis, it is issued.
The policy includes the port of shipment, place of arrival, freight, and how to pay it.
Weight Certificate
This certificate is required for products and goods that depend on weight, such as sugar, flour, barley, wheat, corn, and the like.
Packing Statement
This statement is issued when the goods are heterogeneous or similar, to know all the goods and packages contained in the trucks.
For example, when importing foodstuffs, household items, clothes, and shoes, these products are given serial numbers, parcel numbers, and their contents.
Statement of Specifications
If the products or merchandise depend on sizes, specifications, and measurements, then, in this case, it is necessary to indicate the specifications, such as wood, iron, cement, gold, and silver.
Inspection Certificate
This certificate is issued by institutions specialized in inspection and inspection. Usually, the inspection process is carried out immediately before shipment
through a random sample that is chosen by the inspection institution.
After that, the inspection certificate is approved, stating the condition of the inspected goods and complete specifications
or the inspection takes place by sending the buyer to one of his employees to inspect the goods
at the source port before shipping it to the buyer’s port.
Health Certificate
This certificate is issued by the Ministry of Health in the exporting country to verify the goods related to food materials and products
such as meat, canned, milk, and cheese to ensure the validity of its use and consumption, whether human or animal.