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Field 48 (‘Period for presentation in days’) in Letter of Credit (L/C)

Field 48 (‘Period for presentation in days’)

F48 is an optional field in MT700 swift message of Documentary letter of credit.

F48 (Period of Presentation) field defines the period of time in calendar days by which the presentation of documents should be made in the negotiating bank. The beneficiary will do the presentation/negotiation to get the payment.

From the F44C(Latest Date of Shipment) , the countdown will start. Normally the period is up to the LC expiry date mentioned in F31D(Date and Place of Expiry).

The date can be mentioned 7,10,14,21 any days as agreed between buyer and seller but not later than the LC expiry date.

If the field is not mentioned in the documentary credit then a default of 21 days is considered. But must not exceed the expiry date as I told you earlier.

Within this presentation period, the beneficiary submits negotiable documents mentioned in 46A(Documents Required)   to the presenting bank as per instruction in F41D or F41A(Available With..By…)

As a common practice, LC  validity is kept 90days (one quarter) to maintain the same charge. In that case, the latest date of shipment is mentioned as 69 days. The presentation period is 21 days if there’s no specific requirement from the buyer or seller.

The presentation can be both Electronic records or paper documents.

Do you have any thoughts about this? let me know in the comments.

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3 thoughts on “ field 48 (‘period for presentation in days’) in letter of credit (l/c) ”.

Is it possible for a period of presentation in an L/C to exceed 21 days? Let’s say 60 days from bill of lading date but within the LC validity.

Can F48 be 31, after bill of lading date? Thanks.

Hi Eddie, F48 is an optional field that comes after F71D (charges) as per SWIFT format. can you share more about your inquiry?

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Passages The International Trade Blog

The hidden expiration date on every export letter of credit.

Roy Becker

However, another date equal in importance is referred to as the last date for presentation. The presentation period—the window of time in which the exporter must present documents—is tied to the ship date as indicated in the original transport document.

Letter of Credit Presentation Period

A letter of credit includes terminology similar to “documents must be presented within 10 days after the bill of lading date but within the validity of the letter of credit.” For example, if the shipment took place on January 1, documents must be presented no later than January 11 or the expiration date if earlier. If the expiration date is January 5, documents must be presented by January 5, not the 11th.

Some letters of credit require a presentation period of seven days, some 15, etc. If the letter of credit does not state a presentation date, the exporter has 21 days according to UCP Article 14c. Exporters should be aware of this requirement and feel confident they can work within the stated time period. If not, they should request an amendment.

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Why does a letter of credit include these time requirements? The importer stipulates them because a delay in presentation can create problems. When the goods arrive at the customs entry point, the importer needs the documents to clear the goods. If not cleared in a timely manner, the goods will go into storage and incur daily charges.

With a short presentation period, the importer can force the exporter to deliver the documents to the bank quickly. Once the documents enter banking channels, they will find their way to the importer in due time for customs clearance.

An alert exporter, however, must ask several key questions:

  • How quickly after shipment can the documents be assembled and presented to the bank?
  • Can unusual situations cause delays?
  • Can the consular's signature be obtained (for a specific country) within the time limit?

Some consulates are located in distant cities and only sign documents once a week. If the appointed day for signing documents falls on a holiday, in either country involved in the transaction, then one more week must be added to the time frame. While 10, 15 or even 21 days may seem like adequate time, it can slip away quickly.

Like what you read?   Subscribe today   to the International Trade Blog to get the latest news and tips for exporters and importers delivered to your inbox.

This article was first published in December 2014 and has been updated to include current information, links and formatting.

About the Author: Roy Becker

Roy Becker was President of Roy Becker Seminars based in Centennial, Colorado. His company specialized in educating companies how to mitigate the financial risk of importing and exporting. Previous to starting the training company, Roy had over 30 years experience working in the international departments of several banks where he assisted many importers and exporters with the intricate banking needs associated with international trade.

Roy served as adjunct faculty in the International MBA programs at the University of Denver and University of Colorado in Denver. He conducted seminars at the World Trade Center Denver and The Center for Financial Training Western States, and was a guest lecturer at several Denver area Universities.

Roy retired in 2021.

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period for presentation under letter of credit

A Comprehensive Guide to Standby Letters of Credit (2021)

In this extremely comprehensive guide to standby letters of credit (SBLC), we cover:

  • What a standby letter of credit is
  • Why SBLCs are used more commonly in the USA
  • Risks and considerations to be aware of when using standby letters of credit
  • An overview of the different types of SBLC available
  • The differences between SBLCs and other similar instruments including demand guarantees
  • The rules and regulations you need to know about when using standby letters of credit

The guide is written by Glenn Ransier , Technical Advisor, ICC Banking Commission and the Head of Documentary Trade and Standby LCs with Wells Fargo Bank in North America.

Let's get started. (Note this is a long guide, if you'd rather download the PDF version to read later, you can do so here )

What is a Standby Letter of Credit?

The global rule sets which govern standby letters of credit (SBLC) - both the Uniform Customs and Practices current revision 600 (UCP 600) and International Standby Practices current revision (ISP98) - define a SBLC as an “undertaking”.  An undertaking provides the named beneficiary with an “independent” assurance of payment from the undertaking’s issuer (issuers are most often banks).

The obligations of the SBLC or “undertaking” supplement, and are in addition to, any other underlying contract/agreement between the issuer’s client (In SBLC terms, the client is most often referred to as the applicant) and the client’s contract counterparty (In SBLC terms, the counterparty is known as the beneficiary).

When the issuer bears a stronger credit rating, a SBLC is also a credit enhancement tool.   An applicant’s ability to obtain a SBLC from an issuer reflects good faith as the SBLC supports an applicant’s credit quality.

In most cases and depending on the nature of the type of SBLC being issued, a beneficiary is typically only authorized to claim payment from an issuer in situations where the applicant is unable to successfully conclude the underlying contract.

While a SBLC may include a reference to an underlying contract between an applicant and a beneficiary; the issuer’s obligations remain fully independent of any underlying contract to which it may be supporting.

As an independent undertaking, the issuer of the SBLC  has its own obligation to ultimately pay the beneficiary (or another bank which has already paid the beneficiary such as a confirming bank) on receipt of a document/presentation made by, or on behalf of the beneficiary, which comply with the terms and conditions of the SBLC.

However, most SBLCs never receive a drawing, (also known as: claim or demand for payment) and simply expire in accordance with a SBLC’s stated expiry date/period.  This is because most applicants will successfully complete their contractual obligations and as such, the beneficiary will have no reason to demand payment under a SBLC.  Upon a standby letter of credit’s expiry, it will simply cease to exist and be unavailable for drawing and closed by the issuer.

Unless otherwise stated in a SBLC, standby letters of credit are deemed: “irrevocable” meaning they cannot be changed or cancelled prior to its stated expiry date without the agreement of all parties.

Example of a typical process flow for a SBLC SBLC issuance process – direct to beneficiary or utilizing an advising bank

period for presentation under letter of credit

Benefits of using SBLCs

  • A bank’s SBLC substitutes and may enhance or replace the creditworthiness of the applicant for that of the issuer of the standby letter of credit.
  • SBLC undertakings support/collateralize “any” type of underlying contract, agreement, or obligation between an issuer’s client/applicant and the applicant’s client/counterparty, the beneficiary.
  • SBLCs are recognized globally as an effective means of securing cross-border and domestic contracts.

How are SBLCs commonly used?

Banks following BASEL or Dodd-Frank requirements will classify their issued or confirmed SBLCs as supporting either a “financial” or a “performance” obligation. These two classifications are defined as:

  • “Financial” SBLCs are issued to back financial obligation or some form of indebtedness, such as loan repayment, and irrevocably obligate the Issuer in the event the Applicant fails to honor their payment obligation.
  • “Performance” SBLCs are issued to back a company’s performance related duties. These are contractual, non-financial obligations such as: completing the building of a road or wind farm, etc. and irrevocably obligate the Issuer in the event the Applicant fails to perform as agreed.

Who are the parties involved in a Standby Letter of Credit?

Advising bank –The beneficiary will typically request that a SBLC is sent to a bank in their country or one with which the beneficiary has a relationship. If the beneficiary does not request a specific bank, the issuing bank will either: send the SBLC directly to the beneficiary or choose to send the SBLC to the beneficiary through a bank with which the issuer has a relationship.

If the issuer sends the standby letter of credit through another bank, the bank that receives the SBLC and sends it to the beneficiary will be known as the advising bank. The advising bank is not a party to a SBLC and has no authority to approve or disapprove an amendments terms or obtain drawing rights.

Applicant - (also known as an instructing party or requesting party) – The SBLC applicant enters into a contract with a counterparty. When the contract requires a standby letter of credit to support it, the applicant will make a request, typically to its bank, to issue a SBLC in favour of its contract’s counterparty. In SBLC terms, the counterparty becomes the beneficiary.

In the underlying contract, the applicant and beneficiary terms associated with SBLCs may have very different names: e.g. lender and borrower; buyer or seller; principal and drawer; etc.

It must be noted that a SBLC’s stated applicant may or may not be the issuer’s client. An applicant may receive silent or openly known support to have a standby letter or credit issued. For example, Company AZA may have insufficient credit or collateral to induce an issuer/bank to issue its SBLC. In such a case, it can enlist its parent, a factoring company, etc. to lend support to help Company AZA be named as the applicant in the SBLC.

The parent or other company providing the support may or may not be stated in the SBLC; however, it is considered the client/applicant of the issuer versus the applicant stated in a SBLC. An applicant is not deemed a party to an SBLC. They are the party which requests an issuer to issue its independent SBLC in favour of a beneficiary.

Beneficiary – is the undertaking party who receives all the benefits of a SBLC. They are the only party who may make a drawing; receive payment against the SBLC and/or accept or reject amendments, etc. In the underlying contract, the applicant and beneficiary terms associated with SBLCs may have very different names: e.g. lender and borrower; buyer or seller; principal and drawer; etc.

Confirmer or Confirming Bank –confirmation may only be added at the request of an issuer. When added, a confirmer or confirming bank becomes similar to a second issuing bank because, like the issuer, the confirmer undertakes to honour (or negotiate) or pay a complying document presentation. The confirmer’s undertaking is in addition to the issuers undertaking, but it may be limited in several manners, such as: a) amount; b) expiry; and c) allowable languages documents may be presented in, etc.

Issuer or Issuing Bank or Opening Bank – is the party that issues a separate, irrevocable, independent SBLC on behalf of its applicant client. Because it is independent, a SBLC is separate and distinct from any underlying contract on which it may have been based. Because it is irrevocable, a SBLC cannot be amended until all parties agree to the amendment.

Nominated Bank is the bank/party authorized by the issuer to undertake honour, negotiate or otherwise make a payment in the event it receives a complying document presentation/demand. A confirmer is most often a nominated bank.

A nominated bank which has not confirmed or otherwise committed to pay in some form has no obligation to do so. Unless a confirmer is involved in a SBLC, it rare to see a nominated party as the majority of SBLCs expire and are only available for payment with the issuer.

Why are SBLCs more commonly used in the United States?

period for presentation under letter of credit

Banks in the U.S. historically did not have the corporate power to issue certain types of guarantees but have generally always had the power to issue letters of credit (LC).

It was relatively simple to take conventional commercial LCs and adjust the drawing conditions to call for documents like default certificates and demands for payment, rather than on board negotiable bills of lading, invoices, and other typical shipping and commercial documents. This meant SBLCs could evolve from commercial LCs. It is harder to convert an ordinary, dependent guarantee into an independent undertaking.

Risks and considerations to be aware of when using SBLCs

Applicant considerations: There is a cost associated with SBLC transactions.

An applicant is not a party to an SBLC. The applicant is a party to an underlying contract while the issuer of the standby letter of credit is not. The applicant requests a SBLC to be issued. However, once issued, the issuer must then make its own, independent examination and payment decisions independent of input from the applicant and what the terms of an underlying contract state.

An applicant should have a relationship comfort with the intended SBLC beneficiary because most standby letters of credit are payable against only a draft/bill of exchange and a simple drawing statement. This allows for the possibility for an improper drawing.

Once a SBLC is issued, all parties must agree to any amendment or cancellation request unless the SBLC has expired.

Applicants must align the contract’s terms with the SBLC especially in the area of drawing requirements. Because a standby letter of credit is documentary, an issuer is not concerned with the underlying contract and will make its payment decision solely upon reviewing a beneficiary’s document presentation on its face, against an SBLCs terms, without seeking confirmation of fact(s), action(s) or statement(s) made by the issuer of any document contained in the presentation.

Beneficiary considerations: A beneficiary must determine its credit rating of the issuer. Where an issuer’s credit rating, size or country risks are unacceptable to the beneficiary, a beneficiary may require an acceptable confirming bank.

Once the beneficiary receives a SBLC, it should ensure that SBLC wording complies with the requirements of the underlying contract e.g.

  • Can a beneficiary legally make the required statements and are all reasons they can make a demand for payment properly addressed?
  • Does the SBLC expire with sufficient time to complete the underlying contract?
  • Can the beneficiary obtain all required drawing documents?

This upfront review will help to assure success if the beneficiary makes a drawing against the SBLC, understanding that when a presentation does not comply with a SBLC’s stated terms/conditions, an issuer is not obligated to pay.

The SBLC should be made subject to its preferred international rules such as ISP98 versus UCP600 as the rules align everyone involved with a SBLC and may also assist in the case of a legal matter.

Confirmation and/or advising costs may be due by the beneficiary.

Issuer considerations: As the issuer is supporting its applicant, it needs to consider the applicant’s credit rating. They also need to consider their ability to complete the underlying contract/agreement, often without reviewing the contract/agreement.

Reputational and/or compliance risks such as money laundering, collusion between an applicant and a beneficiary, supporting an unpopular contract/agreement, etc. should also be considered.

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Types of SBLC

Here is an overview of the most common types of SBLC.

Advance payment

This SBLC’s purpose is to ensure the repayment of an advance payment which a buyer has made (or will make at a contract’s closing) to the supplier of goods or services.

In connection with large contracts, especially international transactions, the parties will agree that a supplier of goods or services must receive a certain percentage of the overall contracted value, e.g. 10% upon signing of the contract. To safeguard the buyer against losing its advance payment, they will require an SBLC naming them as the beneficiary to secure the repayment of the sum(s) advanced should the contracted goods or services not be delivered or completed.

The SBLC ensures the buyer is made whole for any advance made. However, often these types of SBLC’s do not provide remuneration for any loss of interest or profit margins that the buyer may sustain.

Bid or tender bond

Supports an issuers' client’s bid to be awarded for a project or contract mandate. This type of SBLC assures the beneficiary that if selected, the applicant has the ability to support and comply with its bid and that they will honour the bid if they are selected. Most often used by contractors or construction companies, they are typically needed for a portion of the overall project’s value.

A SBLC which generally requires only the presentation of a draft or bill of exchange without the need of any supporting statements whatsoever. From an applicant and/or an issuers perspective, these are considered the riskiest type of SBLC. This is because a beneficiary will be able to draw for any reason. It is also risky because the simple terms of the SBLC with regards to a presentation or drawing requirement makes it difficult to stop an improper drawing.

Supports an applicant’s payment obligations to pay for goods or services on a one-off or ongoing basis in the event of non-payment by other methods.

Direct Pay LCs are hybrid SBLCs issued to provide a credit enhancement to a bond offering. E.g. industrial revenue bond, also commonly referred to as variable rate demand bonds. These types of SBLC are most often issued in favour of the bond trustee. Unlike the majority of SBLCs, they are the primary payment mechanism for the interest and principal due on the underlying bond and will receive periodic drawings for payment.

A large majority of SBLCs will fall into this category.  These standby letters of credit will support any financial payment obligation such as loan repayments, etc.

These SBLCs address the insurance or reinsurance obligations of the applicant and are used by insurance companies to distribute insurance risks among themselves. Rather than cash collateralizing other insurers or beneficiaries for use of their internal lines of credit, these SBLC’s are used as collateral.

Performance

A performance SBLC is used to secure the applicant’s satisfactory fulfilment of its contractual performance obligations toward the beneficiary. For example, should the applicant fail to perform a contracted duty such as: complete a construction project, or repair equipment, or build a home or road within the contracted specifications and/or timelines, then the beneficiary will be entitled to present a drawing statement.

Counter SBLC

An applicant or the beneficiary may require a local SBLC to be issued directly by an overseas, reputable party - most often a bank - in the same country as the beneficiary.

The applicant may not have the means or would prefer not to open another line of credit with an overseas party to facilitate this limited need. In this case, they would request an issuer to issue a counter SBLC. The counter SBLC provides collateral to a local party or bank (often a correspondent of the issuer of the counter-undertaking), to induce that bank to issue its own separate and distinct, local undertaking.

In these instances, there are two undertakings:

  • The 1st is the counter-SBLC between the issuer and the local bank
  • The 2nd is the local undertaking between the local issuer and the beneficiary

The undertaking type and/or their governing rule sets do not need to be like for like. Each bank has its own policies toward issuing and receiving counter SBLCs.

Through the use of counter SBLCs, a client maintains a single line of credit.

A counter SBLC may be necessary in the following scenarios:

  • Beneficiary requires/demands a local SBLC or guarantee;
  • Beneficiary requires a “local bank” to issue the final undertaking and will not allow another local bank to advise or confirm it;
  • The undertaking or guarantee must be subject to laws outside of the issuer’s policies.

The beneficiary of the counter-SBLC is the financial institution requested to issue its own instrument. The beneficiary of the second instrument is the applicant’s counterparty in the underlying contract/agreement.

The drawing requirements for a counter-SBLC generally require a simple statement that the second financial institution received a demand for payment against the instrument it issued. The drawing requirements under the second instrument will have ultimately been provided by the applicant of the counter SBLC issuer.

Example of a typical process flow for a counter SBLC

period for presentation under letter of credit

What is the difference between an SBLC and a Commercial Lettter of Credit?

Costs – Costs between SBLCs and Commercial LCs usually differ.

At a high level both types of LC typically require an issuer to consider factors such as:

  • Applicant/client size
  • Collateral and required line of credit size
  • The issuer’s internal LC processing costs
  • Credit establishment and compliance risk costs
  • The differences of the types of LCs anticipated to be requested

Depending on the laws applicable to the Issuer, there may be different cash reserve loss requirements needed for commercial LCs vs performance SBLCs vs financial SBLCs, (Note: This is the case for all countries following Basel) which may affect the issuing/opening fee.

Both LC types will require an applicant to pay an issuance fee of some type. However, commercial LCs are expected to have at least one, if not multiple document presentations. Each presentation will typically be assessed by an examination fee of some type. Conversely, most SBLCs do not receive a beneficiary’s document presentation or drawing and so no examination related fees will be assessed.

Where a SBLC generally covers longer term and ongoing contracts, the issuance fee is needed for the duration of the SBLC.

Commercial LCs are typically issued to support a single need e.g. to cover a payment for: a) a shipment of goods; or b) services completed. They typically expire earlier than a SBLC.

For applicants and beneficiaries which routinely transact, a longer term SBLC may be the more economical LC undertaking, instead of issuing multiple commercial LCs. The commercial LCs will be assessed multiple issuance and examination fees.

Document presentations – Commercial LCs are a beneficiary’s primary payment option. Rather than relying on the underlying contract for payment, the beneficiary will request payment from the issuer’s independent commercial LC undertaking in settlement of the underlying contract they have with the applicant. Conversely, SBLCs take the opposite view and, in the overwhelming majority of cases, the issuer of a SBLC does not expect to receive a document presentation nor make a payment.

As a secondary payment option to the beneficiary, if a document presentation/demand is received, it generally means that the applicant has failed to meet its terms against the underlying contract.

Document types – Commercial LCs require documentary presentations which usually consist of commercial documents such as commercial invoices, packing or weight lists, transport documents, etc. SBLCs are payable most often against simple beneficiary statements and the documents presented often have no intrinsic value.

Misstatements/Fraud – Understanding the difference with document types outlined above, the possibility of a beneficiary requesting a payment in error, by accident or purposely are greater with a SBLC. While a very rare occurrence, it is recommended that the applicant and beneficiary have an established relationship when dealing with SBLCs.

Duration - Commercial LCs are typically short term in nature and their expiry date is generally 6 months or less. SBLCs most often cover longer term contracts, and their duration may be years in length on an overall basis.

Tenors – Any LC undertaking must define the period when a complying document presentation is due for payment and this period is known as the LC’s tenor. As LC undertakings, both Commercial LCs and SBLC’s can be payable “at sight”. This means upon a reasonable time from when the nominated or issuer has found the documents to comply with an LC’s terms.

Conversely there also exists time tenors, which detail that a payment is to be made at a fixed future certain date from the time a presentation is found to be complying. Time tenors are typically referred to as Deferred Payment Undertakings or Banker’s Acceptances. One term, “Negotiation”, may be used as a sight or time tenor.

Commercial LCs often include some form of financing need for trade and, as such, time tenors are utilized. SBLCs which generally do not expect a presentation or demand for payment will overwhelmingly use the sight tenor.

Terms and Conditions – Given their very different payment needs, the data content of commercial versus SBLCs differs significantly.

Purpose  – Commercial LCs facilitate trade and are issued with the intention that a document presentation will be delivered to a bank for payment for a shipment of goods or payment for services.  They are the primary payment vehicle for the beneficiary.

On the other hand, SBLCs cover any type of contract or agreement between two parties.  Provided the issuer is willing to support its applicant, the type of contract a SBLC can support is boundless and includes the different types we covered above (which is not an exhaustive list).

When an applicant does not meet its contracted duty(ies), the beneficiary will make a claim against the applicant for payment under the underlying contract.  When the applicant fails to honour the request for payment, the beneficiary will make a presentation for payment against the SBLC making it a secondary payment vehicle, or payment of last resort for a beneficiary.

SBLCs vs Bank Guarantees

period for presentation under letter of credit

Similar to the commercial LC or a SBLC, a demand guarantee (DG) is an independent and irrevocable “undertaking,” provided by an issuer to a beneficiary, that provides assurance of payment upon receipt of complying document presentations.

DGs are often referred to as first demand guarantees. DGs are more common in Europe, Asia, and the Middle East. SBLCs are more common in the Americas, however they remain globally issued and/or accepted.

Surety or ancillary guarantees should not be confused with DGs and are not the same as LC undertakings. They are outside the scope of this guide.

DGs and SBLCs are extremely similar “undertakings” with the key differences provided by its governing rule set. Like the SBLC, demand guarantees:

  • Require the beneficiary to present a compliant documentary demand in order to receive payment against the undertaking
  • Are independent from the underlying contract
  • Do not require the issuer to investigate the legitimacy of a demand.

When included in a SBLC, UCP600 or ISP98  will govern the instrument and provide a series of default resolutions in cases where a SBLC is silent. Conversely, when included in a DG, the Uniform Rules for Demand Guarantees (URDG 758) will govern and provides it defaults resolutions.

While some defaults are similar, there are significant differences in the approach taken by the rule sets especially in areas such as:

  • Force Majeure situations
  • Document examination period and approach
  • Confirmation
  • Allowable payment tenors
  • Required notifications to an applicant
  • Governing law and jurisdiction
  • Replacing a DG or SBLC undertaking lost by a beneficiary
  • Some terminology differences e.g. guarantor versus issuing party.

Most banks will require a DG to be subject to the URDG 758 to normalize the roles and responsibilities of each party to the undertaking. Issuing a DG that is silent as to its governing rule set and/or is subject to laws of another country, creates potential risk for the issuer (guarantor is the issuer for DGs) and the applicant. This is because the roles and responsibilities may not be directly addressed, well known or understood.

SBLC rules and regulations

period for presentation under letter of credit

Below is an overview of the key regulations, codes and rules that govern SBLCs.

International Standby Practice (ISP98)

  • ISP is a set of rules that when incorporated into an undertaking by referencing the ISP98 or ICC publication 590, will cause the undertaking to be deemed as a Standby Letter of Credit.
  • The ISP was approved and endorsed by the International Chamber of Commerce (ICC) in January 1999 (ICC publication 590).
  • The ISP took more than five years to create and it was the result of interaction between individuals, banks, and national and international associations.
  • The ISP98 is a copyright of the Institute of International Banking Law & Practice (IIBLP) .
  • ISP is not law, but it contains resemblances to USA L/C legal doctrine.
  • It represents a more comprehensive rule set for SBLCs versus the UCP 600.

Uniform Customs and Practice (UCP 600)

  • UCP is a set of rules that that when incorporated into an undertaking, will cause the undertaking to be deemed as a letter of credit.
  • The primary focus of the UCP is to govern commercial letters of credit. However, as noted in UCP Article 1 in parenthesis, UCP applies to standby letters of credit “to the extent to which they are applicable”.
  • UCP is not a law, rather a set of articles developed by the International Chamber of Commerce (ICC) Banking Commission and others. They are copyrighted by the ICC
  • ICC is a non-governmental organization.
  • UCP was first published in 1933 making it the oldest and most legally tested rule set. Thereafter revised in 1951, 1962, 1974, 1983, 1993 and its current revision in 2007.
  • Receiving a document presentation which contains an extend or pay request e.g. request to extend the expiration date of the SBLC or pay the presentation
  • Issuances of counter-SBLCs;
  • Examining documents against a SBLC which requires a document to make and/or complete a statement utilizing quotation marks; require a witness, etc.
  • What to do in cases where a beneficiary has merged or been acquired after issuance of an SBLC
  • Syndicated or participated deals.

Uniform Rules for Demand Guarantees (URDG 758)

  • The URDG is a set of rules that that when incorporated into an undertaking, will cause the undertaking to be deemed a demand guarantee (DG).
  • URDG 758 entered into effect July 2010 and is a complete revision of the original revision URDG 458.
  • The URDG rules support demand guarantees, not surety guarantees.
  • Where possible, it was aligned with the concepts of UCP 600; however, its default positions differ from UCP and ISP in a variety of manners.
  • URDG 758 now has a companion document titled the International Standard Demand Guarantee Practice (ISDGP) for URDG 758 (ICC publication 814E) . It supplements the URDG by identifying and recording best practice in relation to the URDG rules and beyond.

                                                                                                                                                                                                  Evergreen clauses

Given the long-term expiry nature of SBLCs, they often insert what is commonly referred to as an “Evergreen” or “automatic-extension” clause. The Evergreen Clause allows an SBLC’s expiry date to automatically extend for a fixed period-of-time (e.g. every six months or year).

It also provides an issuer or confirmer and/or the applicant with an exit period (e.g. “unless XX days prior to any then current expiration date, the issuer notifies the beneficiary that the issuer elects not to extend the SBLC”). This allows them the possibility to have the SBLC expiry with a simple cancellation notification and without the need for a beneficiary to agree to an amendment.

However, any cancellation notification must be sent or received by the beneficiary by the notification period indicated in the SBLC’s specific evergreen clause. This is normally anywhere between 30 and 90 days from a then current expiration date.

How Evergreen clauses benefit SBLCs

The applicant, issuer or confirmer is provided with the means to close the SBLC without the need for a beneficiary to consent or otherwise have to agree to an amendment or return an undertaking. (Note: The cancellation is typically sent when the underlying contract is also close to completion, but there remain other reasons for cancellation such as: applicant seeking to replace an issuer for improved costs or other reasons, or an issuer seeking to remove itself from a deal; etc.)

In addition, providing longer-term commitments often requires higher rates/fees. The exit opportunity provided by an Evergreen Clause may keep fees more reasonable.

SBLC frequently asked questions

See the section above that covers this in detail

SBLC undertakings can support “any” type of underlying contract, agreement, or obligation between an issuer’s client or applicant and the applicant’s client/counterparty - the beneficiary - provided the issuer is willing to support the nature of the underlying contract.

The SBLC obligations supplement and are in addition to any other underlying contract/agreement between the issuer’s client, the applicant and the beneficiary. When the issuer bears a stronger credit rating, a SBLC is also a credit enhancement tool.

An applicant could require that a beneficiary must inform them of an intended drawing XX days in advance. The SBLC could require the beneficiary to make this certification and provide some form of documentary evidence; e.g. a copy of an email to ensure it was completed. This notification could allow an applicant to resolve the contract issue negating the need for a drawing.

Conversely, a trusted neutral third party or an applicant could require that a beneficiary’s drawing statement be countersigned or attested by a third party neutral to the applicant and beneficiary; or the applicant or their representative to help ensure that the drawing is warranted (Note: Given the neutrality of a SBLC between an issuer and a beneficiary, having an applicant requirement to countersign or attest to a drawing is discouraged in rules and often prohibited by an issuer and/or a beneficiary).

Most SBLCs have a sight tenor and, as noted throughout this guide, in most cases a SBLC will never receive a presentation or drawing so there is no need to make a payment.

Discounting or prepaying a sight SBLC can be associated with fraud and as such, caution is needed when considering such a possibility.

Yes, and as noted in UCP 600, ISP98 (and URDG 758) and when allowed by applicable law, in certain cases the issuer may issue a SBLC on its own behalf.  In these cases, the issuer becomes the applicant and the issuer.  This is commonly known as a two party SBLC.

About the author

Glenn Ransier Technical Advisor, ICC Banking Commission; Member of URDG 758 drafting team; and Co-Chair for the ISDGP

Head of Documentary Trade and Standby LCs with Wells Fargo Bank N.A .

Email: [email protected]

Disclaimer: Contents represent the author’s sole opinions and may not represent those of any past, present or future employer.

Table of Content

What is a Letter of Credit?

Why is letter of credit important, features / characteristics of letter of credit, documents required for a letter of credit, how does letter of credit work, letter of credit - process, letter of credit with example, letter of credit sample format, types of letter of credit, bank guarantee vs letter of credit.

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31 August 2022

Letter of Credit (LC) - Meaning, Process & Role In International Trade

There are several uncertainties that arise when buyers and sellers across the globe engage in maritime trade operations. Some of these uncertainties revolve around delayed payments, slow deliveries, and financing-related issues, among others. The sheer distances involved in international trade, different laws and regulations, and changing political landscape are just some of the reasons for sellers needing a guarantee of payment when they deliver goods through the maritime route to their sellers. Letters of credit were introduced to address this by adding a third party like a financial institution into the transaction to mitigate credit risks for exporters.

A letter of credit or LC is a written document issued by the importer’s bank (opening bank) on importer’s behalf. Through its issuance, the exporter is assured that the issuing bank will make a payment to the exporter for the international trade conducted between both the parties.

The importer is the applicant of the LC, while the exporter is the beneficiary. In an LC, the issuing bank promises to pay the mentioned amount as per the agreed timeline and against specified documents.

A guiding principle of an LC is that the issuing bank will make the payment based solely on the documents presented, and they are not required to physically ensure the shipping of the goods. If the documents presented are in accord with the terms and conditions of the LC, the bank has no reason to deny the payment.

A letter of credit is beneficial for both the parties as it assures the seller that he will receive his funds upon fulfillment of terms of the trade agreement and the buyer can portray his creditworthiness and negotiate longer payment terms, by having a bank back the trade transaction.

A letter of credit is identified by certain principles. These principles remain the same for all kinds of letters of credit. The main characteristics of letters of credit are as follows:

Negotiability

A letter of credit is a transactional deal, under which the terms can be modified/changed at the parties assent. In order to be negotiable, a letter of credit should include an unconditional promise of payment upon demand or at a particular point in time.

Revocability

A letter of credit can be revocable or irrevocable. Since a revocable letter of credit cannot be confirmed, the duty to pay can be revoked at any point of time. In an irrevocable letter of credit , all the parties hold power, it cannot be changed/modified without the agreed consent of all the people.

Transfer and Assignment

A letter of credit can be transferred, also the beneficiary has the right to transfer/assign the LC. The LC will remain effective no matter how many times the beneficiary assigns/transfers the LC.

Sight & Time Drafts

The beneficiary will only receive the payment upon maturity of letter of credit from the issuing bank when he presents all the drafts & the necessary documents.

  • Shipping Bill of Lading
  • Airway Bill
  • Commercial Invoice
  • Insurance Certificate
  • Certificate of Origin
  • Packing List
  • Certificate of Inspection

LC is an arrangement whereby the issuing bank can act on the request and instruction of the applicant (importer) or on their own behalf. Under an LC arrangement, the issuing bank can make a payment to (or to the order of) the beneficiary (that is, the exporter). Alternatively, the issuing bank can accept the bills of exchange or draft that are drawn by the exporter. The issuing bank can also authorize advising or nominated banks to pay or accept bills of exchange.

Fee and charges payable for an LC

There are various fees and reimbursements involved when it comes to LC. In most cases, the payment under the letter of credit is managed by all parties. The fees charged by banks may include:

Opening charges, including the commitment fees, charged upfront, and the usance fee that is charged for the agreed tenure of the LC.

Retirement charges are payable at the end of the LC period. They include an advising fee charged by the advising bank, reimbursements payable by the applicant to the bank against foreign law-related obligations, the confirming bank’s fee, and bank charges payable to the issuing bank.

Parties involved in an LC

Main parties involved:

Applicant An applicant (buyer) is a person who requests his bank to issue a letter of credit.

Beneficiary A beneficiary is basically the seller who receives his payment under the process.

Issuing bank The issuing bank (also called an opening bank) is responsible for issuing the letter of credit at the request of the buyer.

Advising bank The advising bank is responsible for the transfer of documents to the issuing bank on behalf of the exporter and is generally located in the country of the exporter.

Other parties involved in an LC arrangement:

Confirming bank The confirming bank provides an additional guarantee to the undertaking of the issuing bank. It comes into the picture when the exporter is not satisfied with the assurance of the issuing bank.

Negotiating bank The negotiating bank negotiates the documents related to the LC submitted by the exporter. It makes payments to the exporter, subject to the completeness of the documents, and claims reimbursement under the credit.

(Note:- Negotiating bank can either be a separate bank or an advising bank)

Reimbursing bank The reimbursing bank is where the paying account is set up by the issuing bank. The reimbursing bank honors the claim that settles the negotiation/acceptance/payment coming in through the negotiating bank.

Second Beneficiary The second beneficiary is one who can represent the original beneficiary in their absence. In such an eventuality, the exporter’s credit gets transferred to the second beneficiary, subject to the terms of the transfer.

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The process of getting an LC consists of four primary steps, which are enlisted here:

Step 1 - Issuance of LC

After the parties to the trade agree on the contract and the use of LC, the importer applies to the issuing bank to issue an LC in favor of the exporter. The LC is sent by the issuing bank to the advising bank. The latter is generally based in the exporter’s country and may even be the exporter’s bank. The advising bank (confirming bank) verifies the authenticity of the LC and forwards it to the exporter.

Step 2 - Shipping of goods

After receipt of the LC, the exporter is expected to verify the same to their satisfaction and initiate the goods shipping process.

Step 3 - Providing Documents to the confirming bank

After the goods are shipped, the exporter (either on their own or through the freight forwarders ) presents the documents to the advising/confirming bank.

Step 4 - Settlement of payment from importer and possession of goods

The bank, in turn, sends them to the issuing bank and the amount is paid, accepted, or negotiated, as the case may be. The issuing bank verifies the documents and obtains payment from the importer. It sends the documents to the importer, who uses them to get possession of the shipped goods.

Suppose Mr A (an Indian Exporter) has a contract with Mr B (an importer from the US) for sending a shipment of goods. Both parties being unknown to each other decide to go for an LC arrangement.

The letter of credit assures Mr A that he will receive the payment from the buyer and Mr B that he will have a systematic and documented process along with the evidence of goods having been shipped.

From this point on, this is how a letter of credit transaction would unveil between Mr A & Mr B:-

Mr B (buyer) goes to his bank that is the issuing bank (also called an opening bank) and issues a Letter of Credit.

The issuing bank further processes the LC to the advising bank (Mr A's bank).

The advising bank checks the authenticity of the LC and sends it to Mr A.

Now that Mr A has received the confirmation he will ship the goods and while doing so he will receive a Bill of Lading along with other necessary documents.

Further, he will send these documents to the negotiating bank.

The negotiating bank will make sure that all necessary requirements are fulfilled and accordingly make the payment to Mr A (the seller).

Additionally, the negotiating bank will send all the necessary documents to the issuing bank.

Which again the issuing bank will send to Mr B (Buyer) to confirm the authenticity.

Once Mr B has confirmed he will make the payment to the issuing bank.

And the issuing bank will pass on the funds to the negotiating bank.

To understand the process clearly refer to this image:

Letter of Credit - Process Flow Chart

Following are the most commonly used or known types of letter of credit:-

Revocable Letter of Credit

Irrevocable Letter of Credit

Confirmed Letter of Credit

Unconfirmed Letter of Credit

LC at Sight

Usance LC or Deferred Payment LC

Back to Back LC

Transferable Letter of Credit

Un-transferable Letter of Credit

Standby Letter of Credit

Freely Negotiable Letter of Credit

Revolving Letter of Credit

Red Clause LC

Green Clause LC

To understand each type in detail read the article, Types of letter of credit used in International Trade .

What is the application process for an LC?

Importers have to follow a specific procedure to follow for the application of LCs. The process is listed here:

  • After a sales agreement is created and signed between the importer and the exporter, the importer applies to their bank to draft a letter of credit in favor of the exporter.
  • The issuing bank (importer’s bank) creates a letter of credit that matches the terms and conditions of the sales agreement before sending it to the exporter’s bank.
  • The exporter and their bank need to evaluate the creditworthiness of the issuing bank. After doing so and verifying the letter of credit, the exporter’s bank approves and sends the document to the importer.
  • After that, the exporter manufactures and ships the goods as per the agreed timeline. A shipping line or freight forwarder assists with the delivery of goods.
  • Along with the goods, the exporter also submits documents to their bank for compliance with the sales agreement.
  • After approval, the exporter’s bank then sends these complying documents to the issuing bank.
  • Once the documents are reviewed, the issuing bank releases the payment to the exporter and sends the documents to the importer to collect the shipment.

What are the Benefits of an LC?

A letter of credit is beneficial for both parties as it assures the seller that they will receive their funds upon fulfillment of the terms of the trade agreement, while the buyer can portray his creditworthiness and negotiate longer payment terms by having a bank back the trade transaction.

Letters of credit have several benefits for both the importer and the exporter. The primary benefit for the importer is being able to control their cash flow by avoiding prepayment for goods. Meanwhile, the chief advantage for exporters is a reduction in manufacturing risk and credit risk. Ultimately, since the trade deals are often international, there are factors like location, distance, laws, and regulations of the involved countries that need to be taken into account. The following are advantages of a letter of credit explained in detail.

LC reduces the risk of late-paying or non-paying importers There might be instances when the importer changes or cancels their order while the exporter has already manufactured and shipped the goods. The importers could also refuse payment for the delivered shipments due to a complaint about the goods. In such circumstances, a letter of credit will ensure that the exporter or seller of the goods receives their payment from the issuing bank. This document also safeguards if the importer goes into bankruptcy.

LC helps importers prove their creditworthiness Small to midsize businesses do not have vast reserves of capital for managing payments for raw materials, equipment, or any other supplies. When they are in a contract to manufacture a product and send it to their client within a small window, they cannot wait around to free up capital for buying supplies. This is where letters of credit come to their rescue. A letter of credit helps them with important purchases and serves as proof to the exporter that they will fulfill the payment obligations, thus avoiding any transaction and manufacturing delays.

LCs help exporters with managing their cash flow more efficiently A letter of credit also ensures that payment is received on time for the exporters or sellers. This is especially important if there is a huge period of time between the delivery of goods and payment for them. Ensuring timely payments through the letter of credit will go a long way in helping the exporters manage their cash flow. Furthermore, sellers can obtain financing between the shipment of goods and receipt of payment, which can provide an additional cash boost in the short term.

A Bank guarantee is a commercial instrument. It is an assurance given by the bank for a non-performing activity. If any activity fails, the bank guarantees to pay the dues. There are 3 parties involved in the bank guarantee process i.e the applicant, the beneficiary and the banker.

Whereas, a Letter of Credit is a commitment document. It is an assurance given by the bank or any other financial institution for a performing activity. It guarantees that the payment will be made by the importer subjected to conditions mentioned in the LC. There are 4 parties involved in the letter of credit i.e the exporter, the importer, issuing bank and the advising bank (confirming bank).

Things to consider before getting an LC

A key point that exporters need to remind themselves of is the need to submit documents in strict compliance with the terms and conditions of the LC. Any sort of non-adherence with the LC can lead to non-payment or delay and disputes in payment.

The issuing bank should be a bank of robust reputation and have the strength and stability to honor the LC when required.

Another point that must be clarified before availing of an LC is to settle the responsibility of cost-bearing. Allotting costs to the exporter will escalate the cost of recovery. The cost of an LC is often more than that of other modes of export payment. So, apart from the allotment of costs, the cost-benefit of an LC compared to other options must also be considered.

FAQs on Letter of Credit

1. is letter of credit safe.

Yes. Letter of Credit is a safe mode of payment widely used for international trade transactions.

2. How much does it cost for a letter of credit?

Letters of credit normally cost 1% of the amount covered in the contract. But the cost may vary from 0.25% to 2% depending on various other factors.

3. Can a letter of credit be cancelled?

In most cases letters of credit are irrevocable and cannot be cancelled without the agreed consent of all parties.

4. Can a letter of credit be discounted?

A letter of credit can be discounted. While getting an LC discounted the supplier or holde of LC should verify whether the issuing bank is on the approved list of banks, with the discounting bank. Once the LC is approved, the discounting bank releases the funds after charging a certain amount as premium.

5. Is a letter of credit a not negotiable instrument?

A letter of credit is said to be a negotiable instrument, as the bank has dealings with the documents and not the goods the transaction can be transferred with the assent of the parties.

6. Are letters of credit contingent liability?

It would totally depend on future circumstances. For instance, if a buyer is not in a condition to make the payment to the bank then the bank has to bear the cost and make the arrangement on behalf of the buyer.

7. A letter of credit is with recourse or without recourse?

A 'without recourse' letter of credit to the beneficiary is a confirmed LC. Whereas an unconfirmed or negotiable letter of credit is 'with recourse' to the beneficiary.

8. Who is responsible for letters of credit?

The issuing bank takes up the responsibility to complete the payment if the importer fails to do so. If it is a confirmed letter of credit, then the confirming bank has the responsibility to ensure payment if the issuing bank and importers fail to make the payment.

The Uniform Customs and Practice for Documentary Credits (UCP) describes the legal framework for all letters of credit. The current version is UCP600 which stipulates that all letters will be irrevocable until specified.

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Letter of Credit and Trade Finance timelines

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A reader asked me a question about letter of credit and trade finance timelines..

With a letter of credit. What sort of timings are usually connected to when the payment between banks occurs? Does the shipment sail prior to the LC being satisfied?

image for reader question

The roles of the involved banks First of all it is important to understand that there are usually 2 banks involved in the LC transaction: 1) The LC is issued by the buyer’s bank. That bank is termed “ issuing bank ”. 2) The LC is advised to the seller by another bank. That bank may have different roles and responsibilities – all depending on what the bank has agreed to do i.e.: The bank may act as an Advising bank : Not obligated under the LC to pay. The bank may also act as a Nominated bank : Nominated under the LC (e.g.) to pay, but any obligation under the LC depends on the agreement made with the seller. The bank may also act as a Confirming bank : Has given an undertaking to pay when a complying presentation has been made. This means that When a complying presentation is made to the issuing bank, then it must pay (according to the terms of the LC). When a complying presentation is made to the Advising bank, it will normally not pay until funds has been received from the issuing bank. Nominated bank, its payment will depend on the agreement made with the seller. Confirming bank, it must pay when a complying presentation is made to it.   How the LC is available Also important in this respect is the “availability” of the LC. In general LCs are issued either at “sight LCs” or “Usance LCs.” For the first payment is made “at sight” i.e. right after presentation of the documents. For the latter payment is made after a specified number of days (as determined by the LC) – e.g. “90 days after shipment.”   The timelines given by the rules Practically every LC is governed by the UCP 600. Those rules include the following provisions: The banks (issuing, confirming, nominated) have “a maximum of 5 banking days following the day of presentation” to determine if a presentation is complying. This means that if the issuing / confirming bank has not refused the presentation within that timeline then they are obligated to pay (according to the terms of the LC). Also important is the rule that dictates what the bank must do when it determines that the presentation is complying: When the issuing bank determines that a presentation is complying it must pay (according to the terms of the LC).  When a confirming bank determines that a presentation is complying, it must pay (according to the terms of the LC) and forward the documents to the issuing bank. When” is not defined in the rules, but it is practice that the issuing / confirming bank must start the payment process right after they determine that it is a complying presentation.   The LC in practice The above may seem a bit abstract, so let us look at two realistic scenarios: Scenario 1: A confirmed LC On 1 October the seller received an LC from their bankers. The bank has indicated that they have confirmed the LC. The LC is available “at sight” with the confirming bank. On 15 October the seller ships the goods covered by the LC. (From that day the seller has 21 days to present the document to the bank). On 20 October the seller presents the documents to the confirming bank. (From that day the confirming bank has 5 banking days to examine the documents). On 23 October the confirming bank revert to the seller informing that the documents comply with the terms and conditions of the LC, and that they will effect payment value 26 October. On the same day the confirming bank forwards the documents to the issuing bank. On 26 October the payment is made to the seller. On 28 October the documents arrive at the issuing bank. (From that day the issuing bank has 5 banking days to examine the documents). On 2 November the issuing bank accepts the documents, pays the confirming bank, and draws the funds from the buyer.   Scenario 2: An unconfirmed LC On 1 October the seller received an LC from their bankers. The bank has indicated that they have NOT confirmed the LC. The LC is available “at sight” with the issuing bank. On 15 October the seller ships the goods covered by the LC. (From that day the seller has 21 days to present the document to the issuing bank). On 20 October the seller presents the documents to the advising bank. On 23 October the advising bank revert to the seller informing that the documents comply with the terms and conditions of the LC, and that they have forwarded the documents to the issuing bank awaiting payment. On the same day the advising bank forwards the documents to the issuing bank. On 28 October the documents arrive at the issuing bank. (From that day the issuing bank has 5 banking days to examine the documents). On 2 November the issuing bank accepts the documents, pays the advising bank, and draws the funds from the buyer. On 4 November the advising bank receives the finds from the issuing bank, and pays the seller.   As can be seen from the above: It is the documents from the seller (including the transport document) that trigger the payment; i.e. shipment is made before payment. When the payment is made to the seller depends highly on the structure of the LC. It should be added also, that in the two above examples the documents did comply with the terms and conditions of the LC. If that is not the case, the confirming and issuing banks may refuse the documents, and payment is only made when approved by the buyer.

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For more information you can contact Kim Sindberg by email..

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What are the implications of shipping material 2 days after latest shipment date, once a confirmed LC was received from the customer?

So nice.and thanks a lot

Dear Readers, My LC stated as follows (just for some important clause) 1. At sight 2. Available with my Bank by negotiation 3. Latest shipment 15 November 4. LC expiry : 25 November in Indonesia 5. LC confirmation : Without (also my Bank no need confirmation because my bank has correspondence line with issuing bank) 6. Incoterms 2010 and UCP 600 applied.

I have shipped the cargo on 5 November, due to some of shipping documents need to legalized to Applicant’s Embassy so I just submitted the all shipping documents as per LC on 20 November. On 23 November my Bank Officer told me that my documents 100% Complying the LC, BUT his Branch Manager would not to negotiate my LC because he wonder about expiry of the LC. His arguments : If all shipping documents couriered to issuing Bank on 23 Nov, the docs will reach issuing bank on 26 November (LC expired already). I insists to ask him to negotiate my LC. I said to him “Please refer to UCP 600 for this circumtances”. After involving his District Manager finally the bank has negotiated my LC.

I wonder I will facing again this circumstances in the future. Exactly, WHAT UCP 600 SAID REGARDING PRESENTATION DOCUMENTS CLOSE TO LC EXPIRY ? Please kindly help. thank you,

Another important point is that an ‘advising’ bank only receives and forwards the shipping documents; it does not check or validate them. A ‘confirming’ bank does check and validate the documentation so in case there is any discrepancy, it can be handled locally. This is significant when time is of the essence but should become less relevant as you gain experience in handling LCs and learn the pitfalls to avoid. Another point of relevance is partial shipments. In case you are shipping more than one container, it is prudent that the LC includes allowance for partial shipments. This allows the seller to start collecting right after the first shipment and not have to wait until all the order has been shipped to start the collections process.

Hi Everybody,

I wonder if the carrier should compy with specific standards or not? I mean it is one thing when the carrier is a big international company like Maersk, the other when it is a relatively small NVOCC (or maybe just a forwarding company) issuing HBLs.

I have experienced with LC from USA for frozen fish or frozen foods. Seller do not accept the LC with clause ” PAYMENT after passed USFDA Approval” or anything wording like this. But seller can accept for clause ” Beneficiary’s Certificate stating that “If goods rejected by USFDA, beneficiary will reimburse to applicant all fund that already drawn plus any additional cost occured…… …… ….. ” “

Re: the letter of credit (LC) article. You left out one of the most important steps, i.e., the seller’s instructions to the buyer detailing the specific terms/wording to be included in the letter of credit. These instructions should be sent to the buyer BEFORE the buyer’s bank draws up the actual LC. The seller’s documentation must be EXACTLY identical to the terms/wording of the LC or the bank will declare the documentation differences as “discrepancies” and refuse payment until after the seller OKs the differences. This could possibly defeat the original purpose (protection) of the LC and/or add expenses (charged by the bank) to make the changes. In other words, once the buyer/seller agree to conduct the sale with an LC, they must then agree to the terms, especially its various dates. If not, the buyer may receive the copy of the LC and then realize he cannot comply with it and then must go back to the issuing bank for (additional) costly changes.

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The Trade and Receivables Finance Companion pp 73–94 Cite as

Letters of Credit for Export

Protecting the Beneficiary

  • Stephen A. Jones 2  
  • First Online: 15 February 2020

405 Accesses

The primary concern of a seller is whether they will be paid by the buyer for the shipment of goods. A letter of credit provides an independent payment undertaking of a bank, subject to the presentation of complying documents. For the seller, it is often said that ‘the documents are more important than the goods’.

If the documents do not fully conform to the credit, this is known as a ‘discrepant’ presentation which at best can result in delayed payment and at worst in rejection of documents and no payment.

This chapter discusses the optimum structure of the export letter of credit to mitigate risk for the seller and to provide a pre-shipment finance or post-shipment discount or negotiation solution. The same trading scenario is examined in Chap. 5 to illustrate the key differences in structure between an export and import letter of credit.

  • Any bank by negotiation
  • Assignment of proceeds
  • Availability
  • Bank to bank reimbursement
  • Bill of lading
  • Cargo insurance
  • Confirmation
  • Contract of carriage
  • Control over the goods
  • Deferred payment
  • Discount finance
  • Discrepancy waiver
  • Discrepant presentation
  • Document rejection
  • Documentary risk
  • Export letter of credit
  • Letter of credit terms
  • Negotiation
  • Place of expiry
  • Presentation period
  • Pre-shipment finance
  • Reimbursement authorisation
  • Unconfirmed credit

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Jones, S.A. (2019). Letters of Credit for Export. In: The Trade and Receivables Finance Companion. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-25139-0_6

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What Is a Letter of Credit?

How a letter of credit works, types of letters of credit, how to apply for a letter of credit.

  • Advantages and Disadvantages
  • Letter of Credit FAQs

When Does Payment Occur With a Letter of Credit?

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Letter of Credit: What It Is, Examples, and How One Is Used

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

period for presentation under letter of credit

A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility (financial assistance that is essentially a loan).

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade to protect buyers and sellers.

Key Takeaways

  • A letter of credit is a document sent from a bank or financial institute that guarantees that a seller will receive a buyer’s payment on time and for the full amount.
  • Letters of credit are often used within the international trade industry.
  • There are many different letters of credit including one called a revolving letter of credit.
  • Banks collect a fee for issuing a letter of credit.

Jessica Olah / Investopedia

Buyers of major purchases may need a letter of credit to assure the seller that the payment will be made. A bank issues a letter of credit to guarantee the payment to the seller, essentially taking responsibility that the seller will be paid. A buyer must prove to the bank that they have enough assets or a sufficient line of credit to pay before the bank will guarantee the payment to the seller.

Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit.

Because a letter of credit is typically a negotiable instrument , the issuing bank pays the beneficiary or any bank nominated by the beneficiary. If a letter of credit is transferable , the beneficiary may assign another entity , such as a corporate parent or a third party, the right to draw.

The International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.

How Much a Letter of Credit Costs

Banks will usually charge a fee for a letter of credit, which can be a percentage of the total credit that they are backing. The cost of a letter of credit will vary by bank and the size of the letter of credit. For example, the bank may charge 0.75% of the amount that it's guaranteeing.

Fees can also depend on the type of letter. In an import-export situation, an unconfirmed letter of credit is less costly. A confirmed letter of credit may have higher fees attached based on the issuing bank's credit strength.

The types of letters of credit include a commercial letter of credit, a revolving letter of credit, a traveler’s letter of credit, a confirmed letter of credit, and a standby letter of credit. International trade will also sometimes use an unsecured— red clause —letter of credit.

Commercial Letter of Credit

This is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

Revolving Letter of Credit

This kind of letter allows a customer to make any number of draws within a certain limit during a specific time period. It can be useful if there are frequent shipments of merchandise, for example, and you don't want to redraft or edit letters of credit each time.

Traveler’s Letter of Credit

For those going abroad, this letter will guarantee that issuing banks will honor drafts made at certain foreign banks.

Confirmed Letter of Credit

A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default . The issuing bank in international transactions typically requests this arrangement.

Standby Letter of Credit

A standby letter of credit provides payment if something does not occur which is the opposite of how other types of letters of credit are structured. So, instead of facilitating a transaction with funding a standby letter of credit is like an insurance contract in that it protects and compensates one party (the beneficiary) if the other party named in the agreement fails to perform the stated duty or meets certain service level agreements outlined in the letter of credit.

Example of a Letter of Credit

Citibank offers letters of credit for buyers in Latin America, Africa, Eastern Europe, Asia, and the Middle East who may have difficulty obtaining international credit on their own. Citibank’s letters of credit help exporters minimize the importer’s country risk and the issuing bank’s commercial credit risk.

Letters of credit are typically provided within two business days, guaranteeing payment by the confirming Citibank branch. This benefit is especially valuable when a client is located in a potentially unstable economic environment.

Letters of Credit are best prepared by trained professionals, as mistakes in the detailed documents required can lead to payment delays and fees. Due to industry variations and types of letters of credit, each may be approached differently.

Here's an import-export example.

  • The importer’s bank credit must satisfy the exporter and their bank. The exporter and importer complete a sales agreement.
  • Using the sales agreement's terms and conditions, the importer’s bank drafts the letter of credit; this letter is sent to the exporter's bank. The exporter’s bank reviews the letter of credit and sends it to the exporter after approval.
  • The exporter ships the goods as the letter of credit describes. Any required documentation is submitted to the exporter's bank.
  • The exporter’s bank reviews documentation to ensure letter of credit terms and conditions were met. If approved, the exporter's bank submits documents to the Importer’s bank.
  • The importer's bank sends payment to the exporter’s bank. The importer can now claim the goods sent.

Advantages and Disadvantages of a Letter of Credit

Obtaining letters of credit may be necessary in certain situations. However, like anything else related to banking, trade, and business there are some pros and cons to acknowledge.

Can create security and build mutual trust for buyers and sellers in trade transactions.

Makes it easier to define the specifics of when and how transactions are to be completed between involved parties.

Letters of credit can be personalized with terms that are tailored to the circumstances of each transaction.

Can make the transfer of funds more efficient and streamlined.

Buyers typically bear the costs of obtaining a letter of credit.

Letters of credit may not cover every detail of the transaction, potentially leaving room for error.

Establishing a letter of credit may be tedious or time-consuming for all parties involved.

The terms of a letter of credit may not account for unexpected changes in the political or economic landscape.

How Does a Letter of Credit Work?

Often in international trade, a letter of credit is used to signify that a payment will be made to the seller on time, and in full, as guaranteed by a bank or financial institution. After sending a letter of credit, the bank will charge a fee, typically a percentage of the letter of credit, in addition to requiring collateral from the buyer. Among the various forms of letters of credit are a revolving letter of credit, a commercial letter of credit, and a confirmed letter of credit.

What Is an Example of a Letter of Credit?

Consider an exporter in an unstable economic climate, where credit may be more difficult to obtain. A bank could offer a buyer a letter of credit, available within two business days, in which the purchase would be guaranteed by the bank's branch. Because the bank and the exporter have an existing relationship, the bank is knowledgeable of the buyer’s creditworthiness , assets, and financial status. 

What Is the Difference Between a Commercial Letter of Credit and a Revolving Letter of Credit?

As one of the most common forms of letters of credit, commercial letters of credit are when the bank makes payment directly to the beneficiary or seller. Revolving letters of credit, by contrast, can be used for multiple payments within a specific time frame. Typically, these are used for businesses that have an ongoing relationship, with the time limit of the arrangement usually spanning one year.

A letter of credit is like an escrow account in that payment to the beneficiary only happens when the other party performs a specific act or meets other performance criteria spelled out in the letter of credit agreement.

Letters of credit can play an important part in trade transactions. There are different types of letters of credit that may be used, depending on the circumstances. If you need to obtain a letter of credit for a business transaction, your current bank may be the best place to begin your search. You may, however, need to expand the net wider to include larger banks if you maintain accounts at a smaller financial institution.

International Trade Administration. " What Is a Letter of Credit? "

International Chamber of Commerce. “ Global Rules .”

Export-Import Bank of the United States. " To Confirm or Not to Confirm (Letters of Credit) ."

Cornell Law School. " 12 CFR § 208.24 - Letters of credit and acceptances. "

USAID. " Letters of Credit and Trade Finance ," p.106.

FDIC. " Off-Balance Sheet Activities ," p.2

  • Columbia Bank. " Letters of Credit. "

Citi. “ International Trade .”

Citi. “ Products and Services .”

International Trade Administration. " Letter of Credit. "

  • International Trade Administration. " Trade Finance Guide ," Page 7.

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Usance letters of credit – what are they? | 2022 TFG Usance LC Guide

When using an usance or deferred letter of credit, the issuing bank must make payment by a preset date. This makes planning easier and unlocks working capital.

By Marcus Lankford

Last modified Monday December 12, 2022

period for presentation under letter of credit

Estimated reading time: 9 minutes

Usance (or deferred)   letters of credit (LC)  are a specific type of LC payable at a predetermined time period.

When Letters of Credit were first introduced, there were a number of specific Letters of Credit that developed.

This is a short guide about usance or deferred LCs.

On this page

What is a letter of credit?

How does a letter of credit work?

What are usance letters of credit?

Why should SMEs use usance letters of credit?

Usance letter of credit and sight letter of credit – what’s the difference?

When will a usance letter of credit be used?

Things to watch out for when using letters of credit

How can TFG help

Letter of Credit Explained

Before we get into usance or deferred letters of credit, let’s first recap what a normal letter of credit is. If you’re an importer or an exporter, you will probably want your goods and cash to be as safe as possible during a trade transaction.

To protect against non-payment or non-delivery, one of the best ways to reduce your risk in a trade transaction is to use a letter of credit .

Letters of credit are legally-binding financial instruments that are issued by banks or specialist trade finance institutions to ensure that payment is made for goods received.

Let’s suppose that an importer wants to purchase goods from an exporter in a trade transaction. To secure the transaction using a letter of credit, the importer can apply for a letter of credit from an ‘issuing bank’ (so called because this is the bank that will issue the letter of credit).

Meanwhile, the exporter must get in touch with a ‘confirming bank’ – so called because this is the bank that will confirm the letter of credit on the seller’s behalf. (This bank is also known as the ‘advising bank’.)

When the terms set out in the letter of credit are met – such as receipt of goods or bills of lading – then the issuing bank is legally obliged to issue payment for the goods to the confirming bank.

Put simply, a letter of credit helps ensure that the seller will get paid, as long as the terms specified in the letter of credit are met.

This reduces the risk to the importer (the buyer), and increases security for the exporter (the seller) – and as a trading business, that’s exactly what you want.

period for presentation under letter of credit

Usance Letters of Credit Explained

A usance or deferred letter of credit is a type of letter of credit used often in trade finance whereby the issuing bank must make payment by a preset date.

Once a sale contract is agreed upon between a buyer and a seller, the buyer can request that a letter of credit be used to secure the transaction.  

The buyer will nominate their bank of choice (the issuing bank) and the seller can nominate their own bank (the confirming bank). 

The terms are negotiated between buyer and seller, including the delivery date and the description of goods being sold.

If using a deferred or usance letter of credit, this means that the payment will be made by the issuing bank at a preset date, and after the relevant documents are presented. 

The date of payment is set either after the bills of lading are confirmed upon shipment, or when the issuing bank receives confirming documents and is typically set at 90 days.

Once the seller ships the goods, they send confirmation of shipping with the letter of credit to their confirming bank, which will review the documents and send them to the buyer’s issuing bank.

Once the issuing bank and buyer have reviewed and confirmed the documentation, the issuing bank must pay the confirming bank within the time period set out in the letter of credit, while deducting a fee (or ‘advising charge’) for itself.

On the seller’s side, there is the option to negotiate payment discounting, which allows the seller to receive payment faster.

In such cases, the confirming bank will release the payment to the seller ahead of the deferred payment date but will deduct a greater percentage fee for itself.

period for presentation under letter of credit

SMEs and Usance Letters of Credit

Cross-border trade can be risky, but using a letter of credit can help facilitate trust in transactions, both during shipping and in the payment stage of the trade.  Letters of credit are widely recognised by banks worldwide, and using one should help you safely complete cross-border transactions.

If you are the buyer, using a letter of credit provides evidence that you can make payment to the seller, which increases trust between you and the seller. 

Sellers are more likely to stick to the letter of credit’s terms and conditions, making it more likely that your business plan will run on time and the goods you purchase will be in the condition required for your business needs.

And if the seller doesn’t or can’t meet the conditions stipulated in your letter of credit, you won’t be legally obliged to issue payment at all.

Using a deferred letter of credit makes cash flow management even easier, because it gives you more time to pay for the goods, and therefore more time to utilise those goods for sale, which frees up working capital.

Seller: 

If you are the seller, you will receive payment for your goods shipped as and when the terms specified in the letter of credit are met.

If the terms are met, then the buyer’s issuing bank is legally obliged to pay you even if the buyer changes the order, cancels the order, goes bankrupt, or refuses to pay. 

By using a deferred letter of credit, you are sure to receive the payment by a certain date, so that you can plan your business with a more certain cash flow. 

If your buyer offers long payment terms, or has previously made late payments, then this can be extremely useful for you from a security point of view.

Better still, the letter of credit itself can be used as collateral in the meantime, to finance working capital loans that can help cover production and shipping costs.

Sellers can also add the option of discounting, whereby they agree to receive a slightly lower payment for the transaction, albeit at an earlier date.

Usance letter of credit and sight letter of credit – the difference

credit facility letters of credit application form

Where a usance LC is used, once the issuing bank receives documents that comply with the terms of the LC, the issuing bank will accept the draft and agree to transmit the agreed funds at the later maturity date.

Thus, the buyer is provided with a form of credit since they will take receipt of the product but will not need to transfer payment until a future date.

Usance Letters of Credit – use cases

Usance Letters of Credit LC Featured Image SME Guide

The LC will set out the time to maturity and the actual payment date so that both parties can use this as a reference.

The tenor is typically set out as being a certain amount of days following the bill of lading date or following sight.

If it is “following sight” then this will be from the date the documents are received by the issuing bank.

Having a usance LC allows the purchaser to deploy funds into other areas of the business until payment is made.

Application stage: 

When applying for a letter of credit, remember that your application can be rejected due to incorrect or incomplete documentation. 

This could include submission of the wrong documents, typos and other errors, or ambiguity in your application.

You must also consider the difficulty of meeting the terms set out in the letter of credit from the counterparty’s point of view if your application is to be successful.

Payment stage:

Once an application has been approved, the seller should double-check that the quality and quantity of goods meet the requirements set out in the letters of credit before they ship.

Once the goods have arrived, the buyer should double-check the quality and quantity of goods, to ensure that they meet the requirements set out in the letter of credit, before submitting documentation to the banks for confirmation.

As noted above, banks are under no obligation to pay the seller until the right documents or other evidence is presented, and this process generally incurs administrative costs. 

Confirmation and issuing banks normally charge commission and administrative costs for the letter of credit.

How can TFG help?

At Trade Finance Global (TFG), our advisers are experts in all things international trade, and we can help you find the perfect partner bank or financial institution to suit your financing needs.

TFG can advise you on what financing works best for your business, so that you can feel safe and assured during a trade transaction. 

By working TFG, we can help you with all the documentation and procedural requirements, bringing added trust and security to your trade.

Get in touch with our team

About the author(s).

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Marcus Lankford

Marcus Lankford is a Restructuring Advisory Analyst at Kroll. He holds a BA in Economics and Politics, with a core focus on International and Environmental Economics, Political Lobbying and Digital Information at Work.

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Letters of Credit Hub

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  2. Letter of Credit

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  3. What Happens if Letter of Credit is Silent in Regards to the Period of

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  4. Understanding a Letter of Credit with the help of an Example

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  5. What is a Letter of Credit and How Does it Work?

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  6. 10+ Sample Letter Of Credit

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  1. Letter of Credit

COMMENTS

  1. Field 48: Period for Presentation

    Field 48: Period for Presentation: DEFINITION This field specifies the period of time after the date of shipment within which the documents must be presented for payment, acceptance or negotiation. USAGE RULES The period of time is expressed in number of days.

  2. Field 48 ('Period for presentation in days') in Letter of Credit (L/C)

    August 4, 2020 Mukit 3 Comments F48 is an optional field in MT700 swift message of Documentary letter of credit. F48 (Period of Presentation) field defines the period of time in calendar days by which the presentation of documents should be made in the negotiating bank. The beneficiary will do the presentation/negotiation to get the payment.

  3. The Hidden Expiration Date on Every Export Letter of Credit

    Some letters of credit require a presentation period of seven days, some 15, etc. If the letter of credit does not state a presentation date, the exporter has 21 days according to UCP Article 14c. Exporters should be aware of this requirement and feel confident they can work within the stated time period. If not, they should request an amendment.

  4. Letters of Credit

    The only requirement under such an expression (which is undefined in UCP600) and as under ISBP A19g), is for the bank to simply evidence that the presentation has been made within expiry and the amount of drawing does not exceed the available amount under the LC. No other examination need be made. Banks will often check points 1, 2 and 4.

  5. PDF Understanding the Letter of Credit Process

    Role of Documentary Letters of Credit. Foster Global Trade. Pay Beneficiary Quickly after Shipment. Protect Beneficiary against Applicant Payment Risk. Establish a Universally accepted and structured Payment Methodology (UCP 600) Establish a simple and trusted payment method. Allow Buyers to Finance Purchases.

  6. PDF Export Letter of Credit Guide

    Guide For Requesting an Export Letter of Credit. These instructions will provide the buyer with a list of important terms and conditions to be included in the letter of credit that you are requesting. Export Quotation Worksheet. This worksheet is designed to be an example for gathering the basic information required in the preparation of an ...

  7. Letters of Credit Demystified: Who? What? Where? When?

    Most Letters of Credit are governed by UCP 600 and it clearly sets out that all of the banks (issuing, confirming, nominated) set out above have "a maximum of 5 banking days following the day of presentation", to decide if a presentation is complying. When documents are deemed to be complying, payment must be made according to the details ...

  8. Managing payment and discrepancies with a letter of credit

    Where the terms and conditions of the letter of credit are. straightforward and uncomplicated, the reasonable time period would. be much less than the seven days. The issuing bank may contact. the applicant to determine if the applicant wants to waive the. discrepancies and make payment under the letter of credit.

  9. Standby Letters of Credit

    The assignee of the proceeds under a credit has not right to draw thereunder but must wait until the beneficiary makes a complying presentation. Under ISP 98 an assignment of proceeds does not bind the issuer (or other nominated bank) until it has acknowledged the same, and it is under no obligation to give such acknowledgment. [ISP 98 Rule 6. ...

  10. UCP 600 and Letters of Credit

    The Uniform Customs & Practice for Documentary Credits (UCP 600) is a set of rules agreed by the International Chamber of Commerce, which apply to finance institutions which issue Letters of Credit - financial instruments helping companies finance trade. Many banks and lenders are subject to this regulation, which aims to standardise ...

  11. A Comprehensive Guide to Standby Letters of Credit (2021)

    News / Jun 24, 2021 A Comprehensive Guide to Standby Letters of Credit (2021) In this extremely comprehensive guide to standby letters of credit (SBLC), we cover: What a standby letter of credit is Why SBLCs are used more commonly in the USA Risks and considerations to be aware of when using standby letters of credit

  12. Letter of Credit (LC)

    A letter of credit is beneficial for both the parties as it assures the seller that he will receive his funds upon fulfillment of terms of the trade agreement and the buyer can portray his creditworthiness and negotiate longer payment terms, by having a bank back the trade transaction. Features / Characteristics of letter of credit

  13. Letter of Credit and Trade Finance timelines

    The banks (issuing, confirming, nominated) have "a maximum of 5 banking days following the day of presentation" to determine if a presentation is complying. This means that if the issuing / confirming bank has not refused the presentation within that timeline then they are obligated to pay (according to the terms of the LC).

  14. Letters of Credit for Export

    A letter of credit provides an independent payment undertaking of a bank, subject to the presentation of complying documents. For the seller, it is often said that 'the documents are more important than the goods'.

  15. PDF Handouts: Working With Letters of Credit

    Documentary Letter of Credit Requirement. Within three (3) business days following Supplier's written. confirmation of the Purchase Order, Purchaser will arrange for the issuance by a bank (the "Issuing Bank") of a documentary letter of credit in the amount of the Purchase Price stated in this Agreement plus five percent (5%), to Supplier ...

  16. Letter of Credit: What It Is, Examples, and How One Is Used

    A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. If the buyer is unable...

  17. Field 31D: Date and Place of Expiry

    A credit must state an expiry date for presentation. An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation. The place of the bank with which the credit is available is the place for presentation. The place for presentation under a credit available with any bank is that of any bank.

  18. Letter of Credit: On the basis of the documents alone

    According to article 14 of the UCP 600, banks are in fact obliged to exclusively evaluate that the content of the document presented "appears - on the basis of the documents alone" and "on its face" - "to fulfil the function of the document in conflict with the data stated in the credit or in other required documents.".

  19. Field 48: Period for Presentation

    According to the letter of credit rules a presentation consists of a transport document should be presented to the nominated bank within 21 days... Field 48: Period for Presentation Ozgur Eker (CDCS) - 3 October 2018 What is Field 48: Period for Presentation?

  20. Commercial, Sample Agreement

    The following sample standby letter of credit is premised on a fact pattern of a bank's customer entering into a purchase of goods or other commercial contract with a seller. The bank issues a standby letter of credit to the seller, to be available in the event of nonpayment or other default under the contract by the buyer.

  21. Usance letters of credit

    A usance or deferred letter of credit is a type of letter of credit used often in trade finance whereby the issuing bank must make payment by a preset date. Once a sale contract is agreed upon between a buyer and a seller, the buyer can request that a letter of credit be used to secure the transaction. The buyer will nominate their bank of ...