Documentary credit

Definition Thoại LamLetter of credit A letter issued by a bank upon request of the bank’s client, the importer, in which the banks promises to pay certain amount of money within a certa

Mode of Payment:

CREDIT

GROUP 6

1 Definition Thoại Lam

Letter of credit

A letter issued by a bank upon request of the bank’s

client, the importer, in which the banks promises to pay certain amount

of money within a certain period of time to a beneficiary on the

condition that he presents a set of document in strict

compliance with the terms and conditions set in that letter

in whose favour a L/C is issued

Which advises/ authorized to advise a beneficiary of the availibility of a credit

& its terms

$

Confirming bank

$

Paying bank

2 Procedure Quang Huy

 Beneficiary ships

goods

 Assemble documents against L/C

 Forward documents Pay

 Ask for payment & release

documents

 Pay

Huỳnh Như

3 Components of an L/C

Huỳnh Như

Name, address of relevant parties to L/C

L/C amount

Huỳnh Như

Goods description

Huỳnh Như

Documents to be presented

Huỳnh Như

Documents to be presented

Minh Nguyệt

4 Main types of L/C

Basing on the nature of the L/C

Basing on time of payment

Special L/C

Minh Nguyệt

4 Main types of L/C

Basing on the nature of the L/C

Revocable L/C

can be modified or canceled anytime before it has been

performed without seeking the beneficiary's consent

 limited security payment method to the beneficiaries

 not frequently used in international trade

Minh Nguyệt

4 Main types of L/C

The issuing bank undertakes not to revoke the credit before a specific time or event Every amendment at least requires beneficiary's

acceptance in order to be effective

Basing on the nature of the L/C

Irrevocable L/C

Thanh Huyền

4 Main types of L/C

Special L/C

Standby L/C

a bank issues on behalf of its customer to serve as a guarantee

to the beneficiary of the letter of credit that the bank's customer will perform a specified contract with the beneficiary

Phương Hằng

5 Advantages

Benefits to

seller/exporter buyer/importer bank

Phương Hằng

5 Advantages

To seller/exporter

 Guaranteed payment

 Exporter can avoid the political risk of the importer’s country

 Reducing the production risk

 Stability in exchange rate

Phương Hằng

5 Advantages

To buyer/importer

• Helps reduce the risk of non-performance of Exporter

• Avoids partial pre-payments or deposits to the seller 

• Control the shipping dates for the goods being purchased

• Purchasing Power

• Credit Worthiness

Hoàng Ân

6 Disadvantages

To seller/exporter

 Ties up the business line

 Costs (issuing, negotiating…) can make L/C expensive

 Seller’s bank controls the shipping documents

 The goods shipped may not conform to the order

Hoàng Ân

6 Disadvantages

To buyer/importer

• Strict compliance is required for payment

• Still subject to political risk of the country the L/C originates

• Subject to the financial strength and stability of the issuing bank

• The paperwork can be very time consuming

• More expensive than other methods of payments (receiving, negotiating fees )