| (1) The existence of transportation documents |
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| - A method of L/C which an exporter presents the transportation documents (B/L and insurance policy etc.) issued by third parties, and a bank reimburse the documents to make L/C payment. |
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| 1. If the documents an exporter has to present to a bank for Nego is not the transportation documents but just simple receipts or statement issued by an exporter or a importer, it is called Clean L/C and it is again classified in detail as following depends on the existence of cargos. |
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2. Stand-by L/C
- A kind of Clean L/C to secure or fund issued as unusual L/C that when a debtor default to perform a contract, a creditor may request of a security to activate to the person guaranteed.
- The purpose of L/C issuance is to accomodate finance or to render services not in undertaking a cargo.
- It is normally used when a main office is guaranteeing the foreign branch's local finance or when procuring performance bond to participating international bid or to deposit for a contract.
- There are stand-by L/C, bid-bond stand-by L/C and performance bond.
- Stand-by L/C and a letter of payment guarantee (L/G, Letter of payment
Guarantee) |
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a. If inserting Stand-by L/C applying wording, UCP is applied to scandalize
the issuing form and clarify the right of parties and the relations with
obligation
b. but since L/G is issued on the base a contract, the contents of suretyship
obligation of L/G can be complicated according to a contract,
c. and Stand-by L/C requires specific documents of payment obligation,
Notice of Default, Draft,
d. when requesting payment in accordance with L/G, a creditor should be
able to present a proof that a debtor has violated a contract in order for a guaranteeing bank to pay a forfeit.
e. Although the payment obligation of Stand-by L/C is executed by the
reimbursement clause
f. the performance method for a suretyship obligation of L/G is by remit or
other various method per disbursement demand. |
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| 3. Non-draft L/C is classified as following depends on its formality. |
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a. Documentary clean L/C
- When an exporter is conducting Nego, all that is needed is bill of change issued by him/herself. The only difference is it requires no incidental shipping document (B/L, insurance policy and invoice etc.) which is the only difference from draft L/C and the rest is same as documentary L/C.
- Since shipping documents are to be directly sent to a importer from an exporter, the L/C is establishable only when a importer and an opening bank is maintaining the special relations (i.e : If paying L/C payment at the time of opening, if the companies are interrelated company etc.).
b. Cargo receipt L/C with the fishing industry
- When the fishing boats and such are directly delivering the seizure marine products from the open sea to a business party in the foreign country, the documents or a receipt obtained from the business party is to be Nego.
c. Local L/C
- Since domestic L/C is a transaction within the country, the standard documents to be presented for Nego are the receipt from the goods received party not the transportation documents and the local L/C handling regulation is applied rather than UCP regulations. |
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(2) Reserving the right of cancellation |
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- If Revocable wording is indicated at the top corner of the left L/C, an opening bank may exercise the right of cancellation without the consent of a beneficiary unless there is a Nego notification for L/C (The Article No. 6 of UCP).
- Validity to exercise the right of cancellation : Possible until the arrival of a purchasing bank's Nego notification to an opening bank.
- Normally, those revocable L/C is restricted by a purchasing bank or established only when nominated. |
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| - If revocable wording is not indicated on L/C, everything else is regarded as irrevocable L/C. Without the consent of a beneficiary, the L/C will not be canceled or modified. |
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| <3> Conditional irrevocable L/C |
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- A L/C that contains information in the special Instruction column that the execution of the said L/C can be control by an opening bank or the unilateral conduct of an applicant
- When such a L/C is received, an exporter must throughly examine of the applicant's credibility and sincerity. |
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| Ex)-Shipment is subject to further instruction |
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| -The invoice must be counter-signed by buyer's agent xxx Co. |
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(3) Recourse right of an purchasing bank |
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| - If a Nego bank fail to receive L/C payment from an opening bank, the payment can be requested to the beneficiary. |
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| - If Without Recourse wording is indicated on L/C, a purchasing bank my not exercise the right to recourse for the clean Nego parts if a beneficiary indicates Without Recourse on bill of change while conducting Nego. |
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(4) Simplicity of payment settling method |
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| - If a purchasing bank is Depositary Correspondent Bank, L/C payment settling between the banks is simple by adjusting the banks' accounts. |
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- When a purchasing bank receives payment from an opening bank, an opening bank and purchasing bank agree to arrange an opening bank to remit L/C payment to the nominated specific bank after sending documents. When the remittance is completed, a purchasing bank settle payment to a beneficiary.
- The method is largely used if a purchasing bank is not the Depositary Correspondent Bank of opening bank or when an opening bank handles L/C with large amount or if intended to settle payment after receiving payment from an applicant, |
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- If the currency of L/C is currency from third countries or if the Depositary Correspondent Bank of an opening bank is not in the exporting country (base on city), a purchasing bank presents bill of exchange for reimbursement that is issued by an exporter to the reimbursing bank which was already nominated in L/C settle payment.
- At this time, a purchasing bank will send the shipping documents to an opening bank and present bill of change for reimbursement to the nominated reimbursing bank and upon receiving the reimbursing bank will settle L/C payment finally according to the details of an opening bank's reimbursement authorization. |
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(5) Depends on the payment disbursement period |
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| - A cash transaction L/C that if a purchasing bank sends the shipping documents from the exporting country, an opening bank should carry over the shipping documents to a importer as long as the documents are free of vice and the importer settles L/C by reimbursing the documents. |
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- When an applicant is taking over the shipping documents from an opening bank, it is referring to the deferred payment basis which requires to settle L/C payment due to a certain period fixed by L/C term has arrived.
- Usance L/C is when an exporter request a usance draft nego, it classifies to usance nego, taker over or Deferred Payment Letter of Credit depends on the bank at export location's handling method conditions, |
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- L/C that divided the shipping or payment period in a certain period.
- An agreement that grants an exporter to ship the goods in number of times is called Installment shipment credit
- An agreement that grants an importer to pay only the deposit portion when receiving the shipping documents and the balance to be paid per certain divided period is called installment payment credit.
- For installment shipping, if an exporter fail to execute shipping duty within the fixed period of time, all the shipping including the said shipping becomes invalid.
- Installment payment is to be used to reduce a importer's payment burden when L/C amount is a large amount of money and some times up to the term of loan can be endowed. |
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| <4> advance payment L/C (red clause L/C) |
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- This L/C is to help an exporter to receive some fixed amount of money in advance at the same time of L/C opening for the convenience of export when an exporter's fund reserve is insufficient and if the export goods are agriculture and marine products that requires to go through a process of gathering.
- This L/C is called Red clause L/C because the terms were written in red ink and when accepting advance payment, an exporter is to issue a draft only for the cash advance payment part without the shipping documents.
- Examples of red clause |
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- To enable the beneficiary to pay for the merchandise for the purchase and shipment of which this credit is opened.
xx Bank(advising bank) may make advances to the beneficiary up to the aggregate amount of xx% of this credit at the request of and against the beneficiary's receipt stating that the advances are to be used to pay for the purchase and shipment of the merchandise covered by this credit.
Document received within validity of letter of credit are to be reduced from red clause.
Interests are for account of the beneficiary.
The advances with interest are chargeable as withdrawals against this credit should they not be repaid by the beneficiary prior to the expiration of this credit.
All red clause advances should be endorsed on the reverse of the original letter of credit and advised to us in writing. |
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(6) Nominated condition of a purchasing bank |
| <1> Negotiation L/C (open L/C, general L/C ; freely negotiating L/C) |
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- A L/C for an exporter to select a Nego bank to Nego shipping documents as the exporter pleases.
- Beneficiary and third parties in accordance with endorsement of a beneficiary may Nego.
- An exporter must present bill of change when nego.
- Payment undertaking wording
- "We hereby agree with the drawer, endorser and bona-fide holder of drafts drawn under and in compliance with the terms of this credit that such drafts shall be duly honored on presentation and surrender of the documents" |
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| <2> Straight L/C (payment L/C ; nominated L/C) |
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- Referring to the nominated L/C that prohibits Nego by other banks since the purchasing bank of the exporting location nominated the purchasing bank in the L/C in advance.
- Bank that controls Nego at the exporting location is called a Paying Bank and the special trait of the L/C is non-bill, non-endorsement.
- A beneficiary is suppose to present the shipping documents personally to the opening bank or drawee bank and receive L/C payment.
- As long as L/C is not requiring in a written statement, a bill of change is not necessarily to present. |
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| <3> Restricted L/C (Special L/C) |
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- Although the right to select the 1st purchasing bank of an exporter is not restricted, the last purchasing bank that sends the shipping documents from the exporting location to the opening bank is already nominated in L/C.
- The 1st bank that Nego the documents from an exporter shoulders burden to Renego the documents to the nominated bank. |
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Ex)
1. Negotiation under this credit is restricted to xx Bank(Nego restricted L/C)
2. Payment under this credit is restricted to xx Bank(Payment restricted L/C)
3. Documents must be presented to the drawee xx Bank for payment not later than xx date.(Straight L/C)
4. Reimbursement will be effected to you upon receiving your advice of negotiation(Reimbursement restricted L/C) |
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(7) Approval condition of the entire/partial Nego amount |
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- L/C that issue a draft on the entire commercial invoice amount presented by
an exporter.
- Whether the following indication wording is on or not on L/C, interpret it as a draft issuing condition on the entire amount.
Ex)-"~by negotiation of your draft at sight drawn on ~ for 100% of Invoice value" |
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- When importing Bulky cargo such as machineries or grains, terms are indicated in
the L/C as "When conducting Nego, pay only the part amount of the invoice amount and the balance follow by an inspection as per the result".
Ex)-After payment 90% of invoice value the documents are to be delivered to(buyer) by(Issuing Bank) to arrange for sampling, weighing and testing of merchandise.
Upon receipt by(Issuing Bank) of written statement from(buyer) stating that the merchandise has been sampled and weighed(Surveyor, xxx)and has been tested by(Inspector xxx), the remaining 10% of invoice value or any part thereof will be paid by(Issuing Bank). Weights by(Surveyer, xxx)and analysis by(Inspector, xxx) will be considered final. |
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(8) Depends on who the usance call loan is, |
| <1> Seller's usance L/C (sipper's usance L/C, trade acceptance L/C) |
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- If the subject to usance call with usance L/C that allows payment to be delay until certain period of time to a importer is an exporter. it is called the Seller's
usance. |
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- If the subject to usance call loan during the usance period is either a purchasing bank or an opening bank, it is called the Banker's usance,
- If the subject to a draft acceptance is a bank in the foreign country, it is called Overseas Banker's usance L/C
- If the subject is an opening bank, it is called the Domestic Banker's usance L/C.
- With this L/C, an export may Nego as same as at sight term except that it requires to indicate usance period on a draft. |
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<3> Buyer's usance L/C
<4> The common special traits of USANCE L/C |
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- Usance period is indicated on L/C .
- When accounts receivable bill is issued, the name of recipient of the bill is to be stated on L/C.
- Those acceptance indicated bill is possible for discount in a fiance market. |
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(9) Condition to utilize a method of period |
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- Since the L/C is indicating the special bank to take charge of a usance bill at the exporting location as an acceptance bank, an exporter must request the acceptance of a usance bill at the nominated bank and the acceptance bank should mark acceptance on the bill of change for acceptance after inspecting the documents presented by an exporter and return it to an exporter.
- An accepting bank perform payment against the presented bill on the bill maturity date and receive compensation from an opening bank the disbursed payment.
- These kinds of L/C is normally usance, bill and non-endorsement. |
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| - Since a Nego bank to Nego a usance bill is not nominated on L/C, an exporter may request Nego against a bill at any bank the one pleases and the bank conducted Nego may receive reimbursement from an opening bank on the bill's maturity date. |
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- Usance method is same as acceptance L/C but this L/C does not issue a bill and a deferred payment Ban exercise paying affairs in virtue of the office.
- For the L/C the documents inspection bank in the exporting location is usually an open bank's branch. A Deferred paying bank issue payment undertaking statement to an exporter in virtue of the office after documents inspection however, the statement is not a marketable securities therefore, an exporter may not use it for discount before the period expires.
- Also, the Deferred payment is to be classified as deferred sight L/C or deferred payment L/C depends on the interest or exchange risk accompanying condition. |
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1. Deferred sight L/C
- A method use by a importer on deferred payment base at sight bill price.
2. Deferred payment L/C
- A importer shoulders interest as deferred payment.
Main)
-The difference of Deferred payment and Installment payment
- installment payment if not acknowledgeable if it is deferred base but the installment payment on Installment is the principle and the period for installment payment is fixed as more than 1 year and less than 3 years.
- Reason why deferred payment L/C is non-bill
- Export using deferred payment base requires bill but Europe made is as No-bill usance L/C in away to avoid the stamp tax when issuing large amount of bill, and as of a proof of deferred, a paying bank issue a certificate of payment to an exporter. |
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(10) Depends on transferability |
- Transferable as long as transfer possible wording is in L/C.
- Only 1 time transfer is possible, and installment transferring is possible only for installment shipping.
<1> Transferable L/C
<2> non-transferable L/C |
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(11) Depends on the confirmation |
- If a beneficiary suspects a opening bank's international credibility or the country where a importer is located has unstable politics or economics (significantly lacking with the foreign currency) the beneficiary is to request for L/C confirmation and normally a notification is followed by an advising bank's confirmation upon a request of an opening bank.
- A confirming bank shoulders the same payment obligation as an opening bank.
<1> Confirmed L/C
<2> Unconfirmed L/C |
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(12) Special L/C |
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- When the first established L/C is performed, another L/C in the same amount will be automatically renewed after certain period elapse. Per certain period, it is determined by the transaction parties when there is a payment notification and when there is no payment refusal notification even after certain period has elapsed after Nego has been performed.
- With revolving method, there is Cumulative method where no-performed portion gets carry over to the next term and a Non-Cumulative method where those non performed parts in the said period will automatically canceled without carrying over to next term.
- For revolving L/C the overall amount should be clearly stated as per L/C. - The overall amount will be determined by the transaction parties however, an opening bank's consent is required.
- Examples of revolving words
- The amount of drawings under this credit becomes automatically reinstated on payment by us. Draft drawn under this credit must not exceed to US$~ in any calendar month. |
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- If a beneficiary of the master L/C who is not a manufacturer received non-transferable L/C from a foreign country, this is a method to establish the 2nd L/C under its own responsibility by back to back the master L/C to perform the L/C in amicable way.
- When a 2nd L/C is established at the country of master L/C's beneficiary subject to a native in the country, it will be a Sub L/C if established to the order third countries. The establishing range of Back to back L/C is restricted to the master L/C range but regardless of L/C number in divided method. |
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| <3> Bonded processing L/C |
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- Bonded processing trading is when an exporter manufacture process the raw materials in a bonded processing areas for exporting purpose which is provided by a importer by importing them using non-draft and for such method of trading, L/C is open only for the processing fee.
Ex)
-...US$10,000. available by your draft at sight for processing fee of under mentioned merchandise... |
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| <4> Counter trade L/C (compensation trade L/C ; liaison trade L/C) |
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- Liaison trading is when a importer is facing difficulties and payment with an effective money is difficult due to the importing country's foreign currency problem, the importer will agree for an exporter to establish Counter L/C to balance the both countries' export/import transaction.
- The Counter L/C establishing requirement can be classified as the following 3 items.
1. Back to back method |
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| - A kind of L/C that inserts wording "The L/C is effective if an exporter open Counter L/C subject to a importer within xx date from the date L/C received " as a L/C terms. |
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| - A restriction method when an export has been performed as L/C terms and a importer settles payment, the payment is to deposit to a Escrow A/C(account) as per the parties agreement, and the money within the Escrow's account could be taken out as the settling fiance when an exporter open a counter L/C subject to a importer |
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- A transaction method where an exporter/importer both open L/C for the same amount. A method that allow to Nego when an exporter issue a confirmation to a importer until when a counter L/C will established,
- And if the confirmation issuing exporter's credibility is doubtful, a guarantee of a bank could be requested.
Ex)
-This Letter of Credit shall not be available unless and until standard prime banker's Letter of credit in favor of ~ for account of ~for an aggregate amount of ~ have been established pursuant to the contract of ~ |
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Trade Helper 
L/C(Letter of Credit)
{1} Letter of credit
[6] The kinds of L/C 
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