Opening a Letter of Credit
Key's Global Trade Services Group assists clients in all technical aspects of letter of credit transactions. We issue letters of credit on behalf of clients who import goods and services to the United States, assuring payment to their suppliers upon presentation of documents in compliance with the terms of the letter of credit. Through the letter of credit arrangement, we actually substitute our own credit for that of the client, and then pay the seller for goods and services rendered. When payment is made, we debit the client's account.
When opening a letter of credit, the wording in the letter of credit should be specific, but not too detailed. The more detailed a letter of credit is, the more likely the seller will reject it, as its terms may be too difficult to meet. Likewise, the buyer should define in detail what is being shipped and purchased. In specifying documents required by the seller, it is important to specify those that are required for customs clearance and those that correspond to the agreement, format purchase order, or sales contract agreed to between buyer and seller.
Typical Documentation Required
- Bill of Lading (a.k.a. title document, since possession of an original bill of lading is equivalent to having the title of the goods in possession of the holder)
- Commercial Invoice
- Consular Invoice
- Certificate of Origin
- Draft (a.k.a. Bill of Exchange)
Other documents may include an Inspection Certificate and advice from the shipper regarding shipment information.
Documentary, or trade, letters of credit are usually irrevocable credits. The credit can be confirmed or unconfirmed, depending on the:
- Generally accepted payment terms in the buyer's country
- Amount of the goods covered by the credit
- Demand for the goods
- Degree of country risk the exporter is willing to take
To apply for a letter of credit to be opened, the importer needs to have a credit line with a bank and complete a letter of credit application.
The letter of credit application should containing the following information:
- Beneficiary — Indicate the company name and complete address of the exporter.
- Amount — State the actual amount of the credit, including any freight or insurance costs as agreed to by both parties. Approximate or 'about' amounts are used to indicate an acceptable level of 10 percent plus or minus the stated amount.
- Validity or Expiry Date — Indicate the time required by the exporter to prepare the shipment and the necessary documents for presentation to the bank.
- Advising Bank or Beneficiary's Bank — It is optional to indicate the exporter's bank. This may be left blank so that the issuing bank can freely select an advising bank. If the exporter specified a particular advising bank, it is customary that the buyer lists this bank on the letter of credit application.
- Tenor or Payment Availability — The tenor of the credit determines when payment is available. Sight drafts call for payment upon shipment and examination of compliant documents. Time drafts or deferred payment may be used as agreed to in advance between buyer and seller, which allow for a specified period of time to elapse from shipment to payment.
- Required Documents — The documents required for the buyer specifies presentation and payment to the exporter.
- Description of Goods — This should be a short, concise description of the goods being shipped including quantity. If the credit allows for an approximate amount, it is acceptable that the goods shipped be plus or minus 10 percent in quantity as well.
- Other Conditions to Fulfill — State any additional conditions required by the exporter. If the credit is transferable, it will be indicated in this section of the letter of credit application.