Letters of credit
A guarantee for your operations abroad.
What are Letters of Credit?
A Letter of Credit can be defined as any agreement by which a Bank (Issuer), acting at the request and under instructions of its Customer (Ordering party/Importer), assumes an irrevocable commitment to make a payment to a Payee (Exporter) directly or through an Intermediary Bank upon presentation of the required documents, provided that all credit terms and conditions are met.
“Credit” any irrevocable agreement, however designated or described, constituting a final commitment by the issuing bank to properly honor a payment.
“Letters” refers to the set of documents that substantiate the commercial transaction and constitute the counterparty of the credit to the bank.
Letters of credit
Different types of Documentary Credits
Advantages for the Exporter:
- “Irrevocable”: Credits that cannot be changed or canceled without the agreement of all concerned parties.
- “Unverified (Notified) Credits”: Credits where the bank designated by the issuing bank (notifier) merely notifies the payee without any commitment or responsibility on its part, safeguarding only the authenticity of the credit.
- “Confirmed”: Credits in which the confirming bank assumes the same obligations as the issuing bank, provided that all the terms and conditions of the letter of credit have been fulfilled. It can be said that there is "double payment guarantee".
- Transferable or non-transferable.
Advantages for the Importer:
- Punctuality in collection, if it complies with the provisions of the credit;
- Security in collection, through the payment obligation of the issuing bank, provided that all terms and conditions of the credit are fulfilled;
- Ease of obtaining financing (with a "guarantee" from the credit itself);
- Political and/or economic risk coverage if the credit is confirmed by the Bank;
- It allows for market diversification: new business opportunities in previously unthinkable markets.
- Security in knowing that the documents requested for dispatch are the correct ones;
- Control over delivery dates and conditions;
- Security in knowing that payment will only be made by the Bank if the terms and conditions mentioned in the credit are strictly fulfilled by the payee (exporter);
- Proves its financial capacity and solvency to the exporter;
- Eliminates the need of paying in advance.
How does it work?
Forms of use/payment of documentary credits:
- In cash: Credit stipulating immediate payment to the payee (exporter) if the documents submitted under the credit are in accordance with the terms and conditions stipulated therein.
- By deferred payment: Credit stipulating payment to the payee within a specified term.
- Mixed: Credit that has underlying payments in cash and deferred payments. The exporter receives part of the credit in cash and the remainder on credit.
- Ordering party: Importer who gives instructions to the Bank to open the credit
- Issuing party: Bank that opens the credit and agrees to pay the payee
- Notifying party: Bank that notifies the payee of the credit without commitment (except to verify its authenticity)
- Confirming party: Bank that adds a letter of credit to the "confirmation" and assumes joint responsibility with the issuing bank to pay the payee.
- Payee: Exporter for whom the credit is opened.
- See the price list for Documentary Credits in point 16.2