Letter of credit is an agreement between issuing bank (bank of the buyer), on behalf of one of its customers (applicant or buyer), authorizing another bank, known as the advising bank (bank of the seller), to make payment to the(seller). The issuing bank, on the request of its customer (applicant), issues the letter of credit. The issuing bank makes a commitment to honor drawings made under the credit. The beneficiary is usually the provider of goods or services.Letter of Credit elements:
It is well known that each bank has its own formula in the design of the letter of credit, but all of these formulas in banks of all countries are subject to specific international standards
Letter of credit content must include the following:
Applicant:
the buyer who need to purchase goods or services, apply the LC to the issuing bank.
the buyer who need to purchase goods or services, apply the LC to the issuing bank.
The applicant fills the LC paper (agreement) with all information related to his company (company name, phone,
fax...etc.) also he fill same information related to the seller and other conditions.
fax...etc.) also he fill same information related to the seller and other conditions.
Beneficiary:
the seller who provides goods or services and receives a swift copy of LC from his bank (advising bank) through issuing bank (bank of the buyer)
the seller who provides goods or services and receives a swift copy of LC from his bank (advising bank) through issuing bank (bank of the buyer)
Total amount of the order also added into LC
Port of loading: is a place (port) while the seller load the cargo on board
Port of destination: is a place (port) while the buyer receive goods which shipped by the seller
Documents:
Documents are the most important terms required to clear goods from customs after goods arriving and this operation called "customs clearance", the required documents to be requested by the applicant and mentioned in LC are:
And any other additional certificates such as certificate of insurance, inspection certificate and whatever
Shipping Terms:
When you decide to drive for somewhere you will look for the best ways can take you to your destination easily, also when you decide to choose a way to ship your goods, if you need it safer you can choose CIF (Cost, Insurance and Freight).
These types of shipping defined as The Incoterms (International Commercial Terms) are a universally recognized set of definitions of international trade terms, such as FOB, CFR and CIF.
Incoterms are used throughout the world and are accepted by banks, customs authorities, all types of carriers, transportation intermediaries and financial institutions.
In the below is a list of the most common Incoterms:
FCA (Free Carrier)
The goods cleared by the seller, exporter, and manufacturer for export and then delivered to the carrier specified by the buyer at the specified place. If the specified place is the seller’s factory, the seller will be in charge of loading the goods onto the transport vehicle. If the specified place is any other location, the seller will not be responsible for the transportation of goods.
Carrier can be a shipping line, an airline, a trucking firm, a railway or a freight forwarder.
FAS (Free Alongside Ship):
The seller clears the goods for export then places them alongside the vessel at the “specified port of shipment”. The buyer will be responsible for the loading fee, the main carriage, the cargo insurance and other costs implicated.
LCs can also be used in the payment terms of FAS transactions.
DDP (Delivered Duty Paid):
The seller clears the goods and makes them available to the buyer at the specified place of destination, cleared for import but not unloaded from the transport vehicle.
The exporter assumes therefore all responsibilities for delivering goods, including important clearance, duties and other costs payable upon import.
DDU (Delivered Duty Unpaid):
The seller also clears the goods for export and makes them available to the buyer at the destination place. However, cargo remains un-cleared for import. The buyer bears the import customs clearance, duties, administrative charges and any other costs upon import as well as the transport to the final destination.
The above-defined terms are a brief summary of the Chamber of Commerce Incoterms in their latest publication.
There are some other terms issued by the ICC but they are not as frequently used as the ones just mentioned. These terms are:
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid To)
- DAF (Delivered At Frontier)
- DES (Delivered Ex Ship)
- DEQ (Delivered Ex Quay)
Note: the importer chooses Terms which suits him to be added into LC terms, most of shipping terms are no longer useful for importers due to high risk included.
The most popular terms in using are (FOB, CFR, and CIF).
Previous Article
Post a Comment