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- Letter of Credit
Letter of Credit
Guarantee for lowering risks of purchase / sales transactions
- Lower risk for parties involved in purchase / sales transaction
- Buyer can receive short-term bank financing (discounting)
- Operation regulated by regulations issued by the International Chamber of Commerce (ICC)
Exchange of goods and services in international market is a rather complex and risky process: goods and financial resources are exchanged outside the borders of the country and is often connected with concerns about whether sellers and buyers are able to respect mutually binding commitments. SEB bank Letter of Credit (as well as Bank Guarantee/Pledge or Documentary Collection) will considerably lower your company import or export deal risks and will provide guarantees to both exporters and importers of goods.
In what cases SEB bank Letter of Credit would be necessary
- You have a new international business partner and the business relationship has not yet been tested;
- Your cooperation partner requests this type of transaction;
- You as a seller are not confident about the buyer's ability to pay;
- You as a buyer are not confident that the seller will be able to deliver goods;
- If legislation of one of the transaction partners – buyer or seller – requires Letter of Credit as a mandatory form of payment;
- The objects of the agreement are medium or large projects or goods produced by special order;
- Economic or political situation in the country of buyer or seller is unstable;
- Transactions are made with partners in distant countries (for instance, China, India, Japan, Korea and others) – countries from which deliveries take relatively long time and you do not have specific knowledge about their traditions, legislation and other nuances;
- If goods are appropriate for storage;
- Minimal time for making a transaction is one month, average – 3 months, but there are also transactions that can last up to one year.
What is guaranteed by the Letter of Credit
Letter of Credit for both transaction partners – for exporter of goods and for importer of goods – provides a guarantee of payment for goods or services. The payment is being made in exchange for presenting documents confirming the delivery of goods and only when all the obligations, set fourth in the Letter of Credit, have been fulfilled:
- The seller has guaranteed payment in exchange for documents that are listed in the Letter of Credit, confirming that the goods have been shipped or services have been provided;
- The buyer receives a guarantee that the seller will not receive the payment, if he will fail to ship goods or provide services in accordance with the conditions in the Letter of Credit.
Letter of Credit is a separate transaction, independent of trade or other agreements – all sides involved in Letter of Credit transaction are working only with documents, not goods or services that these documents refer to. The bank undertakes risk about your transaction by issuing a Letter of Credit, therefore the service fee for Letter of Credit will be comparatively more expensive than the alternative – Documentary Collection. Letter of Credit does not exclude other means of payment – you can combine it with the usual order of payments. International transactions practice shows that most often it is the case – for instance, you can include 10% advance payment in the agreement, 70 % payment with Letter of Credit and 20% after payment etc.
Letter of Credit is a secure and internationally recognized form of payment – it is regulated by the regulations of the International Chamber of Commerce "Best Practices for Transitions with Credit Letters (UCP 600, 2007 rev.)".
Letter of Credit advantages, if you are a seller in the transaction
- You will receive payment for goods in a timely manner. If you submit all the documents envisaged in the Letter of Credit, the byer's bank is guaranteed to pay out the amount indicated in the Letter of Credit to you. You as a seller are not dependent on the byer's financial situation or the political situation in the payer's country – the bank guarantees making the payment in accordance with the conditions stated in the Letter of Credit.
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When using Letter of Credit, you will be able to better manage the company financial flow. You can offer to the buyer to use the delayed payment, and the bank can offer you the discounting of the payment at the time that is best for you.
Read more about Discounting of Letters of Credit
Advantages of Letter of Credit, if you are a buyer in the transaction
- Transaction does not require pre-payment (advance).
- You will receive goods or services on time. The seller, in order to receive payment, will have to fulfill all conditions set out in the Letter of Credit.
For lowering transaction risks you can choose also other trade financing transactions, for instance, Documentary Collection or Bank Guarantee.
Read more about Documentary Collection
Read more about Bank Guarantee
Comparison of Letter of Credit, Bank Guarantee and Documentary Collection
|
Documentary Collection |
Letter of Credit |
Bank Guarantee /Pledge |
|---|---|---|
|
Type of payment |
Type of payment |
Instrument for limiting risk |
|
Payment for trading documents |
Payment for trading documents |
Takes place without making a payment |
|
Documents are not returned to the buyer without payment or pledge to pay for goods within a certain time frame |
Documents are not returned to the buyer without payment or pledge to pay for goods within a certain time frame |
Documents can be requested only in case of guarantee payment
|
|
Bank does not have a commitment to pay |
Bank has a commitment to pay |
Bank has a commitment to pay |
What type of Letter of Credit to choose
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Letters of Credit for various transactions can differ with the level of security and with the time frame during which the bank takes over the risk of the transaction. Bank specialist will help you choose the most appropriate one for each transaction. Most often used Letters of Credit are:
- Irrevocable Letter of Credit is a payment document that issuing authority cannot revoke or change its conditions without seller's consent. Seller' s bank in this case announces to the seller about opening of Irrevocable Letter of Credit on his behalf, and the announcing bank does not have an obligation to issue payment against documents submitted by the seller.
- Confirmed Irrevocable Letter of Credit is another – confirming bank's – Letter of Credit confirmation for irrevocable obligation (in addition to Letter of Credit issuing authority obligation) to pay for documents, it they are fully correspond to the conditions of the Letter of Credit.
- Transferable Letter of Credit issued in cases, if buyer, seller and mediator are involved in the transaction.
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Stand-by Letter of Credit is a bank guarantee issued in the form of a bank guarantee that operates in accordance with internationally accepted rules of operations with Letters of Credit. Similar to bank Guarantee, Stand-by Letter of Credit is not a form of payment but a guarantee document, confirming that the seller will receive payment, if buyer will settle obligations stated in the Letter of Credit. Most often Stand-by Letter of Credit is used in transactions with the United States, where it serves as an alternative to a bank guarantee.
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Letters of Credit can differ also with the form of payment – you can choose the most appropriate payment for your transaction.
- At sight is most often used form of Letter of Credit, when seller can receive payment immediately after submitting documents agreed in the Letter of Credit to the bank, if all conditions of the Letter of Credit are fulfilled.
- By deferred payment means that seller will receive the payment after a certain time period – on the date or term set in the Letter of Credit (and not when submitting documents to the bank). The bank undertakes to pay the payment on a certain term, but the buyer receives documents required by the Letter of Credit before the payment. Most often the Letter of Credit term for transferring the money is set as number of days after receiving documents listed in the Letter of Credit or transportation documents.
- By acceptance means that the bank accepts trats or transportation bill of exchange and thus agrees to pay it in a certain term.
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By negotiation means that the bank buys documents from the client, immediately paying out the money and, in accordance with the Letter of Credit, awaits payment from the Letter of Credit issuing bank.
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Possible Letter of Credit types of arrangement:
- Money deposit – Open deposit at the bank;
- Real estate mortgage;
- Company actives commercial pledge;
- Other type of arrangement that is acceptable to the bank.
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Buyer and seller conclude a trade agreement, agreeing on delivery of goods, quantity, quality and payment that will be made with a Letter of Credit.
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Buyer delegates its bank (issuing bank) to open a Letter of Credit on behalf of seller in accordance with conditions agreed by both parties. Letter of Credit can include in your opinion most important conditions of the transaction – description of goods, price per unit, term of payment and a list of documents that the seller has to submit to the bank. The bank will evaluate your security.
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The issuing bank sends the Letter of Credit to announcing bank that usually is located in the country where the seller of goods is registered.
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Seller's bank (announcing bank) announces to the seller about the opened Letter of Credit and makes aware of its conditions.
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When conditions of the Letter of Credit are received, the seller compares them with the trade agreement, If Letter of Credit does not correspond to the requirements of the agreement, the seller has the right to require changes in the Letter of Credit. Please note that Letter of Credit is a document that cannot be revoked therefore it cannot be cancelled or annulled without agreement from all parties.
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If the Letter of Credit corresponds to the requirements of the agreement, the seller sends goods to the buyer and submits documents required in the Letter of Credit to the announcing bank.
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Announcing bank checks the submitted documents. If they correspond to the conditions of the Letter of Credit, the bank can pay for them in the form agreed on in the Letter of Credit – by making immediate or deferred payment, by acceptance or by negotiation of Letter of Credit documents.
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Announcing bank sends the documents to the issuing bank. After repeated check of the documents the issuing bank makes payment to the announcing bank that makes settlement with the seller.
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Issuing bank takes off the respective amount from the buyers account and returns the documents to the buyer, as a result of which the goods are transferred for the use of the buyer.
| In force from | In force to | |
|---|---|---|
| Irrevocable Letter of credit application |
26.01.2021
|
In force
|
| Provisions for the issue of letters of credit |
13.02.2017
|
In force
|
| Services | Fees |
|---|---|
| Letter of credit line1 | |
| Processing of the Letter of credit line, increasing the limit | 0,5%, min 150.00 EUR |
| Term prolongation for a Letter of credit line | 0,2%, min 150.00 EUR |
| Other changes to the Letter of credit line agreement upon the customer's request | 0,5%, min 50.00 EUR |
|
Import letters of credit |
|
| Issue of the Letter of Credit | 100.00 EUR |
| Issuance of a letter of credit within the scope of the Letter of credit line | By agreement, min 70.00 EUR |
| Preparation and coordination of letter of credit template | By agreement, min 70.00 EUR |
| Amendment/cancellation of letter of credit | 70.00 EUR |
| Handling and payment of documents | 0,20%, min 85.00 EUR |
| Discrepancy fee | 70.00 EUR/ 80.00 USD |
| Letter of credit utilisation (depending on the type of collateral): | |
| • type of collateral: cash cover in SEB bank |
0,2% of the amount of the credit letter, min 70.00 EUR |
| • another collateral | By agreement, min. 70.00 EUR |
| Deferred payment fee | 70.00 EUR |
|
Export letters of credit |
|
| Preparation and coordination of letter of credit template | By agreement, min 70.00 EUR |
| Advice of letter of credit | 85.00 EUR |
| Advising of amendment/cancellation/non-utilisation of a letter of credit | 70.00 EUR |
| Preliminary checking of letter of credit documents2 | 70.00 EUR |
| Handling and payment of documents | 0,20%, min 85.00 EUR |
| Confirmation of a letter of credit | According to risk, min. 100.00 EUR |
| Discounting of documents | According to risk, min. 100.00 EUR |
| Preparation/advise of assignment of proceeds | 70.00 EUR |
| Transfer of a letter of credit | 0,2%, min 150.00 EUR |
| Deferred payment fee | 70.00 EUR |
1 The commission fee must be paid on the day the agreement or amendments are signed.
2 The fee is applied in case of more than one document undergo prior inspection.