In order to standardize the use of letters of credit and provide a basis for dispute arbitration, the International Chamber of Commerce has formulated the “Uniform Customs and Practice for Documentary Credits”, namely the International Chamber of Commerce Publication No. 600, which is commonly referred to as “UCP600” in the industry. Many letters of credit will be annotated with “This letter of credit is handled in accordance with “UCP600″” or similar words.
The letter of credit is handled by a bank on behalf of the foreign merchant. The foreign merchant issues the letter of credit through his bank of account, and we exporters receive the letter of credit, deliver foreign trade documents and collect payment through our domestic bank of account. Therefore, if we have agreed with the foreign merchant to pay the payment through the letter of credit, we must inform the foreign merchant of our bank information (similar to the remittance route). Therefore, the parties involved in a letter of credit may include:
(1) Applicant. The person who applies to the bank for the opening of a letter of credit, that is, the foreign merchant.
(2) Opening/Issuing Bank. The bank that accepts the entrustment of the applicant to open a letter of credit and bears the responsibility of guaranteeing payment. That is, the bank where the foreign merchant opens an account.
(3) Advising/Notifying Bank. Refers to the bank entrusted by the issuing bank to transfer the letter of credit to the exporter. It only proves the authenticity of the letter of credit and does not bear other obligations. It is generally the exporter’s bank where the exporter opens an account.
(4) Beneficiary. Refers to the person who guarantees the payment through the letter of credit, that is, the exporter.
(5) Paying/Drawee Bank. The bank designated for payment on the letter of credit. In most cases, the paying bank is the issuing bank.
Another common practice is that before the issuing bank of the foreign merchant pays, if the full set of documents of our exporter is complete and correct, our domestic bank or a certain bank is willing to pay first to “buy” the full set of documents, which is called the negotiating bank. This operation is called “negotiation”, which charges a small handling fee, but allows the exporter to get the payment earlier.
In export foreign trade, the general procedure for operating letters of credit is:
1. We tell foreign merchants the name, address, SWIFT code and other information of the bank where we opened an account.
2. Foreign merchants ask the issuing bank to open a letter of credit and hand it over to our domestic bank.
3. The domestic bank will notify us in time after receiving the letter of credit. We can go to the bank to collect the original letter of credit, or we can collect a copy and keep the original in the bank (more secure).
4. We prepare goods and transportation according to the letter of credit, and organize the full set of documents specified in the letter of credit, and hand over the full set of documents to our domestic bank within the time limit specified in the letter of credit.
5. The domestic bank will review it first, and remind us to modify it if there are any errors. If it cannot be modified, we will ask for our opinion on whether to submit the documents with “discrepancies” (about the response and handling of similar situations, we will talk about it in detail below). If the review is correct, it will be delivered to the foreign issuing bank by express delivery. Usually, the issuing bank can receive this set of documents within a week, and review the documents within 5 working days. After approving them, it will notify the foreign merchant to pay and take away the documents – the term “redemption”. Adding the time for foreign payments to arrive at domestic bank accounts, if there is no accident, it will take about 2 to 3 weeks from the time we present the documents to the bank to receive the payment.
After the letter of credit is opened, the foreign merchant cannot regret it. But we can ask for modification of the terms before the bank presents the documents. The bank will charge a handling fee for modifying the letter of credit. Therefore, it is best to discuss the terms with the foreign merchant in advance before opening the letter of credit, especially the terms on document requirements, and try to avoid spending money to modify them afterwards.
If you find that there are problematic terms in the opened letter of credit, you must modify them in time, even if you agree to the customer to modify the handling fee at our expense. Don’t easily submit documents without discrepancies, and don’t easily believe the customer’s unilateral promise of “accepting discrepancies”. Because the letter of credit is issued by the bank, the bank bears the responsibility. Even if the customer promises you, it is useless if the bank does not get the customer’s confirmation. In particular, if you encounter a customer with poor reputation, if they know in advance that there will be discrepancies, they will deliberately make things difficult after the goods are shipped out of the port and take the opportunity to lower the price, which puts the exporter in a passive position.