Documentary credit – stages in transaction

The stages in a documentary credit transaction are as follows:

(1) The buyer asks their bank to issue a L/C in favour of the Seller.

(2) The buyer’s bank (the issuing bank) asks the seller’s bank (the advising bank) to advise that the L/C has been issued in the seller’s favour.

(3) The exporter dispatches the consignment to the buyer and presents the shipping documents to the advising bank.

(4) The advising bank checks the documents and pays the seller (if it acts as a correspondent bank of the issuing bank)

(5) The advising bank notifies the issuing bank that the documents have been presented and forwarded them.

(6) The issuing bank checks the documents, pays the advising bank.

(7) The issuing bank releases the shipping documents to the buyer and debits their account.

(8) The buyer collects the consignment by presenting the documents to the carrier.

a. Buyer approaches Bank Dear Sirs

We have just concluded an agreement to purchase monthly shipments of … from... over the next six months and would like to make use of international payment facilities by opening a series of monthly credits for $2000 each in favour of… It has been agreed that we provide credits with a bank … against which our supplier would draw for the value of shipment as they are made.

Please let us know on what terms you would be prepared to arrange the necessary credits and to handle the shipping documents for us.

Yours faithfully

b. Bank offers to provide credit Dear Sirs

We thank you for your inquiry of 15th March. We shall be pleased to handle the shipments (referred to) and arrange for the necessary documentary credit with our Bank against deposit of Bill of Lading and other shipping documents. If you complete and return the enclosed form we will make the arrangements.

Our commission charges for irrevocable documentary credits would be 1/8 to 1/4% on each of the monthly credits, to which must be added 1/4% for irrevocable credits and also our charges for such items as telegrams and postages. In return for these charges you have our assurance that your interests would be carefully protected.

Yours faithfully

c. Buyer instructs Bank Dear Sirs

I have completed and enclose the form of application for a documentary credit received with your letter of 17th March and shall be glad if you will arrange by telegram to open for our account with your bank irrevocable credits for 62,000 a month in favour of… the credits to be valid untill 30th September next.

To enable them to use the credits the company must present the following documents:

- Certificate of policy of insurance - Certificate of Origin

and draw on your bank at 60 d/s for each consignment for the value of about £2,000.

Yours faithfully

d. Bank agrees to open credit Dear Sirs

As instructed in your letter of 20th March we are arranging to open a documentary credit in your favour valid until 30th September. You will find enclosed a copy of our telegram opening the credit. We shall be glad if you will check it to ensure that it agrees with your instructions.

As soon as the credits are used we will debit your account with the amount notified to us as having been drawn against them.

We shall take all necessary steps to make sure that your instructions are carefully carried out, but wish to make it clear that we cannot assume any responsibility for the safety of the goods, or for delays since these are matters beyond our control.

Yours faithfully

e. Buyer notifies Exporter Dear Sirs

This is to inform you that we have opened irrevocable credits in your favour for £2,000 a month with…, valid until September next. The terms of credit authorise you to draw at 80 days on the bank in… for the amount of your

invoices after each shipment. Before accepting your draft, which should include al/ charges, the bank will require you to produce the following documents:

- Bill of lading in triplicate

- One copy of the invoice covering C.I.F...

- Certificate of policy of insurance - Certificate of origin

We will expect your first consignment about the middle of August.

Yours faithfully

f. Bank issues L/C Dear Sirs

On instruction from Messrs … received through our office, we have opened monthly irrevocable credits for £2,000 in your favour, valid until 30th September next. You have authority to draw on us at 60 days against these credits for the amount of your invoices upon shipment of… to... Your drafts must be accompanied by the following documents, which are to be delivered to us against our acceptance of the drafts:

- Bill of lading in triplicate - Commercial invoice

- Insurance certificate of policy - Certificate of Origin

discounting facilities at current rates.

Yours faithfully

g. Exporter presents documents Dear Sirs

Referring to your advice of 30th March, we enclose shipping documents for the first of the monthly consignments to...

As required by them we have included all charges in our invoice which amounts to £1,725.75 and enclose our draft at 60 days for this sum. We shall be glad if, after acceptance, you will discount it at the current rate and remit the net amount to our account with...

We thank you for your help in this matter.

Yours faithfully

h. Bank debits Buyer Dear Sirs

As instructed by your letter of 20th March, our bank has for your account a bill for £2,725.75 drawn by… for the first of… to you on SS… We have debited your account with this our charges amounting to £4.30.

The ship left... on 22nd April and is due to arrive in… on 2nd May. The shipping documents for this consignment are now with us and we shall be glad if you will arrange to collect them.

Yours faithfully

II. INVOICES AND STATEMENTS