How to fill Letter of credit Application📝

Summary

This video provides a detailed guide on how to complete an LC (Letter of Credit) application form, including key fields like buyer and seller information, payment terms, shipment details, and more. It explains the various choices available, such as whether to allow partial shipments or transshipment, how to set the expiry date, and the importance of adding confirmation for added security. Additionally, the video walks through setting payment methods (sight, deferred, or mixed) and how to select appropriate Incoterms. This comprehensive guide is designed to help users navigate the complex process of opening an LC for international trade.

Takeaways

• 😀 The LC application form requires providing information about both the buyer (importer) and the seller (exporter).
• 😀 The method of issuing the LC can be through Swift (recommended for faster processing) or via courier.
• 😀 Expiry date of the LC should be determined based on the shipment date and presentation days, with grace days for unforeseen delays.
• 😀 The expiry date typically falls one month after the shipment date, such as December 30th if the shipment is on December 1st.
• 😀 The place of presentation for documents is where the supplier submits the paperwork (e.g., China if the supplier is based there).
• 😀 The LC amount should be clearly mentioned, e.g., 100,000 units of currency, and the supply bank details must be provided.
• 😀 Tolerance in quantity may be allowed if the supplier ships more than ordered, especially in manufacturing units where variation can occur.
• 😀 Confirmation of the LC may be requested by the supplier for double assurance in case the issuing bank fails to make payment.
• 😀 Payment terms can include options like payment at sight (immediate payment upon document presentation), deferred payment (payment at a later date), or mixed payments (a combination of immediate and delayed payments).
• 😀 Shipment details include the origin and destination ports (e.g., China to UAE), along with the shipment date, which is predefined in the purchase agreement.
• 😀 Partial shipment allows suppliers to ship materials in stages (e.g., part of the order now and the rest later), while transshipment should be limited unless no direct vessel route is available.

Q & A

What is the first step after the contract is signed and terms are agreed upon for an LC?

The first step is to open the Letter of Credit (LC) by approaching the bank. The bank will provide an LC application form that needs to be filled out with the relevant buyer and seller details.

What details need to be provided about the buyer and seller in the LC application form?

The form requires the buyer (importer) and seller (exporter) details. You should enter the name, address, and other identifying information for both parties.

What is the difference between issuing the LC via Swift and Courier?

Swift is faster compared to courier, and it is the preferred option for most LC applications. Swift is an electronic transfer method that expedites the process.

How is the expiry date for an LC determined?

The expiry date is typically one month after the shipment date. For instance, if the shipment date is December 1st, the expiry date would be December 30th, which allows the supplier 21 days (plus grace days) to present the documents to the bank.

Where should the documents be presented by the seller?

The documents should be presented at the advising bank located in the seller's country. For example, if the seller is in China, the documents will be presented at a bank in China.

What does the tolerance option in an LC refer to?

The tolerance option accounts for slight variations in the quantity of goods delivered. For instance, if the order was for 900 units, but the supplier delivers 910, the tolerance option can accommodate such discrepancies.

What is the purpose of adding a confirmation of credit in the LC?

The confirmation of credit provides additional assurance to the supplier that the payment will be made, even if the issuing bank fails to honor the LC due to reasons like bankruptcy or political instability.

What are the differences between payment at sight and deferred payment options?

In a payment at sight option, the supplier receives payment immediately upon presentation of documents, while in a deferred payment option, payment is made at a later date (e.g., 30 days after shipment or invoice).

What does 'partial shipment' mean in an LC, and when is it allowed?

Partial shipment allows the supplier to ship part of the order at one time and the remaining part at a later stage. It is allowed if specified in the LC terms, but if not allowed, the entire order must be shipped in one go.

Why might transshipment be allowed in an LC?

Transshipment is allowed when there is no direct route between the origin and destination ports. For example, goods may need to be unloaded in a third country before being reloaded onto a different vessel to reach the final destination.