Letter of Credit

A Letter of Credit is a written undertaking issued by a bank (the issuing bank) at the request of the buyer (the applicant or the ordering party) for the account of the seller (the beneficiary). As a result, when the seller delivers the commodity documents in accordance with the terms of the letter of credit, the bank is obligated to fulfill the transaction within the limits of a specified amount during a specified period. The bank's commitment to pay can be in cash or through the acceptance of a promissory note.

Letter of Credit

A conditional written undertaking issued by the importer's bank (the issuing bank) to the correspondent bank in the exporter's country (the beneficiary) under which a particular sum will be paid to the exporter if the terms specified in the credit are met.

Letter of Credit Parties

• Applicant or Buyer: The customer (importer) who applies to the bank issuing the credit with a request to issue the Letter of Credit in accordance with the terms and specifications agreed upon with the beneficiary, which do not conflict with the bank's interests, the laws of the country in which the Letter of Credit is issued, or the international norms of a valid Letter of Credit.
• Issuing Bank: the bank that issues the letter of credit based on the request and instructions of its client (the applicant for opening the credit) in favor of a specific beneficiary and through which the bank is liable to pay the value of the documents supplied by the beneficiary if they comply with the terms of the credit.
• Beneficiary/Seller: The exporting party who ships the products and submits the necessary documentation in accordance with the credit terms.
• Advising Bank: The bank that notifies the beneficiary of the letter of credit
• Confirming Bank: A correspondent bank that adds its pledge to pay the value of the documents to the beneficiary in accordance with the letter of credit terms.
• Negotiating Bank: A bank that negotiates the documents given by the beneficiary in accordance with the credit granted to him
• Reimbursing Bank: The bank that pays the value of the documents based on agreement with the bank opening the credit.

 Letter of Credits types

• (Sight L/C): A letter of credit in which the value of documents that meet the terms of the credit is paid to the beneficiary upon submission to the bank.
• Acceptance L/C: a letter of credit that specifies that the issuing/confirming bank or any other bank listed in the letter of credit will accept and pay the beneficiary's withdrawals on a specific date.
• Deferred Payment L/C: a letter of credit in which the value of the documents is required to be paid to the beneficiary after a predetermined period defined in the credit terms, without withdrawals.
• Transferable Credit (L/C): It is a letter of credit that can be transferred from one beneficiary to another.
• (Back to Back L/C): A letter of credit issued by the bank at the request of its client in exchange for a credit received in his favor and backed by its guarantee.
• Revolving L/C: a letter of credit whose initial value is renewed without alteration after the required number of revolves.
• Mixed L/C: a letter of credit that needs payment of the products' value against sight withdrawals and the remainder against time withdrawals.
• Advance Payment L/C: a letter of credit that is conditional on paying a specified amount in advance for the beneficiary when the letter of credit is opened.
• (Stand-by L/C): The stand-by letter of credit is identical to a letter of guarantee in terms of the reasons and causes that require a claim for fulfillment and payment of the debt. As a result, payment is made in exchange for providing a claim document or documentation for the debt's breach and maturity. A stand-by letter of credit can be issued by any organization, company, body, or merchant.

Letter of Credit main Documents 

• Bill of lading: A contract of carriage, a transport goods receipt, and a document of title affording ownership when the exporter files a request to the carrier company for his goods to be shipped to the buyer's country, whether by sea, air, or land.
• Commercial Invoice: The document that shows the goods' value, their amount, weight, quality, freight charges, and any additional fees.
• Insurance Policy: issued by insurance companies, under which they agree to compensate the products for any losses suffered during the shipping procedure.
• Certificate of Origin: A document proving the products' original country of origin.
• Packing List: a list of the shipped goods' details