Type of Transport Document: Letter of Credit

Dealing with long-distance customers in export or logistic business is risky. Both buyers and sellers may feel apprehension about financial loss while waiting for the goods to be delivered. A document like a letter of credit is issued to placate buyers and sellers, making sure that the transaction and payment run smoothly.

If you have an export/logistic business, or often must import goods for your business, make sure to know about this document and its importance for your works.

Defining Letter of Credit

Letter of credit (L/C) is a document that acts as a financial agreement between buyer and seller, ensuring that the seller will only get paid after the buyer properly receives the goods. The bank issues the document while acting as an uninterested party. The document ensures a safe transaction for the buyer and seller, and both must observe the terms and conditions for a smooth transaction.

The buyer sets up the terms and conditions that must be discussed with the seller. Once both parties agree, the buyer can contact their bank with the terms, conditions, and supporting documents to issue the letter of credit.

Terms and Conditions

What terms and conditions a buyer must list before applying for a letter of credit? Here are several important pointers:

1.      Descriptions of Goods

Descriptions of goods include all the important details, such as the types, sizes, weights/volumes, brands, and quantities. If the goods have specific qualities, such as being chemical, fragile, or dangerous, they must be included.

2.      Technical Descriptions

Technical descriptions include methods of handling the goods, including the packaging and ways to load/unload them. They also include details of handling special goods, such as the flammable or toxic ones.

3.      Required Documents

Issuing a letter of credit requires several documents. They include a commercial invoice, packing list, bill of lading, analysis report, certificate of origin, and other documents requested by the bank.

4.      Shipment Details

Shipment details include the transportation methods, the origin and destination ports, the carrier service, shipment dates (departure and arrival), and the party that should be notified once the goods arrive at their destination port.

Once the documents, terms, and conditions are complete, the buyer can apply for their bank to get a letter of credit. Meanwhile, the seller can also contact their bank to act as the “confirming” party, making sure that the document is valid before the deal is agreed.

Types of L/C

There are several types of L/C known in the world of export and logistic businesses. They are:

1.      Revocable – Letter of Credit

This type can be revoked anytime by the bank, especially if there is a possible error or unseen future problems. However, it is quite rare.

2.      Irrevocable – Letter of Credit

The most common type, the irrevocable L/C has a binding nature. Any changes can only be made with the agreement between the buyer, seller, issuing bank, and confirming bank.

3.      Revolving – Letter of Credit

A revolving L/C document is used if the buyer and seller have regular repeated shipments. It is used to avoid partially utilized payment credits.

4.      Back-to-Back/Master Credit

This L/C is used if the seller and buyer use the services of brokers or middlemen. There must be two issued letters of credit for this purpose.

Letter of credit is an important document to ensure a smooth, safe transaction between the buyer and seller. Make sure to prepare all the documents and read the terms and conditions carefully before utilizing this document.