What is letter of credit?
Letter of credit is the Bank’s obligation to pay out a certain amount of money to the supplier of goods if the documents confirming the shipping are submitted to the Bank in due time.
Letter of Credit is a transaction separate from the contract of sale or other contract on which it may be based.
Letter of Credit may be amended or revoked only with the consent of the beneficiary.
Operations with Letters of Credit
PrivatBank offers the following operations with documentary credits:
- Opening of a letter of credit – a bank’s assumption of an obligation (according to the instructions of an ordering customer) to make a payment to a provider of goods or services.
- Advising of a letter of credit – an official notification about opening, change or cancellation of a letter of credit opened by another bank in favour of the bank’s customer.
- Execution of a letter of credit – verification of documents submitted by a beneficiary and execution of a payment provided that the documents comply with the provisions of a Letter of credit. Should the letter of credit be non-confirmed, an issuing bank shall make the payment on demand of a nominated bank.
- Transfer of a letter of credit – a transfer of a letter of credit to another beneficiary according to the instructions of the initial beneficiary. The transfer shall be made provided the letter of credit is transferable and the bank is entitled to make a transfer thereof.
When to Use Letter of Credit?
Companies face a high level of risks when carrying out trading activities, especially foreign economic operations.
Reasons for non-performance or insufficient performance of contractual obligations may be as follows: unfair practices of a contractor, worsening of its financial standing, force-majeure circumstances, change of economic or political situation in the contractor’s country.
The use of a letter of credit allows a seller and buyer to protect their interests.
It is recommended to use a letter of credit as a settlement tool in the following cases:
- when establishing business relations with a new partner;
- when a seller is not sure about a buyer’s ability to pay, but the buyer is not sure about the seller’s ability to deliver goods/make a piece of work/provide services;
- when international delivery involves country risks;
- when entering into an agreement for a big amount.
Advantages of letters of credit
- a payment guarantee to the supplier provided that it fulfils the conditions of a letter of credit;
- a guarantee for appropriate quality goods or services to the buyer;
- control over the fulfilment of terms and conditions of delivery and letter of credit by an independent party, the bank;
- letters of credit are regulated by the Uniform Customs and Practice for Documentary Credits adopted by the International Chamber of Commerce, therefore all participants of a transaction have a clear view of their rights, obligations and standard requirements while carrying out the transaction.
Why to Choose PrivatBank for Your Letter of Credit?
PrivatBank specialists are always ready to assist you in the following matters:
- drafting agreements which include documentary methods of payment;
- elaborating individual schemes for settlements with letters of credit;
- drafting shipping documents, as well as other documents;
- elaborating specific schemes for execution of documentary operations involving, for example, transferable, revolving and standby letters of credit.
In order to open a letter of credit you need:
- to agree with your contractor on a letter of credit as a tool for making settlements under the contract;
- to get acquainted to General Regulations for Transactions (Section 6: Terms and Conditions for Execution of Documentary Operations) and the bank’s Pricelist;
- to submit Application for Opening of Irrevocable Documentary Credit to the bank.
- to provide funds on your settlement account sufficient enough to make a payment according to a letter of credit and pay the bank’s fees prior to opening the letter of credit.