International Trade Finance

Letter of Credit

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Letter of Credit/ Documentary Credit

 It is a conditional undertaking given by a bank at a request of an importer

(Applicant) or on its own behalf to effect settlement (Payment) to an
exporter (Beneficiary)
 It ensures payment provided the terms and conditions of the credit have
been fulfilled
 The importer has to pay for the documents of the goods to take ownership
of the goods
 The bank is able to supply trade and credit information which is important
to both the importer and exporter
 It is also known as Documentary Credit
 Other types of L/C:
 Transferable L/C
 Revolving L/C (not allowed for Import in Bangladesh) 2
 Letter of Credit (L/C)
Exporte
r

4. Goods are shipped

Importer

9. Documents
5. Documents presented. If received and
any discrepancy exists the import
exporter is notified bill settled
1. L/C application
8. Payment to
exporter

3. L/C
advised

7. Issuing bank will effect payment or accept for a future payment

2. L/C issued

Negotiating / Advising bank 6. Documents sent to issuing bank Issuing/Confirming bank

Documents Goods Flow Cash Flow 3

Advice / Notice
Transferable L/C

 A transferable L/C is an irrevocable L/C designated as transferable

 It is a L/C that can be transferred by the original beneficiary to another party

for the same or lesser value

 The transferable L/C allows partial shipments under which the L/C may be
transferred to one or more beneficiary

 However the second beneficiary is not allowed to transfer to a third

beneficiary

 The first beneficiary is allowed to substitute only drafts and invoices for
presentation unless otherwise specified in the master L/C

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Transferable L/C Phase 1
Exporte 7. Goods are shipped
r

Middleman Importer

1. L/C application
allowing L/C to be
‘Transferable’
6. Transferred L/C advised

4. Request for L/C to

3. Master L/C
be transferred
advised

5. Transferred L/C issued 2. Master L/C issued

Advising bank Transferring bank Issuing bank

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Documents Advice / Notice Goods Flow Cash Flow
 Transferable L/C Phase 2
Exporte 7. Goods are shipped
r

Middleman Importer

8. Documents presented. If
any discrepancy exists the 14. Documents
exporter is notified received and
13c. Payment to import
exporter 13a. Middleman bill settled
receives
payment 10. Middleman advised
to substitute
documents for
presentation under
Master L/C
9. Transferred L/C documents
sent to transferring bank 11. Master L/C documents
sent to issuing bank

13b. Remittance made 12. Remittance made under Master L/C

under Transferred L/C
Advising bank Transferring bank Issuing bank

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Documents Advice / Notice Goods Flow Cash Flow
Revolving L/C

 It is a single documentary credit that covers multiple shipments over a long

period
 It is automatically reinstated after each drawing or upon receipt of
authorisation from the L/C issuing bank
 It has limits as to the duration of the facility and as to the amount involved
for each drawing
 It provides convenience and possible reduction in transaction fess for large
sourcing agents

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 Revolving L/C
Exporte
r

4. Goods are shipped, since being a revolving L/C

multiple shipments can be accommodated Importer

5. Documents presented. If 9. Documents

any discrepancy exists the 1. L/C application on received and
8. Payment to
exporter is notified revolving import
exporter
payment terms bill settled.
Multiple
drawings
3. L/C allowed
advised under
revolving
L/C
7. Issuing bank will effect payment or accept for a future payment

2. Revolving L/C issued

Negotiating / Advising bank 6. Documents sent to issuing bank Issuing bank

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Documents Advice / Notice Goods Flow Cash Flow
Trade Finance

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L/C Discounting / Negotiation

 A L/C is said to be discounted / Negotiated when the negotiating

bank agrees to make payment in advance to the beneficiary upon
receipt of compliant or accepted documents.

 The exporter receives the money for their exported goods from the
bank before the due date. It is thus beneficial to discount / negotiate
the L/C to enhance cash flow

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 L/C Discounting / Negotiation
Exporte
r

4. Goods are shipped

Importer

6. Negotiating
bank will 5. Documents presented for 9. Documents
discount L/C examination with request 1. L/C application received and
and deliver for discounting, subject to import
3. L/C full value to clean presentation bill settled
advised the exporter

8. Issuing bank will effect payment or accept for a future payment

2. L/C issued

Negotiating / Advising bank 7. Documents sent to issuing bank Issuing bank

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Documents Advice / Notice Goods Flow Cash Flow
 L/C Confirmation

 A L/C is considered ‘confirmed’ if a second bank (confirming bank) confirms to pay the invoice

amount even if the issuing bank fails to make the payment

 Bank and country risks, which may arise from defaults or political restrictions, are mitigated

 The confirmation is only valid if compliant documents are presented to the confirming bank

 Confirmation charges are usually borne by the exporter and are reflective of the bank and

country risk

 The ability to confirm a L/C will depend on confirming bank’s risk appetite for the issuing bank

and country where the L/C is issued

 Any advance payment or L/C discounted against a confirmed credit is on a non-recourse basis

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L/C Confirmation

1. L/C application

Importer
Issuing bank

2. L/C issued

3. L/C advised
Negotiating / Exporte
Advising bank r

4. Requests for confirmation

5a. Yes. Bank adds confirmation

Confirmation requirements met?

5b. No. Bank notifies accordingly

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Documents Advice / Notice
Questions ?

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