Application of Letter of Credit

1. Letter
of
Credit Financing

2. How to Apply for a Letter a Credit?
•The basis for applying for a credit is an
impending importation of goods.
•The applicant shall have already made preliminary
contacts leading to a contract to consummate sale
through the shipment of the goods from the
exporter to the importer.
•The importer approaches a bank and arranges for a
letter of credit financing.
•Presents the evidence of the projected
importation, and the banks gives him a form to
fill out.
•In this form , he can detail the nature of the
importation, the documents necessary, and the
extent of credit the bank will undertake on the
applicant’s behalf.

3. •Existing rules and regulations of the Bangko
Sentral should also be taken into account.
•The application form should be prepared with the
utmost care.
•The bank will then investigate the credit standing
of the applicant and determine to what extent he may
be allowed credit.
•If the bank finds the credit risk to be
satisfactory, then it will agree to open a letter of
credit.
•Otherwise, other measures will be resorted to, such
as the putting up of additional collaterals.
•Or the bank may entirely deny the issuance of the
letter of credit if the applicant is not worthy of
the same.

4. Opening the Letter of Credit Itself
•The applicant either opens the same by mail or by
cable.
•If it is opened by mail, the importer will be
given the printed letter of credit together with
sufficient copies to supply all parties with a
record of the same.
•The importer then sends the original accomplished
form to the exporter and distributes the copies to
all concerned.
•One is kept for his own files.
•The bank, too, must have a copy duly signed by
the importer as this will represent the contract
between the importer and the bank.

5. •If the letter of credit is opened by cable, the
bank cables its correspondent in the domicile of
the exporter to notify the latter of the letter of
credit and its terms and conditions.
•The cable expense is borne by the importer.
•Then the written confirmation is sent by mail to
the exporter.
•The copy of the cable and the written confirmation
is also supplied the importer.
•As a matter of policy, some banks may waive
payment of cable charges in notifying the exporter,
when the letter of credit is in foreign exchange.
•They do this for and in consideration of their
commission in negotiating the drafts.
•However, the common practice nowadays is for banks
to charge nominal service fees for such
notification by cable.

6. Parties to a Letter of Credit
In its transmission and negotiation, the following
are the parties concerned:
1. Accredited Buyer
2. Beneficiary
3. Opening Bank
4. Notifying Bank
5. Confirming Bank
6. Negotiating Bank

7. Purposes of the Letter of Credit
The purposes or advantages of the letter of credit may be
viewed from different angels, that is, on the part of the
beneficiary, accredited buyer, as well as the manufacturer and
the banks.
1. To the beneficiary
a. To enable him to finance the transaction during the
transit of the merchandise.
b. To safeguard the credit risk.
2. To the manufacturer
3. To the buyer
a. It affords the buyer a means of using his purchases as
security for obtaining the credit necessary to finance the
transaction.
b. It will eventually lead to the obtaining of funds for
financing in the cheapest markets since the accepted draft
shall become salable at once.
4. To the banks

8. Mechanics
of
Letter of Credit Financing
Typical steps taken are as follows:
1. The buyer ad seller agree upon the terms of
sale.
2. The buyer completes an application for a letter
of credit and forwards it to a bank that will
issue the letter of credit.
3. The bank investigates the credit standing of
the buyer and examines details of sale. If
satisfied, it approves and issues the L/C.
4. The issuing bank then forwards the L/C to a
correspondent bank (advising bank) in the
seller’s country.

9. 5. The advising bank relays the approval of the L/C
to the seller.
6. If the seller is not the manufacturer, the L/C is
assigned (if assignable) to the manufacturer.
7.Having received the assurance of payment, the
seller prepares the documents required under the L/C
and delivers them to the advising bank.
8. The seller also makes arrangements to ship the
goods.
9. The goods, which had been prepared earlier, are
then delivered for shipment/air freight and the bill
of lading is released by shipper/carrier.
10.If the L/C specifies that drawings can be made
upon presentation of the bill of lading, the seller
may draw a draft against the confirming bank. If it
is a time draft, it may be presented first for
acceptance.

10. 11.In the meantime, the advising bank examines the
documents at hand. If it finds these in order, it
sends these back to the issuing bank, and if named
the paying bank (at the same time the advising bank),
it pays seller in the accordance with the letter of
credit.
12. Acceptance may be negotiated in the bill or money
market.
13. While the goods are in transit, notification and
documents evidencing the shipment are sent to the
issuing bank and the buyer.
14. The issuing bank, on the other hand, having
received the documents, examines these. If in order,
the issuing bank will charge the buyer’s account, and
sends the documents to the buyer. The issuing banks
then reimburses the advising bank.

11. 15. Upon arrival of goods, these are brought to the
Customs Office for assessment and payment of duties.
16. The buyer arranges for the release of goods. If
he does not have the necessary cash to pay the
issuing bank, he arranges for trust receipt
financing.
17. When the goods are paid and released, the bank
cancels the L/C.
18. In case of trust receipt financing, cancellation
occurs after the buyer fully settles his account with
the issuing bank.
19. Foreign banks that pay drafts to the issuing bank
are reimbursed through bookkeeping entries, if they
are correspondent banks.

12. Letters of Credit Classified
There are various ways to classifying letters of
credit. Some of the most common classifications are
as follows:
1. According to the method of transmission.
a. Circular
b. Specially advised
2. According to the duration of the substitution of
credit.
a. Revocable
b. Irrevocable
3. According to obligations assumed by the bank.
a. Confirmed
b. Unconfirmed
4. According to the method of reimbursement
a. Simple
b. Reimbursement

13. 5. According to the method of payment
a. Negotiation
b. Straight
c. Sight
d. Acceptance
e. Local Currency
f. Foreign Currency
6. Other Classifications.
a. Assignable
b. Back-to-Back
c. Red-clause
d. Revolving

14. Essential Features of the Letter of
Credit
Some of the important features of a letter of
credit are the following:
1. Advice Number
2. Issuing bank
3. Amount
4. Name of importer
5. Tenor of the Letter of Credit
6. Type of the Letter of Credit

15. Documents Required with Letters of
Credit
1. Commercial Invoice
2. Insurance Certificate
3. Consular Invoice
4. Forwarding Receipts
5. Export License
6. Import License
7. Exchange License