2. Letter of Credit (L/C)
A letter of credit (also known as documentary credit) is a document
issued by a bank on behalf of an applicant (the buyer) undertaking to
make payment to a beneficiary (the seller) up to a stated amount of
money, within a prescribed time limit and against stipulated documents.
There are usually two banks involve in a letter of credit operation. The
issuing bank is the bank of the buyer and issues the credit; the
advising bank usually located in the sellers country.
A letter of credit should usually stipulate a requirement for the
following documents:
• Bill of lading
• Copy of the certificate of origin
• Commercial invoice
• Export license
• Packing list 2
4. 4
Confirmed Letters of Credit
• Confirmed LC. In addition to the Bank guarantee of the LC
issuer, this LC type is confirmed by the Seller's bank or any
other bank. Irrespective to the payment by the Bank issuing
the LC (issuer), the Bank confirming the LC is liable for
performance of obligations.
Unconfirmed Letters of Credit
• Only the Bank issuing the LC will be liable for payment of this
LC.
5. 5
Revocable Letters of Credit
• Revocable letters of credit give issuer the amendment or
cancellation right of the credit any time without prior notice to
the beneficiary. Since revocable letters of credit do not provide
any protection to the beneficiary, they are not used frequently.
Irrevocable Letters of Credit
❖ Irrevocable Letters of Credit cannot be amended or cancelled
without the agreement of the credit parties.
❖ Unconfirmed irrevocable letters of credit cannot be modified
without the written consent of both the issuing bank and the
beneficiary.
❖ Confirmed irrevocable letters of credit need also confirming
bank's written consent in order any modification or
cancellation to be effective.
6. 6
Transferable Letters of Credit
• Transferable letter of credit is a documentary credit that is
issued with the option to allow a trader to transfer its rights
and obligations to the supplier.
Untransferable L/C
• A credit that the seller cannot assign all or part of to another
party.
7. 7
Back-to-Back Letters of Credit
• Arrangement in which one irrevocable letter of credit serves as
the collateral for another; the advising bank of the first letter of
credit becomes the issuing bank of the second L/C. Unlike
transferable letters of credit, there are two separate letter of
credits exist in back-to-back letter of credit transactions.
Advance Payment (Red Clause) L/C
• Letter of credit that carries a provision (traditionally written or
typed in red ink) which allows a seller to draw up to a fixed
sum from the advising or paying-bank, in advance of the
shipment or before presenting the prescribed documents.
8. 8
Restricted L/C
• Only one advising bank can purchase a bill of exchange from
the seller in the case of a restricted LC.
Unrestricted L/C
• The confirmation bank is not specified, which means that the
exporter can show the bill of exchange to any bank and receive
a payment on an unrestricted LC.
9. 9
Deferred L/C
• A credit that is not paid/assigned immediately after
presentation, but after an indicated period that is accepted by
both buyer and seller. Typically, seller allows buyer to pay the
required money after taking the related goods and selling
them.
10. 10
At Sight L/C
• A credit that the announcer bank immediately pays after
inspecting the carriage documents from the seller.
Standby L/C
• Operates like a Commercial Letter of Credit, except that
typically it is retained as a "standby" instead of being the
intended payment mechanism.
• Unlike a trade letter of credit, a standby letter of credit is NOT
meant to be used for payment. A standby letter of credit is
used as a form of "back-up" guarantee (hence the name
"standby") used for a variety of purposes.
11. 11
Parties to Letters of Credit
Main parties of Letter of Credit transaction such as:
• Applicant,
• Beneficiary,
• Issuing bank,
• Advising bank,
• Confirming bank,
12. 12
Parties to Letters of Credit
• Applicant is the buyer of the goods or services supplied by the
seller. Letter of credit is opened by the issuing bank as per
applicant's request. However, applicant does not belong one of
the parties to a letter of credit transaction. This is because of
the fact that letters of credit are separate transactions from the
sale or other contract on which they may be based.
• Beneficiary is the seller of the goods or the provider of the
services in a standard commercial letter of credit transaction.
Letter of credit is opened by the issuing bank in favor of the
beneficiary.
13. 13
Parties to Letters of Credit
• Issuing Bank is the bank that issues a letter of credit at the
request of an applicant or its own behalf. Issuing bank
undertakes to honor a complying presentation of the
beneficiary without recourse.
• Advising bank is the bank that advises the credit at the
request of the issuing bank. An advising bank that is not a
confirming bank advises the credit and any amendment
without any obligation to honor.
14. 14
Parties to Letters of Credit
• Confirming bank is the bank that adds its confirmation to a
credit upon the issuing bank's authorization or request.
Confirming bank may or may not add its confirmation to a
letter of credit. This decision is up to confirming bank only.
However, once it adds its confirmation to the credit confirming
is irrevocably bound to honor or negotiate as of the time it
adds its confirmation to the credit. Even if the issuing bank
fails to honor, confirming bank must pay to the beneficiary.
18. 18
Step-by-step description of a typical Letter of Credit
transaction
1. An Importer (Buyer) and Exporter (Seller) agree on a purchase and sale of
goods where payment is made by Letter of Credit.
2.The Importer completes an application requesting its bank (Issuing Bank) to
issue a Letter of Credit in favor of the Exporter. Note that the Importer must
have a line of credit with the Issuing Bank in order to request that a Letter of
Credit be issued.
3.The Issuing Bank issues the Letter of Credit and sends it to the Advising
Bank by telecommunication or registered mail in accordance with the
Importer’s instructions. A request may be included for the Advising Bank to
add its confirmation. The Advising Bank is typically located in the country
where the Exporter carries on business and may be the Exporter’s bank.
19. 19
4. The Advising Bank will verify the Letter of Credit for authenticity
and send a copy to the Exporter.
5. The Exporter examines the Letter of Credit to ensure:
a) it corresponds to the terms and conditions in the purchase and sale
agreement;
b) documents stipulated in the Letter of Credit can be produced; and
c) the terms and conditions of the Letter of Credit may be fulfilled.
6. If the Exporter is unable to comply with any term or condition of
the Letter of Credit or if the Letter of Credit differs from the
purchase and sale agreement, the Exporter should immediately
notify the Importer and request an amendment to the Letter of
Credit.
20. 20
7. When all parties agree to the amendments, they are incorporated
into the terms of the Letter of Credit and advised to the Exporter
through the Advising Bank. It is recommended that the Exporter
does not make any shipments against the Letter of Credit until the
required amendments have been received.
8. The Exporter arranges for shipment of the goods, prepares and/or
obtains the documents specified in the Letter of Credit and makes
demand under the Letter of Credit by presenting the documents
within the stated period and before the expiry date to the “available
with” Bank. This may be the Advising/Confirming Bank. That bank
checks the documents against the Letter of Credit and forwards
them to the Issuing Bank.
21. 21
9.The Issuing Bank examines the documents to ensure they
comply with the Letter of Credit terms and conditions. The
Issuing Bank obtains payment from the Importer for payment
already made to the “available with” or the Confirming Bank.
10.Documents are delivered to the Importer to allow them to
take possession of the goods from the transport company. The
trade cycle is complete as the Importer has received its goods
and the Exporter has obtained payment.
22. 22
International Commercial Terminology
(incoterms)
• The Incoterms or International Commercial Terms are a series
of pre-defined commercial terms published by the
International Chamber of Commerce (ICC) relating to
international commercial law.
• They are widely used in international commercial transactions
or procurement processes and their use is encouraged by trade
councils, courts and international lawyers.
• A series of three-letter trade terms related to common
contractual sales practices, the Incoterms rules are intended
primarily to clearly communicate the tasks, costs, and risks
associated with the global or international transportation and
delivery of goods.
26. 26
Terms for any transport mode
EXW - EX WORKS (... named place of delivery)
The supplier delivers the goods to the buyer at his premises, i.e., factory,
warehouse, etc. He has the minimum responsibility and does not have to
provide minimum documentation unless upon specific request. The
buyer bears all costs and risks involved upon delivery of the goods until
the desired destination.
FCA - FREE CARRIER (... named place of delivery): The
Seller delivers the goods, cleared for export, to the carrier selected
by the Buyer. The Seller loads the goods if the carrier pickup is at
the Seller's premises. From that point, the Buyer bears the costs
and risks of moving the goods to destination.
27. 27
Terms for any transport mode
CIP - CARRIAGE AND INSURANCE PAID TO (... named place of
destination): The Seller pays for moving the goods to destination. From the time
the goods are transferred to the first carrier, the Buyer bears the risks of loss or
damage. The Seller, however, purchases the cargo insurance.
DAP - DELIVERED AT PLACE (... named place of destination): The Seller
delivers when the goods are placed at the Buyer's disposal on the arriving means
of transport ready for unloading at the names place of destination. The Seller
bears all risks involved in bringing the goods to the named place.
DDP - DELIVERED DUTY PAID (... named place): The Seller delivers the
goods -cleared for import - to the Buyer at destination. The Seller bears all costs
and risks of moving the goods to destination, including the payment of Customs
duties and taxes
28. 28
Maritime-only terms
CIF - COST INSURANCE AND FREIGHT (... named port of
destination): The Seller clears the goods for export and pays the costs of
moving the goods to the port of destination. The Buyer bears all risks of
loss or damage. The Seller, however, purchases the cargo insurance.
FOB - FREE ON BOARD (... named port of shipment): The Seller
delivers the goods on board the ship and clears the goods for export. From
that point, the Buyer bears all costs and risks of loss or damage.
CFR - COST AND FREIGHT (... named port of destination): The
Seller clears the goods for export and pays the costs of moving the goods
to destination. The Buyer bears all risks of loss or damage.
FAS - FREE ALONGSIDE SHIP (... named port of shipment): The Seller
delivers the goods to the origin port. From that point, the Buyer bears all costs
and risks of loss or damage.
29. L/C Commercial documentations
3
6
• Commercial invoice
• Certificate of origin
• A bill of lading (or airway bill)
• A steamship (or airline) company certificate
• An insurance certificate (if goods are insured by the exporter)
• Packing list
30. Commercial Invoice
• A commercial invoice is a business document which records the
sale of goods or services between two parties, and by which the
seller informs the buyer of the amount to be paid for the goods.
• All commercial invoices must be on the exporting company’s
letterhead. The invoice should contain the names and addresses of
the consignor and the consignee, and must accurately describe goods
and components, trademarks, name of the vessel (or airline) and the
date of sailing, port of loading and port of discharge, net and gross
weight, quantity, unit price and extended price of each type of
goods, total value of the shipment, contents of each package and
container, currency, L/C number (if applicable) and freight and
insurance.
3
8
31. Commercial Invoice
A commercial invoice normally includes the following information:
• Date and authorized signature
• The correct name and address of both buyer and seller
• A detailed description of the merchandise purchased strictly
corresponding with the description in the letter of credit, along with
quantity, unit price and total price, all deductions and additional
charges includes in the price.
• Weight of the goods, number of packages , any identifying shipping
marks, any import licenses number, contract number or any other
details requested and stipulated in the L/C.
• Terms of delivery and payment (FOB, CIF. C&F)
• The name of the issuing bank and the letter of credit number
• The port of entry for which the merchandise is destined
• The type of currency and rate of exchange. 39
32. Certificate of Origin
• The certificate of origin must be issued by the manufacturer (or the
exporting firm), and must include the name of the vessel (airline)
and the date of sailing, name(s), nationality(ies), and full street
address(es) of the manufacturer(s) of all items to be shipped.
• Furthermore, the origin of each item or component must be
specified. In addition, a signed statement to the effect that the
document is true and correct must be given.
• If the merchandise is not solely and exclusively a product of the
exporting country, a notarized "Appended Declaration to Certificate
of Origin" must be attached to the certificate of origin.
• In addition, the certificate of origin must include the name and
address of the importer, a description of the goods, and the address
of the shipping company.
4
0
33. BIL (Bill of Lading)
• A bill of lading (sometimes abbreviated as B/L or BoL) is one of
the most important documents in the shipping process. To ship any
goods, a bill of lading is required and acts as a receipt and a
contract.
• A completed BOL legally shows that the carrier has received the
freight as described and is obligated to deliver that freight in good
condition to the consignee.
• Bill of lading is used for any sea shipment and Airway bill is used
for air shipment.
41
34. 34
Different types of Bill of Lading
• Master Bill of Lading: The freight forwarder after receiving goods
from shipper, re-book the same cargo to main carriers who are
vessel owners. The main carriers, once cargo received, issues Bill of
Lading to whom the cargo booked with him. This is called MBL
Master Bill of Lading. In a master bill of lading, the shipper will be
the freight forwarder who delivers the cargo to main carrier and the
consignee, the overseas counterpart party of the freight forwarder
who receives the goods from final shipper.
35. 35
Steamship Certificate
• This certificate (which is an Appended Declaration to Bill of Lading
or airway bill) should be issued by the steamship (or airlines)
company in at least one original. It must be notarized and contain
the following information about the vessel (or plane), named in the
Bill of Lading or the airline company certificate:
– name of vessel (plane), and previous name (if applicable)
– nationality of vessel (plane)
– owner of vessel (plane)
– names of ports (airports) including port (airport) of loading and
port (airport) of discharge.
36. 36
Insurance Certificate
• This certificate (issued by an insurance company in at least one original)
must contain the actual amount of insurance, description and value of insured
goods, name of vessel, port of loading and port of discharge, and name and
address of beneficiary.
• In addition, the "Appended Declaration to Insurance Policy" should state that
the insurance company has a duly qualified and appointed agent or
representative in the importers country, giving his name and full address.
Packing List
• This is a document that indicates the contents of each individual/package in
the container. The packing list includes the cubic measurement (CBM) of the
cartons/Package, the weight, the number of cartons/Packages, the breakdown
of the goods by size
/color/quantity. This document is prepared by the seller or the ship- owner,
and the buyer can specify which information should be included.
37. 37
Terms used in L/C Commercial Documentations
CONSIGNEE (BUYER)
The Person whose name appears on the bill of lading or Airway bill as the
party to whom the goods are to be delivered by the carrier.
SHIPPER
This is the person whose name appears on the bill of lading or air way bill
as the party who has contracted the carrier to dispatch the goods.
FCL (Full Container load)-
A fully loaded container which may be in weight or cubic measurements
terms, contracted by one shipper and conveyed to one consignee and to one
destination.
LCL (Less Container load)-
A consignment of Cargo which does not fill a full container, grouped with
other consignments for the same destination.
38. 38
Terms used in L/C Commercial
documentations
Shipping Marks-
These mark essential to identifying cargo and linking that cargo with
specific documents. Because these marks are important as identifiers, the
marks and numbers should be as simple as possible, shipping marks
include the abbreviated name of buyer, reference number,
destination, package number and container number. (if applicable)
39. L/C Advantages for both Importers and
Exporters
58
For the Exporter/Seller:
✔ Upon presentation of the specified documents (in strict
conformance) the Buyer/Exporter is guaranteed payment (the
exception is if the Issuing Bank folds)
✔ Eliminates risk of the buyer canceling the order and therefore
reduces production risk
✔ Makes it easier for the Buyer/Exporter to secure
order/production financing-pre-export financing
✔ Easier to secure receivable financing (in case where the L/C
is not payable At Sight)
✔ Buyer cannot refuse payment by raising a complaint about
the goods. Any complaints must be settled between the Buyer
and Seller outside of the L/C.
40. L/C Advantages for both Importers and
Exporters
For The Importer/Buyer
✔ In most cases the Importer/Buyer avoids partial pre-payments or
deposits
✔ Helps reduce the risk of non-performance of the Exporter/Seller.
If the Exporter/Seller doesn't ship the goods they don't get paid.
✔ Certainty that payment will only be make to the Exporter/Seller
upon presentation of documents in strict compliance with the L/C
evidencing the shipment of goods.
✔ Documents are received quickly, expediting customs clearance
and ultimate delivery
✔ Makes structuring an advantageous payment schedule easy
✔ Importer/Buyer will receive timely delivery or the goods because
the L/C terms dictate latest acceptable shipment date.
59
41. Disadvantages for the Importer/Buyer:
• Ties up the business credit line
• Unless currency-hedging strategies are utilized, the actual
cost of the goods can increase do to vulnerability to currency
fluctuations.
• Costs involved with issuing, negotiating, and other fees (like
amendments), can make L/C expensive.
• Seller's bank controls the shipping documents
• The goods shipped may not conform (inferior quality for
example) to the order (remember L/C's are strictly about
documents and are separate from the actual goods). Unless
the seller "makes good" the only recourse is through legal
proceedings. 60
42. Disadvantages to the Exporter/Seller:
• Strict compliance is required for payment. Unless all the
documents are 100% compliant with the terms and conditions
of the L/C the bank will not issue payment.
• Still subject to political risk of the country the L/C originates
• Subject to the financial strength and stability of the Issuing
bank
• More cumbersome - requires a high level of expertise to
successfully navigate the process
• More expensive than other methods of payment
• Receiving, negotiating, and other fees associated with L/C can
be expensive. The paperwork can be very time consuming and
cumbersome to produce 6
1
43. 43
Container calculation
• CBM Calculation Formula :
1.Length (centimeter) x Width (centimeter) x Height
(centimeter) / 1,000,000
2.Length meter x Width meter x Height meter
e.g. 35 m x 35 m x 45 m = 0.055 CBM
• CFt Formula : (Length" x Width" x Height" )/1728
• Kt Formula : Pounds divided by 2204.62 = Kiloton (Kt)
44. 44
Container calculation
Calculate the Volumetric Weight of shipment :
• Shipping costs have historically been calculated on the
basis of gross weight in kilograms or pounds. By charging
only by weight, lightweight, low density packages become
unprofitable for freight carriers due to the amount of space
they take up in the truck/aircraft/ship in proportion to their
actual weight. The concept of Dimensional Weight has
been adopted by the transportation industry worldwide as a
uniform means of establishing a minimum charge for the
cubic space a package occupies.
45. Container calculation
(Length x Width x Height in centimeters) / 5000 = Volumetric
Weight in kilograms
6
4
Centimeters / kilograms:
• DHL:
(L cm x W cm x H cm)/5000 or 4000 depending on
certain import/country criteria
• FedEx:
(L cm x W cm x H cm)/6000 (new) or /5000 (old, still used in Asia)
for international shipments, (L cm x W cm x H cm)/7000 for
domestic shipments
• UPS:
(L cm x W cm x H cm)/6000 or /5000 depending on
certain import/country criteria
• Canada Post :
(L cm x W cm x H cm)/6000 or (L in x W in x H in)/166
46. 46
Some calculations for major courier/shipping
companies:
Inches / pounds:
• FedEx Express & UPS:
(L in x W in x H in )/166 (domestic) or /139
(international) (otherwise, actual weight is used for
"billing weight")
• FedEx Ground & UPS Ground:
(L in x W in x H in )/166 (domestic) or /139 (international) if
the package is 5,184 cubic inches or more (otherwise, actual
weight is used for "billing weight")
47. 47
After calculating CBM it is very easier to
calculate the no. of container needed to
complete a shipment.
No. of container needed=Total CBM/
capacity of a container in CBM
51. 40' HQ Shipping Container
40' HQ Shipping Container
Dimensions Metric Standard US Standard
External Length 12.192 40'
Width 2,438 8'
Height 2,896 9'-6”
Internal Length 12,032 39' – 5 45/64"
Width 2,352 7' – 8 19/32”
Height 2,698 8' – 10 7/32”
Door Opening 2,340 7' – 8 1/8”
2,585 8' – 5 49/64”
Cubic Capacity CU Meters CU Feet
76.4 2,700
KG LBS
Maximum Gross Weight 32,500 67,200
Tare Weight 4,850 5,600 71
Maximum Load 28,700 61,600
52. Load ability of ocean containers
• 20 ft container approximately 26-28 CBM
• 40 ft container approximately 55-58 CBM
• 40 ft HQ container approximately 60-68 CBM
• 45 ft HQ container approximately 78 CBM
• Note: This is an HQ or sometimes called HC meaning High Cube and is
12" taller than the standard GP shipping container.
THE END 72
