Import Letters of Credit

The letter of credit is a highly standardized instrument which has evolved over many years into a reliable method of effecting payment for commercial transactions throughout the world. Essentially, an import letter of credit does not differ from an export letter of credit except from the point of view of the user. An importer has different considerations from those of the exporter, and a well-structured letter of credit will adequately serve the needs of both.

The Application Process
When a buyer determines that he will need a letter of credit in order to purchase or finance an order, an application must be completed. A letter of credit constitutes a contingent liability of the applicant (buyer) and, therefore, the bank which issues it; hence, each letter of credit issued becomes an extension of commercial credit. For that reason, it is necessary to apply for an import letter of credit just as one would apply for a loan.

Once the credit approval is in place, the actual process of requesting the issuance of the letter of credit can be a relatively simple one. INTRUST Bank’s international banking specialists are available to provide assistance and advice.

Those who do not have a credit facility established with INTRUST may still apply for a letter of credit if they are prepared to post cash collateral for the amount of the request. Alternatively, INTRUST, acting as an agent for the buyer’s bank, can issue the letter of credit on the strength of its correspondent relationship. For more information contact us.

Requesting an Amendment
If, after the letter of credit has been received, the seller finds that some of its terms or conditions are unacceptable, he may contact the buyer to arrange for an amendment. The buyer then requests the issuing bank to issue an amendment. If the terms of the amendment restrict, contract, or alter the value or terms of the letter of credit in any way, the seller must grant his approval.

The Flow of Goods and Documents
Understanding the flow of goods and documents is essential for proper planning and scheduling of shipments. It is important to remember that banks deal only in documents. The merchandise flows directly from the seller to the buyer. The following steps outline the process with INTRUST as the issuing bank.

1. The buyer (also referred to as the importer or applicant) completes an application for a commercial letter of credit (see figure 1 below).

2. INTRUST issues the letter of credit, usually on the same day the application is received, and transmits it by SWIFT (Society for Worldwide Interbank Financial Telecommunications), mail, or courier — depending on the destination and the instructions received — to a correspondent bank in the country of the seller (beneficiary) (see figure 2 below).

3. The advising bank (the seller’s bank) authenticates the letter of credit — a security measure to provide assurance that the instrument has truly been issued by the bank named therein – and passes it on to the seller (see figure 2 above).
4. The seller examines the letter of credit to determine if he can comply with its terms. If he cannot, he should contact the buyer and request an amendment; if the letter of credit meets with his approval, he will produce and then ship the merchandise directly to the buyer (see figure 3 below).

5. After the merchandise is shipped, the seller will present all of the required documents to his bank, usually the advising bank, for negotiation (see figure 3 above). These documents typically include a bill of lading which conveys title to the merchandise.
6. The negotiating bank will examine the documents for compliance with the terms of the letter of credit. If found to be in order, the documents will be forwarded to INTRUST, and the seller will be paid (see figure 3 above). If the documents contain discrepancies, the negotiating bank will contact INTRUST for approval to pay.
7. Upon receipt of conforming documents or an authenticated request for reimbursement, INTRUST will debit the buyer’s account, transfer the funds to the negotiating bank, and pass the documents on to the buyer (see figure 4 below).

Financing Features
Besides serving as a vehicle for payment, a letter of credit can serve as a financing instrument if the seller and issuing bank agree to the arrangement. The most common methods are described below:

• Deferred payment. With this arrangement, payment is not required until a specified number of days after shipment of the merchandise. The buyer will have access to the documents so that he can claim his goods from the carrier, but payment is deferred until the stipulated future date.
• Time drafts. As with a deferred payment letter of credit, the buyer will be able to obtain the merchandise without making immediate payment as long as the letter of credit stipulates that the draft be drawn at a specified number of days after sight or after shipment. The bank on which the draft is drawn accepts the draft, thereby creating a banker's acceptance, and undertakes to pay it at its maturity. The seller then has the option of holding the draft to its maturity and collecting its face value, or discounting the draft before it matures. Discount rates are usually more favorable than other rates at which the seller might borrow, so financing receivables with this instrument is attractive, especially in a high interest rate environment.

If the seller does not wish to carry the receivable or bear the expense of discounting the banker’s acceptance, the letter of credit may be issued with discount and acceptance charges for the account of the buyer. Again, since the rate is usually favorable, the financing arrangement will generally be attractive regardless of who pays the cost.