Basic Definitions used in Letters of Credit

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This article provides definitions of phrases relating to the parties involved in a Credit as well as clarifying the different wording used to describe Credits.

Credit   –  This is a financial product which acts as an instrument of settlement of the payment obligation between buyer and seller.  The financial institution (usually a bank), which initiates this product, undertakes payment to the seller on condition that the documents stipulated in the Credit are presented and all terms and conditions are complied with.

There are three generic terms which are often used, sometimes in the same document, which all mean the same – Letter of Credit, Commercial Credit and Documentary Credit.  The payment system is triggered by the seller shipping the goods or completing the service work.

Standby Letter of Credit – A financial product which adopts the same basic forms as a Letter of Credit, but payment to the Beneficiary is only made in case of default on the transaction to which the standby relates.  Therefore, it’s function is closer to a bank guarantee than a Letter of Credit which is not surprising since it was developed initially as a type of bank guarantee.

The Applicant – The buyer of the goods who instructs their bank to open a Letter of Credit.  Only the Applicant can initiate the Letter of Credit transaction.  It is not a process that the seller of the goods can organise through the banks.

The Beneficary – The seller of the goods in whose favour the Letter of Credit has been opened.

UCP 600 – The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication No. 600 (UCP 600) are rules that apply to any Documentary Credit when the text of the Credit expressly indicates that it is subject to these rules.

Issuing Bank – The buyer’s bank who issues the Letter of Credit in favour of the seller.  Sometimes known as the Opening Bank.  The Issuing Bank undertaking is detailed in Article 7 of UCP 600.

Advising Bank – The bank to which the Issuing Bank sends the Letter of Credit and advises the Credit to the Beneficiary.  The responsibilities of the Advising Bank are detailed in Article 9 of UCP 600.

Nominating Bank – This is the bank who is authorised to pay.  The Nominated Bank is often the Advising Bank.  Details of nomination are specified in Article 12 of UCP 600.

Confirming Bank – An additional bank which, at the request of the Issuing Bank, provides it own undertaking (in addition to that of the Issuing Bank) to honour the obligations under the Credit.  The Confirming Bank undertaking is detailed in Article 8 of UCP 600.

Reimbursing Bank – This is the bank who is authorised to pay under Bank-to-Bank reimbursement arrangements.  The undertaking of a reimbursing bank is detailed in Article 13 of UCP 600.  The beneficiary usually does not get involved with the reimbursing bank.

This is the fourth article in the series on Getting paid with Letters of Credit. Please do check out the other articles in this series.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training. She is based in the United Kingdom. If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or to access other articles on International Trade matters please do check out our website at www.point-point.com

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