Trade Credit Letter of Credit Magazine Section

 What are the Commonly Requested Documents in a Letter of Credit Transaction?
documents required in lc transaction

A Letter of Credit is also known as 'Documentary Credit'. Nestled in the word 'documentary' is the word 'document'. This is because, in a letter of credit transaction, documents are its driving force. The performance of the seller/exporter is tied to the documents requested in the letter of credit. What that means is that in a LC transaction, the payment from a bank to the seller/exporter is conditional upon the ability of the seller to generate the documents that are requested by the buyer/importer in the letter of credit. In order to pay the seller, once the bank receives the documents from the seller, the bank examines the submitted documents to see if they comply with the documentary credit terms that were set by the buyer and the governing rules of the LC.  The bank also checks the instructions to ensure that the documents submitted by the seller contain no errors.  Since these complying documents submitted by the seller to the bank are the trigger for the seller to get paid, it makes them the most important component of a letter of credit transaction in international trade.

What documents are generally requested in a letter of credit transaction?

It is evident that the buyer generally requests the documents from a seller in a LC transaction.

So think as a buyer/importer when looking for the logic behind the kind of documents that typically get requested in a LC (or documentary credit) transaction.

From a buyers' perspective, the buyer would absolutely need the following:

  1. Proof of value of goods being imported.
  2. Proof of Shipment.
  3. Proof of Packing.

Furthermore, the buyer may also want the following:

  1. Proof of Origin of goods. (same as bullet point number 9 given below)
  2. Proof that the products meet the desired quality
  3. Proof of Insurance.

Additionally, the buyer's country may have statutory requirements like:

  1. Phytosanitary or Health Certification of product that is being imported
  2. The buying country’s embassy-certified (or legalized) Invoice and/or documents
  3. Certification and declaration by the seller/exporter that goods in a particular export shipment are wholly obtained, produced, manufactured or processed in a particular country.

Moreover, the nominated bank that needs to pay the money to the beneficiary of the LC (i.e. seller/exporter) may want a:

  1. Financial negotiable instrument to be drawn-up by seller in order to make payment to the seller at sight or by acceptance of a draft.

So based on the above-listed 10 requirements respectively, let’s generate the document list:

  1. Commercial Invoice (Proof of Value)
  2. Bill of Lading (Proof of Shipment)
  3. Packing List (Proof of Packing)
  4. Certificate of Origin (Proof of Origin)
  5. Inspection Certificate (Proof of Quality)
  6. Insurance Certificate (Proof of Insurance)
  7. Health Certificate of Phytosanitary Certification
  8. Consular Invoice or Legalized Commercial Document(s)
  9. Certificate of Origin (same as #4 given above)
  10. Draft or Bill of Exchange (Negotiable Instrument to be given to the bank in order to get paid)

If you notice these documents that are requested in a LC, typically fall in to the following five categories:

  • Commercial Documents
  • Shipping and Transport Documents
  • Insurance documents
  • Official Documents required by Buyer/Importer’s country
  • Financial Documents

The following is a brief explanation of the above listed documents:

  1. Commercial Invoice

In international trade, a Commercial Invoice is a very important document since it is the official bill of sale and a document based on which the importer pays the exporter. It is issued by the seller/exporter and should be on the beneficiary’s (exporter’s) letterhead that matches the beneficiary information on the L/C. A commercial Invoice includes a description of merchandise (with their Harmonized codes), price, terms and name and address of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit. Unless the letter of credit specifically states otherwise, a generic description of the merchandise is usually acceptable in the other accompanying documents. This is also a document that is used for custom clearance and payment of duties. It should have the correct currency designation and made out in the same currency as the letter of credit.  As per LC Rules UCP600 Article 18: Commercial Invoice "need not be signed” anymore.

  1. Transport Documents

Bill of Lading (Marine/Ocean/Port-to-Port)

Bill of Lading (B/L) is a contract between a seller and the carrier evidencing delivery of goods into the care and custody of the carrier. When authenticated it becomes a document of title. The B/L can be ‘straight’ or ‘negotiable. A straight B/L states that the goods are consigned to a specified person or entity and it is not negotiable free from. If the B/L is negotiable it can be made to the “order” of blank; bank; shipper; buyer; or seller.  The documents evidence control of goods. The B/L also serves as a receipt for the merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination. (Refer LC Rules UCP600 Article 20 UCP600)

A ‘Clean on Board’ B/L means that goods have been received on board by the carrier in apparent good condition and stowed ready for transport.

Other Transport Documents: Non-negotiable seawaybill; Charter party bill of lading; Multimodal transport document; Air transport document; Road, rail, or inland waterway transport document; Courier and post receipt. (Covered under LC rules UCP600 Articles 21 to 25)

  1. Packing List

A packing list is usually requested by the buyer from the seller to assist the buyer in identifying the contents of each package or container that is being exported. It must show the shipping marks and number of each package.

A typical Packing Slip contains the following information:

  • Name, Address, Phone of Seller/Exporter (consignor)
  • Name, Address, Phone of Buyer/Importer (consignee)
  • Description of Goods being Exported
  • Quantity (Number)
  • Weight
  • Package Type
  • Total Number of Packages with contents of each package
  • Markings used on the Package
  • Reference Commercial Invoice, Date and Buyer's Purchase Order, Delivery Term and Mode of Transport
  • Carrier details with a reference to the transport document, vessel name and container number

Though a Packing List is not usually required to be signed, some countries and their customs authorities may want the packing slip to be signed and stamped.

The Packing List should not reveal any financial information (price/value etc.) about the shipment.

  1. Certificate of Origin (C/O or CoO)

A certificate of origin is a document that provides evidence of the country-of-origin of the imported goods. It is used in determining any preferential custom tariff, duty on goods and whether or not goods originate in a country against which the importing country has trade restrictions.  The certificate should be consistent with and identified with the other shipping documents by shipping marks and numbers, and must be signed by the appropriate authority. If this document is missing, the highest rates may be applied to each consignment, and Customs authority in the buyer’s country may not allow the goods to be imported. Unlike transport and insurance documents, Letter of credit rules (UCP600) do not cover certificate of origin under any specific articles.

  1. Inspection Certificate

An inspection certificate evidences that goods were inspected and details the result of the inspection. It is a preventative measure against possible fraud and a means of protecting the buyer against receiving substandard or unwanted goods. Inspection is generally carried out by a third party reputable firm which is independent. Clean Report of Findings (CRF) is a type of Inspection Certificate.

  1. Insurance Certificate

An Insurance Certificate is requested by the buyer/importer when the trade terms specified in the LC is either ‘Cost, Insurance & Freight’ (CIF) or ‘Cost & Insurance Paid to’ (CIP). As per these trade terms the seller contracts for insurance cover against the buyer's risk of loss or damage to the goods during carriage. The insurance document should cover the risk specified in the Documentary Credit.  It should be for the CIF or CIP value of the goods. Otherwise the insurance should be for a minimum of 110% of the amount for which payment, negotiation or acceptance is requested in the L/C. (LC Rules UCP 600 Article 28 covers Insurance)

  1. Health Certificate | Certificate of Free Sale | Certificate of Sanitation

Certain countries require that all imports of meat, poultry, fish, seafood, livestock, vegetables, fruits, etc. that are marked for human consumption are attested by the exporting country that they are free from pests and/or diseases; meet the standards and legislation for export and are fit for human consumption. The declaration that is given on a Health Certificate by the exporting country is a government to government affirmation and is generally issued by government-authorized agencies and departments. However, in a LC transaction if there is no mention of who should issue the Health Certificate then it leaves the door open for anyone to issue the certificate and that includes the seller.

The Health Certificate is also known by the following names: Certificate of Free Sale; Certificate of Sanitation and Free Sale; Certificate of Sanitation and Sanitary Certificate.

Phytosanitary Certificate: Similarly, a Phytosanitary Certificate is issued by the exporting country for plants and plant products that are being exported. The certificate is issued by the plant protection government body of the exporting country to the plant protection government body of the importing country certifying that the plants or plant products covered by the certificate have been inspected and are considered to be free from pests and that they conform to the existing phytosanitary requirements of the importing country.

  1. Consular or Customs Invoice

A consular or customs invoice is prepared by the seller on an official country-specific form. It may be required to be ‘visaed’ (officially stamped) and signed by a consular officer of the importing country that has an office/consulate in the exporting country. The value of goods required must agree with that shown on the commercial invoice.

  1. Certificate of Origin

See No. 4

  1. Bill of Exchange or Draft

A Bill of Exchange (or ‘Draft’) is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time a sum of certain money to or to the order of a specified person or bearer. {Read more about this in our Article on Bill of Exchange}

 

Avoiding Document Discrepancies

Upon receipt of a letter of credit advice from the advising bank the seller should immediately:

  • Verify that the LC Type, its amount and the terms and conditions are as per the negotiated sales contract.
  • Calculate that the expiry date, the latest shipment date and presentation of the document period is workable.
  • Ascertain if the requested documents can be produced and submitted within the above-stated timelines stipulated in the LC
  • Check that the documents that are requested in the LC is what was mutually agreed upon and that there are no non-documentary conditions in the LC
  • See if Merchandise description in the LC is proper and can be stated correctly on all relevant document like Commercial Invoice and Shipping Document. 
  • Ensure that all Names and Addresses (Beneficiary's and Applicant's) are stated correctly
  • see if the LC seeks any 'special conditions' that the seller has to fulfil and that it can be accomplished.

Others:

  • Make sure that the Shipping document shows the correct Consignee
  • Make the Draft (Bill of Exchange) for the correct amount, correct tenor and is drawn upon the correct party.
  • Make sure information stated on different documents is consistent and as per the LC requirements.
  • See that the currency is properly designated in the Commercial Invoice.(USD, CAD etc.)
  • Note if the Bill of Lading (Shipping document) requires to indicate whether freight is 'prepaid' or ; 'collect' i.e. payable at destination
  • Note if the Bill of Lading (Shipping document) requires to mention the port of loading and port of discharge

The seller/exporter should note that the negotiating bank's (that bank that receives and examines the documents) ability to pay against documents submitted by the seller under a given LC, depends entirely on the strict compliance of these documents with the terms and conditions of the LC and the provisions contained in the rules for LCs which is UCP600.

 

 

An Opinion on Documents:

An opinion: The seller should negotiate with the buyer to include only the most essential documents in the LC transaction. (Perhaps just the first four in our list). For any other documents that the buyer requests the seller can deliver them directly to the buyer outside the LC arrangement.

This will hasten up payment considerably and reduce the chances of discrepancies which mostly sprout from documents that have to be submitted to the bank for payment, since they are made part of the LC transaction by the buyer.

Keep in mind that any document that is made a part of the LC transaction has to be submitted to the bank for scrutiny and payment. For this reason you want to keep the list of documents that form part of the LC transaction to a minimum.  

Author: Puru Grover © Credit Guru Inc | CreditGuru.com

 

For this article please note:

A) That the following terms have been used interchangeably in this article:

  • Documentary Credit = Letter of Credit = LC =  L/C
  • Beneficiary = The Seller = The Exporter =The party that that derives payment from the letter of credit
  • Applicant = The Buyer = The Importer = The party who arranges to open the Letter of Credit with their bank = The party who requests the documents from the seller.

B) In this article there is a reference to UCP600.

UCP stands for Uniform Customs and Practices for Documentary Credits (or UCP or UCPDC)

These are a globally accepted set of LC rules on the issuance and use of letters of credit that are put out by the International Chambers of Commerce (ICC). The current version of these rules is UCP600. (600 is the publication number)

You can find more information and buy a copy of these rules from the International Chambers of Commerce website iccwbo.org

  

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