LETTER OF CREDIT (L/C) – ACCEPTED PAYMENT STRUCTURE
Our Letter of Credit Policy
For international transactions settled through a Documentary Letter of Credit, we accept a banking structure that secures the full Contract Value while allowing the Manufacturer/Supplier to receive the required production advance and final payment before shipment.
Our standard requirement is:
100% Irrevocable, Transferable and, where required, Confirmed Documentary Letter of Credit in our favour as Seller and First Beneficiary, incorporating agreed Pre-Shipment Advance Payment provisions.
The Letter of Credit must cover 100% of the total Contract Value and must be issued by a bank acceptable to us and to our bank.
Where confirmation is required, the L/C must be confirmed by a first-class international bank acceptable to us and our bank.
TRANSFERABLE LETTER OF CREDIT
The Letter of Credit must expressly state that it is TRANSFERABLE and must permit us, as First Beneficiary, to transfer the agreed portion of the same Letter of Credit to the Manufacturer/Supplier as Second Beneficiary.
No separate Back-to-Back Letter of Credit is required.
The transferred amount corresponds to the amount contractually payable by us to the Manufacturer/Supplier under the applicable Purchase or Supply Contract.
The original Letter of Credit remains issued for:
100% of the Contract Value in our favour as Seller / First Beneficiary.
PRE-SHIPMENT ADVANCE PAYMENT
The Letter of Credit must permit the Manufacturer/Supplier to receive the agreed production or procurement advance before commencement of production.
The applicable L/C must therefore contain an appropriate:
Pre-Shipment Advance Payment / Red Clause Provision
or another equivalent advance-payment mechanism acceptable to the banks involved.
The advance payment may be made against a limited documentary presentation such as:
- Manufacturer’s Advance / Proforma Invoice;
- Manufacturer’s signed Advance Payment Request;
- Purchase Order or Supply Contract reference;
- Manufacturer’s Beneficiary Certificate confirming that the requested amount represents the agreed production or procurement advance.
No Air Waybill, Bill of Lading, CMR or other transport document shall be required for the production advance.
PRODUCTION
Following receipt of the agreed advance payment, the Manufacturer/Supplier proceeds with the production, procurement, allocation and preparation of the goods.
Once the goods have been completed and prepared for delivery, the Manufacturer/Supplier may proceed with any inspection requirements agreed under the Contract.
The goods remain under the control of the Manufacturer/Supplier until the full contractual amount due to it has been received.
PRE-SHIPMENT DOCUMENTATION
For the final payment prior to shipment, the documentary presentation should be limited to documents that are commercially necessary, objectively obtainable and appropriate to the transaction.
Depending on the nature of the goods and the contractual terms, these documents may include:
- Manufacturer’s Commercial Invoice;
- Packing List;
- Independent Inspection Certificate, only where inspection has been previously agreed;
- Serial Number List, where applicable;
- Certificate of Origin, where applicable and available at the pre-shipment stage.
No unnecessary or duplicative certificates should be required.
INDEPENDENT INSPECTION
Where the Buyer and Seller have agreed that the goods shall be inspected before final payment, the inspection shall be performed by an independent inspection organisation acceptable to the parties.
The Independent Inspection Certificate may confirm, as applicable:
- quantity;
- product description;
- model or specification;
- physical condition;
- packaging;
- serial numbers, where applicable;
- and conformity with the agreed contractual requirements.
An Independent Inspection Certificate shall only be required where such inspection has been expressly agreed before issuance of the Letter of Credit.
FINAL PRE-SHIPMENT PAYMENT
The Manufacturer/Supplier must receive the full contractual amount due to it before the goods are released for shipment or export.
Accordingly, after the goods have been completed and the required pre-shipment documentation has been prepared, the Manufacturer/Supplier presents the applicable documents under the transferred portion of the Letter of Credit.
The remaining contractual amount due to the Manufacturer/Supplier then becomes payable.
The final payment must not depend upon presentation of an:
Air Waybill;Bill of Lading; CMR; or other transport document,
where such documents can only be issued after the goods have been fully paid and released for transportation.
NO SHIPMENT BEFORE FULL PAYMENT
Our standard commercial procedure requires:
Full payment to the Manufacturer/Supplier before release of the goods for shipment.
The transaction sequence is therefore:
Letter of Credit Issued
- L/C Accepted by Our Bank
- Agreed Portion Transferred to Manufacturer/Supplier
- Production Advance Paid
- Production / Procurement
- Inspection, where agreed
- Pre-Shipment Documents Presented
- Manufacturer/Supplier Fully Paid
- Goods Released for Shipment
- Shipment
- AWB / B/L / CMR or Other Transport Document Issued
Accordingly, transport documents are issued after full payment and release of the goods and are not a prerequisite for the agreed pre-shipment payments.
OUR PAYMENT AS SELLER
Our company remains the Seller / First Beneficiary of the original Letter of Credit covering 100% of the total Contract Value.
The Manufacturer/Supplier, as Second Beneficiary, is entitled only to the amount transferred to it under the L/C.
Our contractual commercial entitlement as Seller represents the difference between the full Contract Value payable by the Buyer and the amount contractually payable to the Manufacturer/Supplier.
Where applicable, settlement of this difference is implemented through the invoice-substitution mechanism available under the Transferable Letter of Credit and accepted by the Transferring Bank.
INVOICE SUBSTITUTION
Under the Transferable L/C structure, the Manufacturer/Supplier, as Second Beneficiary, presents the required documents under the transferred portion of the Letter of Credit.
Where applicable, our company, as First Beneficiary, substitutes:
the Manufacturer/Supplier’s Commercial Invoice
with:
our own Commercial Invoice issued to the Buyer.
Our Commercial Invoice reflects the full contractual selling price agreed between our company and the Buyer.
The Manufacturer/Supplier’s invoice reflects the contractual amount payable by us to the Manufacturer/Supplier.
The difference between these amounts represents our contractual commercial entitlement as Seller.
The invoice-substitution and settlement procedure remains subject to the terms of the Letter of Credit and the procedures accepted by the Transferring Bank.
THIRD-PARTY DOCUMENTS
In many international transactions, our company acts as the contractual Seller while the goods are physically manufactured and/or exported by another authorised entity.
The Letter of Credit must therefore permit appropriate third-party documentation.
Such documents may be issued by:
- Manufacturer;
- Licensed Exporter;
- Independent Inspection Company;
- Freight Forwarder;
- Carrier;
- or another authorised entity directly involved in the transaction.
The fact that such documents are issued by the actual Manufacturer, Exporter or other authorised party does not alter our contractual position as Seller and First Beneficiary.
COMMERCIAL INVOICE
Our company remains the contractual Seller to the Buyer.
Accordingly, the Commercial Invoice presented by us under the original Letter of Credit shall be issued by:
Our Company as Seller / First Beneficiary.
Where the transferable structure requires invoice substitution, the Manufacturer/Supplier’s Commercial Invoice may be substituted with our Commercial Invoice in accordance with the terms of the L/C and the procedures of the Transferring Bank.
DRAFT L/C APPROVAL
Before issuance of the final Letter of Credit, the Buyer must arrange for its bank to prepare a:
DRAFT LETTER OF CREDIT
The Draft L/C must be submitted to us for review and, where required, to our bank for approval.
The Draft L/C must clearly provide for:
- 100% of the Contract Value in our favour;
- irrevocable status;
- transferability;
- confirmation, where required;
- agreed pre-shipment advance payment;
- transfer of the agreed portion to the Manufacturer/Supplier as Second Beneficiary;
- documentary requirements for the advance payment;
- documentary requirements for the final pre-shipment payment;
- acceptance of appropriate third-party documents;
- invoice substitution;
- partial shipments, where applicable;
- transshipment, where applicable;
- adequate validity;
- applicable banking rules;
- allocation of banking charges.
The final Letter of Credit must not be issued until its wording and structure have been accepted by us and, where applicable, by our bank.
GENERAL LETTER OF CREDIT REQUIREMENTS
The Letter of Credit must:
1. COVER 100% OF THE CONTRACT VALUE
The original L/C must be issued in our favour for the full Contract Value.
2. BE IRREVOCABLE
The Letter of Credit must be irrevocable.
3. BE TRANSFERABLE
The Letter of Credit must expressly state that it is:
TRANSFERABLE
and must permit transfer of the agreed portion to the Manufacturer/Supplier as Second Beneficiary.
4. BE CONFIRMED WHERE REQUIRED
Where confirmation is required, the L/C must be confirmed by a first-class international bank acceptable to us and our bank.
5. BE SUBJECT TO UCP 600
The Documentary Letter of Credit must be subject to the:
ICC Uniform Customs and Practice for Documentary Credits – UCP 600.
6. PERMIT PRE-SHIPMENT ADVANCE PAYMENT
The L/C must permit the Manufacturer/Supplier to receive the agreed production or procurement advance before production commences.
7. PERMIT FINAL PRE-SHIPMENT PAYMENT
The L/C must permit the Manufacturer/Supplier to receive the full remaining contractual amount due to it before the goods are released for shipment.
8. NOT REQUIRE TRANSPORT DOCUMENTS BEFORE FULL PAYMENT
Where the Manufacturer/Supplier must be fully paid prior to shipment, the L/C must not require:
AWB; Bill of Lading; CMR; or another transport document as a condition for the production advance or final pre-shipment payment.
9. PERMIT APPROPRIATE THIRD-PARTY DOCUMENTS
The L/C must permit documents legitimately issued by the Manufacturer, Licensed Exporter, Inspection Company or any authorised party involved in the transaction.
10. PERMIT INVOICE SUBSTITUTION
The structure must permit us, as First Beneficiary, to substitute our Commercial Invoice for that of the Second Beneficiary where applicable.
11. PERMIT PARTIAL DRAWINGS
The L/C must allow the agreed staged payment structure, including:
- production/procurement advance; and
- final pre-shipment settlement.
12. ALLOW SUFFICIENT TIME
The L/C must provide sufficient validity for:
- transfer of the credit;
- production;
- procurement;
- export licensing;
- inspection, where agreed;
- preparation of pre-shipment documents;
- final pre-shipment settlement;
- release of the goods;
- shipment;
- and completion of the banking process.
13. CONTAIN REASONABLE DOCUMENTARY REQUIREMENTS
The L/C must not contain documentary requirements that are:
- impossible;
- subjective;
- contradictory;
- unnecessarily duplicative;
- commercially unreasonable;
- or outside the reasonable control of the relevant Beneficiary.
BANKING CHARGES
Unless otherwise expressly agreed in writing, all banking charges associated with the establishment and implementation of the Buyer’s Letter of Credit shall be for the Buyer’s account, including where applicable:
- issuance charges;
- advising charges;
- confirmation charges;
- amendment charges;
- transfer charges;
- correspondent bank charges;
- reimbursement charges;
- document examination charges;
- negotiation charges;
- and other banking expenses directly associated with the agreed L/C structure.
BANK APPROVAL
The proposed Letter of Credit structure remains subject to prior approval by our bank and the Transferring Bank.
The banks must accept the proposed:
issuing bank;
confirmation arrangements;
transferability;
transferred amount;
Second Beneficiary;
advance payment mechanism;
final pre-shipment payment mechanism;
documentary requirements;
invoice-substitution procedure;
third-party documentation;
and settlement structure.
No production, procurement or shipment obligation shall arise until the Letter of Credit has been issued, advised, confirmed where required, and accepted by our bank in a form satisfactory to us.
OUR STANDARD L/C REQUIREMENT
For the avoidance of doubt, our standard Letter of Credit requirement is:
100% Irrevocable, Transferable and, where required, Confirmed Documentary Letter of Credit in our favour as Seller / First Beneficiary.
The L/C must:
- secure 100% of the Contract Value;
- permit transfer of the agreed portion to the Manufacturer/Supplier;
- permit the agreed production/procurement advance before commencement of production;
- permit full Manufacturer/Supplier payment before shipment;
- permit appropriate third-party documentation;
- permit invoice substitution;
- permit staged pre-shipment drawings;
- and not require transport documents as a condition for payments that must occur before shipment.
The Manufacturer/Supplier’s normal documentary presentation for final pre-shipment payment shall be limited, as applicable, to:
- Commercial Invoice;
- Packing List;
- Independent Inspection Certificate, only where previously agreed;
- Serial Number List, where applicable;
- Certificate of Origin, where applicable and available.
Buyers are requested to instruct their bank to prepare and submit a Draft Letter of Credit for our review and banking approval before final issuance.
All Letter of Credit terms, documentary requirements, transferred amounts and payment mechanisms remain subject to final contractual agreement and prior approval by the banks involved.