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Useful Info

A Documentary Credit, also commonly called a Letter of Credit, is a commitment by a bank (the "Issuing Bank") to pay the seller or exporter ("Beneficiary") a certain amount for goods or services, provided the Beneficiary conforms with the specified terms and conditions contained in the Credit.

Documentary Credits

A Documentary Credit, also commonly called a Letter of Credit, is a commitment by a bank (the "Issuing Bank") to pay the seller or exporter ("Beneficiary") a certain amount for goods or services, provided the Beneficiary conforms with the specified terms and conditions contained in the Credit.

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More about: Documentary Credits

Why do I need this?

  • Secures payment, provided the terms and conditions are fulfilled
  • Delivery and payment occur at the same time
  • It offers the exporter and importer maximum security
  • Various types of documentary credits are available
  • It is time-consuming, but this is offset by the benefits and security of this method
  • Governed by the Uniform Customs and Practice for Documentary Credits

What are the steps involved?

If you are exporting:

  • You agree with the buyer to the terms and conditions of the sales contract
  • The buyer applies for a documentary credit
  • You receive the documentary credit from FNB Namibia and carefully read the terms and conditions
  • The goods are shipped and/or services supplied
  • Documents called for in the documentary credit are gathered and presented to FNB Namibia
  • If documents are in order, you are either paid or receive a payment undertaking to be paid at a future date, depending on the payment terms of the original agreement
  • These documents are sent to the issuing bank
  • The buyer then uses these documents to claim the goods

If you are importing:

  • You agree with the seller to the terms of the sales contract
  • You apply for a documentary credit
  • The documentary credit is sent to the seller's bank by FNB Namibia
  • Seller ships the goods and/or supplies the services
  • Documents called for in the documentary credit are gathered and presented to the bank
  • If documents are in order, the seller is paid or receives a payment undertaking to be paid at a future date, depending on the payment terms of the original agreement
  • Your bank checks the documents, debits your account (in case of a sight documentary credit), and gives you the documents
  • You use these documents to claim the goods

Types of Documentary Credits

  • Revocable Credit

This can be amended or cancelled at any time by the importer without the consent of the exporter. This option is not often used, as there is little protection for the exporter. By default all credits are irrevocable, unless otherwise stated.

  • Irrevocable Credit

Once issued this can only be changed or cancelled with the consent of all the parties. The seller must merely comply with the terms and conditions of the credit in order to receive payment.

  • Confirmed Credit

In some instances, exporters may request a credit to be confirmed by another bank, (usually a bank in their own country). If a bank adds its confirmation to a credit, it means that it is obliged to pay if the terms and conditions of the credit are complied with. This obligation to pay exists even if the issuing bank or country defaults.

  • Payment Credit

This is available for payment at the tellers of the paying bank, as nominated in the credit. The seller can, therefore, present documents to the paying bank and does not have to wait for the documents to be forwarded to the issuing bank for checking and subsequent payment.

  • Negotiation Credit

This is always payable at the counters of the issuing bank. Buyers can use negotiation credits to delay payment until the documents have been received and checked by the issuing bank.

  • Deferred Payment Credit

Similar to payment credits, except that they are payable at a future date.

  • Acceptance Credit

The accepting bank guarantees payment to the holder of the bill of exchange on maturity date - regardless of whether the credit is confirmed or not. This option comes with an acceptance fee which can be substantial.

  • Back-to-Back Credit

The original letter of credit is used as security to open another credit in favour of the exporter's own supplier. The bank confirming the original credit may not necessarily be the issuing bank of the second credit.

  • Transferable Credit

This is normally used when the exporter is not supplying the goods and wishes to transfer all or part of the responsibilities under the credit to the supplier(s).

  • Red Clause Credit

This enables the exporter to obtain advance payment before shipment. This is provided against the exporter's certificate confirming its undertaking to ship the goods and to present the documents in compliance with the terms and conditions of the documentary credit.

  • Green Clause Credit

Similar to a Red Clause Credit, but in addition to pre-shipment finance the exporter also receives storage facilities at the port of shipment at the expense of the buyer.

  • Packing Credit

This offers pre-shipment finance to the seller against warehouse receipts, forwarding agent's receipts or similar documents that prove the goods are no longer in the seller's possession.

  • Standby Credit

Similar to a normal letter of credit, this method differs in that it is a default instrument, whereas a normal credit is a payment instrument. A standby credit is only called upon in the event of failure to perform. Its function is, therefore, that of a guarantee.

  • Revolving Credit

This allows for the credit to be automatically reinstated under certain circumstances. It is normally used where shipments of the same goods are made to the same importer.

How do I (the seller) know whether this is the correct payment method to opt for?

If you are concerned that the importer may not pay, or you are not comfortable with the country risk in the country of the importer, then you should insist on payment via a documentary credit - also called a letter of credit.

Once your bank adds their confirmation to the credit, the various risks are covered - provided you produce the necessary documents and they conform to the credit terms, you will receive payment, even if the importer's bank and/or country are unable to pay.

How do I (the seller) ensure that payment is effected via a documentary credit?

You need to state in your sales contract that payment is to be effected via a documentary credit. If you have requested payment via documentary credit, you should not proceed with the manufacture and/or shipping of your goods until you have received the documentary credit and checked it carefully to ensure that it is issued in terms of your requirements.

What happens if the documentary credit is not in terms of my (the seller's) requirements?

If this is the case, you will need to request the buyer to arrange for an amendment to the documentary credit.

What is the Uniform Rules for Collections?

It is hard to imagine dealing with collections without the security of international uniformity. The International Chamber of Commerce (ICC) is an international body that has defined worldwide standards for the operation of documentary collections.

These standards are embodied in the 'Uniform Rules for Collections', commonly referred to as the URC 522. The URC 522 is not a force of law, but a set of rules and regulations that are binding on the parties who subscribe to it.

What else do I need to know?

Checklist for buyers applying for a documentary credit

  • Does the credit state the correct form (i.e. revolving, confirmed, transferable, etc)?
  • Can the exporter comply with the terms and conditions without difficulty?
  • Have all the appropriate documents been called for?
  • Does the transport insurance need to cover any special risk?
  • Does the shipping date allow for enough time for the documents to be presented before expiry?
  • Have the delivery terms been stated?
  • Is the description of the goods accurate?

Checklist for sellers on receipt of a documentary of credit

  • Does the credit reflect the contract (amount, description of goods, terms of delivery, expiry and shipment dates)?
  • Has the credit been issued in the agreed form (revolving, confirmed, transferable, etc)?
  • Where and how is the credit available?
  • Where do the documents need to be presented?
  • Is the credit subject to the Uniform Customs and Practice for Documentary Credits?
  • Are the various names and addresses correct?
  • Can the shipment deadlines be met?

I want it!

Call us on 264 61 299 2222.

Legal

Documentary Credits are governed by the Uniform Customs and Practice for Documentary Credits.

Contact Details

Call us on 264 61 299 2222.