Discussion: Important details about L/C's (Letter of Credit)
Post 42 of 84
Replying to [Vishal Kelkar]:but bank here in our country demand collateral in order to pay the seller for the lc amount well they shoulnot but they do , how can we pressurise them todo so?
21 Mar 2007 12:22
Post 43 of 84
Replying to [MikePTY-HK]:
Very Very nice wrote... thats great. New commers can know better how to use L/C as their payment optionts![[em19]](http://img.alibaba.com/images/eng/style/icon/emoticons_great.gif)
Very Very nice wrote... thats great. New commers can know better how to use L/C as their payment optionts
21 Mar 2007 23:21
Post 44 of 84
Replying to [TandH]:
Dear all,
Now, the first question, is the LC safe as a method of trade settlement?
I've gone through all postings by member regarding LC. And clearly I found that the same confusion freely consumed all members.
By virtue of its nature, application and operations, LC is a payment instrument. period. It is an undertaking or a promise of the bank which issues it and bank which confirms it to pay to the seller or beneficiary. So, the doctrine of 'safe' here is very clear. That is payment is guaranteed.
In order to entitle to the guaranteed payment by banks, the seller must exercise his duty, that is to satisfy the terms and conditions expressly stated in the LC. This is because LC works on the basis of matching payment against documents.
LC will remain LC and would not change anything if the seller does not comply to the terms and conditions of the LC. It would remain as a skeleton.
Secondly, does LC guarantee you will receive the goods you ordered?
This is where confusion comes in.
Article 4 of UCP500 clearly states that in LC operations, all parties concerned only deal with documents and not with goods. This is so because LC is not a Sales Contract. LC is a contract of payment which bind 3 important parties i.e. buyer, seller and bank.
Therefore, LC is not an instrument that guarantees the goods. LC is a separate transaction from the Sales Contract. In other word, in a trade between buyer and seller, there are 3 main contract exist:
1. Sales Contract (buy and sell)
2. Payment Contract (method of payment - LC)
3. Contract of Carriage (mode of shipment)
It is very important to fully understand the implication of the contracts above.
Dear all,
Now, the first question, is the LC safe as a method of trade settlement?
I've gone through all postings by member regarding LC. And clearly I found that the same confusion freely consumed all members.
By virtue of its nature, application and operations, LC is a payment instrument. period. It is an undertaking or a promise of the bank which issues it and bank which confirms it to pay to the seller or beneficiary. So, the doctrine of 'safe' here is very clear. That is payment is guaranteed.
In order to entitle to the guaranteed payment by banks, the seller must exercise his duty, that is to satisfy the terms and conditions expressly stated in the LC. This is because LC works on the basis of matching payment against documents.
LC will remain LC and would not change anything if the seller does not comply to the terms and conditions of the LC. It would remain as a skeleton.
Secondly, does LC guarantee you will receive the goods you ordered?
This is where confusion comes in.
Article 4 of UCP500 clearly states that in LC operations, all parties concerned only deal with documents and not with goods. This is so because LC is not a Sales Contract. LC is a contract of payment which bind 3 important parties i.e. buyer, seller and bank.
Therefore, LC is not an instrument that guarantees the goods. LC is a separate transaction from the Sales Contract. In other word, in a trade between buyer and seller, there are 3 main contract exist:
1. Sales Contract (buy and sell)
2. Payment Contract (method of payment - LC)
3. Contract of Carriage (mode of shipment)
It is very important to fully understand the implication of the contracts above.
22 Mar 2007 21:39
Post 45 of 84
Replying to [MikePTY-HK]:Thanks, this message touch me a lot.
23 Mar 2007 00:13
Post 46 of 84
Replying to [MikePTY-HK]:Good recommendation ,Thank you!
02 Apr 2007 23:34
Post 47 of 84
Replying to [MikePTY-HK]:
Dear Mike,thank you for your views!I learnt more about Letter of Credit!
Any way,I was told that there are big risks exist when we are doing payment terms as L/C.It extremely depends on the credit of the buyer's bank.....
usually,we accept T/T payment,aslo sometimes L/C at sight!L/C is allowed for the customers we have cooperated for a long term and we knew each other.........
Thank you again!
Mr.Robert
Dear Mike,thank you for your views!I learnt more about Letter of Credit!
Any way,I was told that there are big risks exist when we are doing payment terms as L/C.It extremely depends on the credit of the buyer's bank.....
usually,we accept T/T payment,aslo sometimes L/C at sight!L/C is allowed for the customers we have cooperated for a long term and we knew each other.........
Thank you again!
Mr.Robert
05 Apr 2007 19:09
Post 48 of 84
Replying to [MikePTY-HK]:
In your first paragraph, you mentioned
In the event that the buyer is unable to make payment on the purchase, the bank is required to cover the full or remaining amount of the purchase.
This sounds like you are explaining about standby LC. But you also mentioned the following
The parties to a letter of credit are usually an applicant who wants to send money, a beneficiary who will receive the money
This, however, sounds like commercial LC. But I assume that you are actually explaining about commercial LC.
Commercial LC does not become operative in the event the buyer fails his obligation to make payment to the seller. The moment it is issued by the issuing bank, it is a full operative payment instrument where issuing bank fully undertakes to pay the seller regardless the buyer is capable or otherwise to pay to the seller. Meaning, under LC, the capacity of the buyer to make payment to the seller is no longer a question.
You also mentioned the following:
by ensuring that the supplier will not be paid until the bank receives confirmation that the goods have been shipped...
Payment under the commercial LC is solely subject to receipt of documents called for under the LC and in compliance with the terms and conditions of the LC by bank. Even if, the goods are shipped, proved by a shipping document and tendered to the bank, but, in absence of other documents required under LC, the bank would not pay.
And one more thing, since 1990, MT700/701 of SWIFT format has become the only mode of issuing LC worldwide when dealing with international traders.
From your post, I think you are quite savvy with the operations of LC.
For further explanation on MT700/701, you can get a handbook on LC issuing guidelines & checklist from me.
In your first paragraph, you mentioned
In the event that the buyer is unable to make payment on the purchase, the bank is required to cover the full or remaining amount of the purchase.
This sounds like you are explaining about standby LC. But you also mentioned the following
The parties to a letter of credit are usually an applicant who wants to send money, a beneficiary who will receive the money
This, however, sounds like commercial LC. But I assume that you are actually explaining about commercial LC.
Commercial LC does not become operative in the event the buyer fails his obligation to make payment to the seller. The moment it is issued by the issuing bank, it is a full operative payment instrument where issuing bank fully undertakes to pay the seller regardless the buyer is capable or otherwise to pay to the seller. Meaning, under LC, the capacity of the buyer to make payment to the seller is no longer a question.
You also mentioned the following:
by ensuring that the supplier will not be paid until the bank receives confirmation that the goods have been shipped...
Payment under the commercial LC is solely subject to receipt of documents called for under the LC and in compliance with the terms and conditions of the LC by bank. Even if, the goods are shipped, proved by a shipping document and tendered to the bank, but, in absence of other documents required under LC, the bank would not pay.
And one more thing, since 1990, MT700/701 of SWIFT format has become the only mode of issuing LC worldwide when dealing with international traders.
From your post, I think you are quite savvy with the operations of LC.
For further explanation on MT700/701, you can get a handbook on LC issuing guidelines & checklist from me.
16 Apr 2007 01:03
Post 49 of 84
Replying to [MikePTY-HK]:
thank you so much for your effort to supply the original swift copy.
it has been wonderful use of info really. thank you!!
thank you so much for your effort to supply the original swift copy.
it has been wonderful use of info really. thank you!!
17 Apr 2007 12:45
Post 50 of 84
when using l/c as payment do you check the goods send to you then the bank will release the funds to the seller right or the money will be release soon after the shippment of the goods.
03 May 2007 09:49
Post 51 of 84
Replying to [MikePTY-HK]:Thanks for your infos...![[em1]](http://img.alibaba.com/images/eng/style/icon/emoticons_smile.gif)
05 May 2007 00:37