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Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits 9 replies,11978 views

#1
There is some confusion about what some of these terms mean. hence this clarification:

A Letter of Credit (LC) can be of two types : (1) Clean and (2) Documentary. Thus we have "Clean Letters of Credit" and "Documentary Letters of Credit".

Since Clean LCs are used rarely nowadays, if at all, the term "LC" has come to mean "Documentary LC". In Documentary LCs, commercial (viz., invoice, transport documents, packing list, insurance etc. ) and financial documents ( bills of exchange, promissory notes, cheques, etc.) are in use. In "Clean LCs" no such document is called for.

The ICC, and as bankers, we also refer to Dcoumentary LCs as "Documentary (Letters of) Credits", or "Doccredits".

Through common usage, all of us nowadays simply say "LC" when we actully mean "Documentary LC". The full expression: Documentary Letter of Credit is also shortened to the term "Documentary Credit".

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#2
Re: Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
Replying to [Catalyst]:

Since i have never use an L/C, I have several question here. may be you can help.

first, how much usually (in percentage from a transaction total value) the L/C rates taken by the issuer and receiving bank in most case. I know there are differences for each country bank policy. but we can use the average.

second, which party should be assured for trusting an L/C. who has the most risk? is it the buyer-seller or the issuing-receiving banks?

third, how many kind of L/C and their condition. just in short description.

fourth, which one is the BG in term of L/C.

fifth, any taxes applied? since some countries takes no taxes for exporting such products and VAT for raw product.

Thank you, i hope anyone as beginner can read your posts and can take the good out of them.
#3
Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
Replying to [BUMshells]:

Thanks for your questions. I have quoted your questions and tried my best to respond as below.

First, how much usually (in percentage from a transaction total value) the L/C rates taken by the issuer and receiving bank in most case. I know there are differences for each country bank policy. but we can use the average.

Answer: Forex buisness is the most profitable of all areas in commercial banking. For LCs, banks charge for every step, every action. That is why it is so costly. The floor rate is usually 0.1% to 0.15% per month, with a minimum flat amount. Other services are similalry charged, on a percentage basis or a flat fee.

Second, which party should be assured for trusting an L/C. who has the most risk? is it the buyer-seller or the issuing-receiving banks?

Answer: I am not very clear about the question. Taking a clue form the word “risk” used in your question, everyone has to bear some degree of risk, even in an LC transaction. It is not risk-free, it is only *lesser* than for other modes.

Third, how many kind of L/C and their condition. just in short description.

Answer: Please search this forum. Detailed information is there easily available.

Fourth, which one is the BG in term of L/C.

Response: BG means Bank Guarantee. It is not a part of any LC. See my article comparing a BG to an LC.

Fifth, any taxes applied? since some countries takes no taxes for exporting such products and VAT for raw product.

Answer: For LC transactions, there is no separate tax. The usual tax rules apply for transactions related to income, expenses, VAT, excise, customs duties, etc. as are normally charged by the government or other authorities. If there is an LC Transaction Tax in any country, I am not aware.
#4
Re: Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
Replying to [Catalyst]:
Question:
What is the exact definition of fully funded letter of credit?
#5
Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
Replying to [RSUH]:

FFLC, FFDLC, FFSBLC are terms coined by individuals, or have come into use through local practices. These terms are not found in the UCP. Therefore, I would not like to venture an authoritative explanation of these terms.

As far as I know, FFLC means fully funded LC, which in turn means LCs issued with 100% of its face value provided as cover to the bank issuing such an LC.

This way, the issuing bank takes minimum or no risk on the buyer.

#6
Re: Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
Replying to [Catalyst]:

You have rightly said on FFDLC.[em16]. There are many people in the bulk commodities trade asking for FFDLC, but could never explain or send a text format when confronted. Some say, fully funded means, full payment assured like BG for the total contract value, but not confident themselves.
#7
Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
Replying to [cyber chap]:

Response appreciated.

The main problem is: No one bothers to go to the source. No one takes the trouble to read the UCP at least once, to know what's in there and what isn't. We love to confuse ourselves, and chase our own (collective) tails. [em3]
#8
Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
How do i set up an L/C account, Where do I go.
#9
Re: Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
how is an accomodation l.c obtained and where from . who can issue an l.c. is it possible to get an l.c which says the exportable goods on order can be supplied after a period of time say one year . Ths period of time may be required to ensure the growth of the flowers/ plants that a floriculturais wants to fulfil the  orders over a perod of time say even on a day to day basis can you please give details
#10
Re: Meaning of the terms LCs, Documentary Letters of Credit, Documentary Credits
mikesaudiopa wrote:
How do i set up an L/C account, Where do I go.
 
Hi
If you want an LC issued in favour of your supplier, go to your banker. If you want your buyer to send you an LC, ask him to apply to his banker.
 
You have already asked this question separately, and been given a very detailed answer.

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