In today’s global village, trade on an international level is an ever expanding business. Importing and exporting affects our daily lives no matter where we come from. There are many products and services unique to a specific area, which offer benefits to those in other parts of the globe. Often, people like you and I come across products or services that we realize would serve other communities well, but not understanding the ins and outs of the trade industry stops us from considering import and export.

In a series of articles, we will explore different areas of the trade industry. This particular article will define and briefly explain the Letter of Credit, which is the most common type of financing available to those in international trade. For further financing options that may be available to you make sure to ask one of our banking law specialists.

A commercial letter of credit is a tool which facilitates payment for goods shipped both domestically and internationally. In brief, the issuing bank substitutes its credit standing on behalf of its client who is the buyer of the goods or services. In the business of international trade, this is an extremely useful tool because individual buyers and sellers do not need to prove their own reliability and credit standing to international partners.

A commercial letter of credit comes into existence on the request of a customer to its bank. This bank (the issuing bank) makes a contractual agreement between itself and the requesting customer, authorising another bank (confirming bank), to make payment to the beneficiary (the provider of goods and/or service). The issuing bank commits to honour drawings made under the credit.

The essential elements of a commercial letter of credit are as follows:

a) there is a payment undertaking given by the issuing bank on behalf of the applicant (the buyer of goods and/or services), b) to pay a beneficiary (the seller) c) a set amount of money on presentation d) of a very specific set of documents which represent the supply of the goods. The letter of credit will e) specify time limits, and f) the documents must absolutely conform to the terms and conditions set forth in the letter of credit. For more information on international trade and financing methods, the UK Government has provided a wealth of information at here.