Frequently asked question about Letters of Credit (L/C)
DEFINITION: An L/C (Letter of Credit) is issued by a bank at the request of the buyer which sets forth specific conditions the seller must meet in order to receive payment. Caveat: Any misunderstanding in the terms of the can lead to non payment to you the exporter.
Q: What is IRREVOCABLE L/C?
A: It cannot be cancelled by the buyer and any change in conditions of sale (ex: late shipment) must be approved by both buyer & seller.
Q: How does a REVOLVING L/C operate?
A: Specified amounts paid out at pre agreed intervals where shipping is accomplished over a period of time, not all at once.
Q: What is the difference between cumulative and non-cumulative under a revolving L/C?
A: Non-cumulative specifies payment is made for whatever is shipped and back order valuation is not used.
Cumulative is when back order amounts are rolled over into succeeding shipments to use the full value of the entire L/C.
Q: What is tenor?
A: The date when L/C’s expire. Bills of Lading must be dated prior to expiration (the tenor date)
Q: Who is the advising bank and which is the confirming bank?
A: The buyers bank overseas advises the U.S. bank of the establishment of the L/C and your (the exporter) bank confirming bank here in the
Q: What does “confirmation” mean on an L/C?
A: The funds for the L/C provided to the advising bank are transferred into Dollars and deposit into your bank. The money is here in the
available for payment when
shipment is made. NOTE: This type of L/C is the most secure -
no international currency transfers can delay the receipt of the funds by
the exporter. U.S.
Q; What is contingent.
A: In the rare case where foreign funds are simply not available due to political or war issued, the contingency is provided by the confirming bank here. It is not needed if the exporter demands an L/C be confirmed. (see above)
Hank Samuel, SCORE Counselor
Visit is at: www.scoresouthflorida.net