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 U.S.
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 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
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