Chapter 6 The use of documents in trade
bank) will issue a letter of credit in favour
of the seller. This is sent to the seller’s
bank (the advising bank).- Seller’s bank advises seller of receipt of
letter of credit documents from buyer’s
bank.
The seller’s bank receives the L/C from
the buyer’s bank. The seller’s bank will
then check the content of the L/C before
passing it to the seller.
Depending on the circumstances, the
seller’s bank (or another bank) will confirm
the L/C before passing it to the seller. - Seller checks detail of received letter of
credit.
The seller should check the detail of the
received L/C (see checklist, page 102).
If there are discrepancies between the
terms agreed in stage 1 and the detail of
the L/C, the seller should ask the buyer
to amend the L/C, otherwise the seller is
running the risk of non-payment. Only the
buyer has the authority to ask its bank to
amend the L/C. - Seller ships goods.
Once the seller is happy with the terms
and conditions of the L/C, it will ship
the goods according to the terms of the
contract, as listed on the L/C. This may be
to a named warehouse or storage facility
close to the buyer’s location. - Seller prepares required documents.
Once the goods have been sent, the
seller must also prepare all the necessary
documents for submission to its bank.
These documents need to be presented in
the form required by the L/C so that they
match the terms and conditions. Under the
terms of a documentary credit, the buyer’s
bank’s responsibility is to ensure payment
is only made when the seller provides
documents which match those listed on
the L/C.
Common errors include the following:
An incorrect number of, or wrongly
titled, documents presented.
No additional documents should be
presented, and the seller should take
care to provide the agreed number of
originals and copies of the required
documents.
Inconsistent details across the
different documents required.
The goods must be correctly and fully
described on the invoice to match
the description given on L/C. The
transport document must accurately
describe the method of transport used,
including details of all parties to the
shipment. The insurance document
must show the appropriate cover
(usually starting on or before the date
of shipment). Any bill of exchange
should be drawn in line with the terms
and conditions of the L/C, for the
correct amount and with appropriate
endorsements. All documents should
be dated.
Unauthorised changes made to
documents.
If any changes have been made to
any documents, they must be properly
authenticated.- Seller sends prepared documents to its
bank.
Once prepared, the documents must be
forwarded to the seller’s bank. The seller
must ensure the documents are received
by the bank by the expiry date on the letter
of credit. This must also be within any
limits established either by the transport
documents (usually 21 days, unless
otherwise stated) or by any import licence
requirements.
The seller should also confirm its
settlement instructions for this transaction.