documentary credits - BNP Paribas Corporate & Investment Banking

DOCUMENTARY
CREDITS
Secure the payment of your international transactions.
A documentary credit, commonly called Letter of Credit or L/C, is a payment
instrument and a payment guarantee at the same time.
This type of solution can fit the needs of both importers and exporters.
Types of documentary credits
A documentary credit is an irrevocable commitment of
the buyer/importer’s bank (the issuing bank) in favour of a
supplier/exporter (the beneficiary), to honour (i.e. to pay at
sight; or to incur a deferred payment undertaking and to pay
at maturity; or to accept a draft drawn by the beneficiary
and to pay it at maturity, as the case may be) a presentation,
provided that the supplier submits a complying
presentation (i.e. a presentation of the documents specified
in the L/C, in conformity with the terms and conditions of the
L/C and the applicable international rules).
By nature, a L/C is an independent payment mechanism,
separate from the sales contract or other agreement on which
it may be based. Banks deal with the documents and not
with the goods or the execution of services or performance to
which these documents are related.
n IRREVOCABLE AND CONFIRMED
Payment instrument + Two payment guarantees, those
of the issuing bank and of the confirmation bank.
It cannot be cancelled without the agreement of
all the parties (importer, issuing bank, confirming
bank, exporter). It covers commercial, political and
non-transfer risks.
SECURITY
Principle
n IRREVOCABLE
Payment instrument + one payment guarantee, the
one of the issuing bank.
It cannot be cancelled without the agreement of
all parties (exporter, importer and issuing bank). It
covers commercial risks only.
Possible Settlement Methods
2. Request of
documentary
credit opening
APPLICANT
1. Commercial
contract
n By deferred payment: the beneficiary will be paid
on due date.
7. Sending of
documents
ISSUING
BANK
BENEFICIARY
6. Presentation
of documents
3. Documentary
credit opening
n At sight: the beneficiary is paid at sight against
presentation of complying documents.
5. Presentation
of documents
ADVISING
AND/OR
CONFIRMING
BANK
4. Documentary
credit notification
n By acceptance: the beneficiary holds a draft
accepted by a bank, which will be paid on due date.
n By negotiation: the beneficiary can ask the
nominated bank to advance the funds before or on
the payment due date.
Specific documentary credits
Depending on your needs, our experts will lead you to the
most suitable solution.
n Revolving
It is a documentary credit in which, the amount is
automatically renewed under the same terms and
conditions. It can be “revolving” in time or in value. It can
also be cumulative or non-cumulative. The issuing bank
is irrevocably committed for the overall amount of the
transaction.
n Transferable
In a transferable documentary credit, the beneficiary
(the first beneficiary, not being the supplier of the goods)
asks the bank where the credit is available, to transfer
the whole or part of the rights to use this credit to a new
beneficiary (the second beneficiary). The latter is often the
real supplier of the goods.
This documentary credit makes it possible to,
simultaneously; pay the second beneficiary for the value
of its invoice and the first beneficiary for the difference
between the value of its invoice and that of the second
beneficiary.
n Back To Back
If a documentary credit cannot be transferred (because
it is not stipulated as transferable or because conditions
between the purchase agreement and the sales agreement
are different), the beneficiary of this documentary credit
will have to request his bank to issue a new documentary
credit which will cover payment to the supplier.
This documentary credit issued by the beneficiary’s bank
(acting as an intermediary) is called a “back-to-back”
letter of credit and requires the granting of a credit facility.
n Red Clause
It is a documentary credit that contains a special condition
of financing, by which the nominated bank (the bank where
the credit is available) is authorised to pay an advance
to the beneficiary before shipment of the goods, against
presentation of certain documents (simple receipt and/
or commitment of the beneficiary to ship the goods and
to present the documents immediately after shipment).
This advance is granted by the bank where the credit is
available, at the request and risk of the issuing bank.
n Green Clause
The mechanism is the same as for the Red Clause. However,
the advance of funds is subject to the presentation of
the documents related to the goods (such as warehouse
or storage certificate, receipt of forwarding agent or
certificate of inspection).
n Syndication
The commitments incurred under a documentary credit
can be syndicated. This involves several banks (bank pool)
that are linked to a contract called “syndication contract”.
The beneficiary of the documentary credit is not informed
of this structuring, whereas the applicant often is.
Key advantages
n Universal means of payment
Thanks to an easy and recognised procedure, you benefit from
a means of payment subject to international uniform rules (the
International Chamber of Commerce - Publication N°600, also
known as Uniform Customs and Practices N°600).
n Means of payment with flexible guarantee
Depending on to the level of security wished, a documentary
credit enables you to cover the commercial risks, the country
risks and the bank risk.
n Means of financing
Depending on the means of availability (settlement methods),
a documentary credit can also be a financing instrument.
n Trade Center Expertise
By involving your BNP Paribas Trade Center at an early stage,
you will be able to identify the feasibility of your transaction
and to benefit from a high level of expertise to set-up your
documentary credit, which will help you in your commercial
negotiations.
n Connexis Trade
Through our dedicated e-platform Connexis Trade, you will be
able to manage all your transactions online.
For further additional information, please contact:
Your BNP Paribas Trade Center
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