Letter Of Credit
Without getting stuck in technical jargon, the term Letter of Credit, or L/C as it is fondly called, is a document from a bank guaranteeing the seller the amount due from the buyer. However, as is to be expected in such transactions, the letter of credit is bound to conditions laid own in the contract. The document is also termed as documentary credit and is almost always mentioned in the first page of the letter as “irrevocable documentary credit” . A very simple outline is given below
- The seller and buyer decide to sign the deed of sale
- The seller has demanded the setting up of a L/C.
- The buyer’s bank agrees to provide the money for the purchase and the draft containing the conditions are given to the seller.
- The buyer and the seller discuss the details and the final contract of the L/C takes shape and the letter of credit is turned over to the seller.
- The seller requests the freight forwarder to consign the goods to the party mentioned in the relevant clause in the L/C.
- The freight forwarder (called carrier) gives the shipper the bill of lading (air way bill) in exchange
- The seller, in his authority as the shipper, submits the Bill of Lading (B/L) to his bank in exchange for the money due.
Banks are Financial Institutions
Banks and freight forwarders speak different languages. This is a point that is, often forgotten by many and the difficulties the freight forwarder face, due to this, is a lot. Financial institutions set up conditions to guarantee the safely of the money they are dealing in and these conditions may or may not fit into the framework of freight forwarding.amendments to letters of credit can be expensive. As conditions can be stringent, it is advisable for the seller to talk to the freight forwarder as well, before the final L/C in place.
Nature Of Goods
In order to avoid ambiguity, the banks may suggest detailed description of the goods and times this description can run into several lines or even a whole paragraph. This will help avoid any misunderstanding about the product in question and will stand in conformity with the deed of sale. Since the seller and the buyer are signatories to the deed, both are committing themselves irrevocably to the product and the conditions attached to it.
However, the freight forwarder will face a difficulty, if the nature and description of the goods become a large body of text. The air way bill (AWB) does not have endless room for such a large paragraph. The real space provided for this is a very narrow column on the right hand side of the AWB (middle) . When this column is full, the remaining part of the text has to be written in the large middle field. If this space is not enough, then the remaining text has to go on a separate sheet of paper, which needs to be attached the original AWB and stamped.
Transshipment Of Goods
The entry “Transshipment : not permitted” in the L/C will land the freight forwarder in a dilemma. Airlines do not operate direct flights to all the airports in the world. Quotations are based on reduced prices and as such the chosen airline will need to offload the cargo at the airport where the transit happens and reload the freight on to the next flight going to the destination. For example if the freight is booked from Frankfurt am Main (FRA) to Shanghai Pu Dong (PVG) on Emirates, the airline will fly the cargo first to Dubai (DXB) and then transfer the goods to the flight leaving Dubai to Pu Dong. Thus, a transshipment becomes inevitable.
Size of Freight
If your freight is more than say 10 tonnes and is oversized, it has to fly on a freighter. Airlines do not operate freighters to all the destinations in the world. Moreover, there are very few Boeing 747 freighters in service (at least not as many as there used to be). If the L/C mentions a direct flight to destination and there are no airlines operating a freighter to there, the situation becomes a dilemma.
Conclusion – Before Finalising A Letter Of Credit
As amendments to the L/C are expensive, it is always a good idea to have the freight forwarder to have a look at the specific conditions, such as
- Last Date of Shipment
- Airport of Destination
- Transshipment
- Nature and Description of Goods