UK Letters of Credit

Letters of Credit (UCP 600)

Unsure what letters of Credit are? Need assistance with the paperwork? Perhaps your Letters of Credit have been rejected? Rest assured whatever your situation;       Unsworth Global Logistics is here to help.

As the shipping of foreign goods to another country can take some time, importers have to ensure the exporters are paid before the goods arrive. This is where Letters of Credit come in. Sometimes known as ‘documentary credit’, Letters of Credit act as a guarantee from the bank that they will pay the seller on behalf of the buyer the agreed amount of money, within a specified timeframe.

If you would like any further information on Letters of Credit, or other documents related to shipping goods, feel free to contact us on +44 (0)20 8539 8899 or loc@uglog.com.

 UK letters of credit

How do Letters of Credit work?

  • The buyer sets out a series of terms and conditions for which they would like to buy and ship the cargo. The list commonly includes things such as description and quantity of the goods, documentary requirements, consignee details and shipping ports to be used.
  • The Letter of Credit is then provided by the buyer’s bank and sent to the seller and his bank.
  • After the shipment has been completed, as per the set terms and conditions, the seller takes the Letter of Credit to his bank where they check if everything has been prepared and shipped as stated.
  • Once the bank is satisfied, they will then pay the seller the agreed amount.

So why use letters of credit?

Letters of Credit are most commonly used when buyers in one country buy goods from a seller in another country, as a way to guarantee payment for the goods.

Advantages

Payment Protection: Letters of Credit mean the seller can be reassured that their payment will be received on time and in full. Should a buyer not provide payment the responsibility then falls to the bank, meaning the seller is protected.

Agreed Terms: For the buyer, it is a guarantee that the seller will stick to their side of the deal and issue documentation that supports this.

Disadvantages

Expense: Due to the additional cost for this service from the bank, it is sensible to weight up the costs against the security benefits.

Bound by Terms: It is also worth noting that the exporter will only receive payment if they stick to the terms stated in Letters of Credit.

Types of Letters of Credit

The 5 most commonly used Letters of Credit are Irrevocable, Revocable, Unconfirmed, Confirmed, and Transferable. Other types include Standby, Revolving, and back-to-back.

  • Irrevocable and revocable Letters of Credit

Revocable Letters of Credit can be altered or cancelled by the issuing bank at any time, for any reason they deem appropriate. Conversely, irrevocable Letters of Credit cannot be altered or cancelled unless all parties agree. It is for this reason that irrevocable Letters of Credit are more secure than revocable ones.

  • Confirmed and unconfirmed Letters of Credit

If the buyer arranges Letters of Credit with their own bank, known as the issuing bank, the seller will usually want a bank based in their own country to double check that the Letter of Credit is in fact valid. The seller may ask that the Letter of Credit is confirmed by their bank, guaranteeing payment even if the issuing bank fails to do so.

  • Transferrable Letters of Credit

Transferable Letters of Credit can be passed from the person receiving payment to others. These Letters of Credit are typically used when a third party is involved in the transaction.

  • Standby Letters of Credit

Standby Letters of Credit act as assurance from a bank that the buyer can pay the seller.

  • Revolving Letters of Credit

Revolving Letters of Credit can cover numerous transactions with the same buyer and seller.

  • Back to back Letters of Credit

Back to back Letters of Credit are used when a third party is involved and transferable Letters of Credit are not suitable.

For further information on Letters of Credit or other documents related to shipping goods, don’t hesitate and call +44 (0)20 8539 8899 or email loc@uglog.com.

Want to avoid rejected Letters of Credit? Check out our dedicated page to rejected Letters of Credit.