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Payment means / Settlement of trade transactions

We provide our customers with services aimed at settling and securing trade transactions

With the development of international trade and commercial exchange also with countries from outside the European Union, the need to apply the safest transaction execution method, ensuring comfort to both of its parties, becomes evident.

The letter of credit is a uniquely safe instrument securing interests of both the importer and the exporter – it is most frequently used by partners concluding high value transactions or commencing cooperation.

On the one hand, it protects the exporter against the trading risk and secures the payment for supplies. On the other hand, the buyer does not incur the risk of inadequate performance under a trade agreement. Therefore, the L/C is a method of securing and settling transactions.

The instrument, which is governed by the regulations of the International Chamber of Commerce, is very useful especially when there is a need to mitigate political – economic differences, culture, customs and varying systems of legal regulations.

Parties to the L/C transaction

There are four parties to the L/C transaction:

  1. The Ordering Party (importer) is a business entity which commissions their bank to open a L/C and undertake to pay to the L/C’s beneficiary a specific amount on the agreed date on the condition of submission of agreed documents by the beneficiary (as the L/C-related requirement). The payment due to the exporter arises from a trade contract concluded by the importer and the exporter which represents a separate legal relationship not related directly to the L/C.
  2. At the Ordering Party’s request, the importer’s bank opens the L/C whereby it unilaterally undertakes to make a payment to the exporter provided that the latter fulfils the L/C-related requirements by the agreed date. The bank’s commitment refers to an obligation to make a payment arising from the L/C against submitted, adequate documents. A decision to make such a payment is based solely on documents submitted by the exporter.
  3. The beneficiary (exporter) is a business entity which sells goods or services to the importer. The L/C is opened for the benefit of the exporter, however, the latter has no commitments arising from the L/C given the fact that supplies of goods stem from a separate agreement, i.e. a trade contract concluded by the importer and exporter. The receivables due to the exporter are repaid upon the fulfilment by them of the L/C-related conditions, i.e. delivery of goods or performance of service and the submission of agreed documents (evidencing due execution of the trade contract) to the advising bank. The advising bank (exporter’s bank) may have different roles as part of the L/C transaction:
    1. Advising the L/C – in this case, the exporter’s bank solely intermediates in correspondence exchanged between the exporter and the importer's bank. Therefore, the intermediating bank acts as the representative of the importer’s bank which means that it does not assume any obligations.
    2. Negotiating documents – in this case, the exporter’s bank intermediates between the exporter and the importer’s bank. The duties of the intermediating bank include the verification of documents submitted by the exporter, yet, it continues to act on behalf of the importer’s bank.
    3. Negotiating bills of exchange/ drafts – in this case, the exporter’s bank advises L/Cs and thus, when intermediating in correspondence exchanged between the exporter and the importer’s bank represents the latter. In addition, the exporter’s bank acts as a buyer of bills of exchange/ drafts in line with the B/E law. Depending on the type of a given B/E, the exporter’s bank may have the right of recourse.
    4. Confirming the L/C – in this case, the exporter’s bank unilaterally assumes an obligation on the L/C’s conditions. Therefore, the intermediating bank undertakes to make a payment on their own behalf for the benefit of the exporter after the latter has fulfilled the L/C-related conditions. Given the above, the intermediating bank has the same rights and obligations with regard to the exporter as if the latter opened the L/C. Settlements between the importer’s bank and the intermediating bank are regulated under a separate agreement concluded between them.

Types of L/C

Taking into account the nature of commitment made by the importer's bank:

  • Revocable L/C – is the L/C whereby the importer’s bank reserves itself the right to revoke or change its commitment at any time before the expiry of the L/C without any need to notify the beneficiary of the fact.
  • Irrevocable L/C – cannot be changed or cancelled without the consent of interested parties: the importer’s bank, intermediating bank, ordering party and beneficiary.
  • Cash-on-delivery L/C – is the letter of credit whereby a relevant payment is made immediately after the exporter submits to the bank consistent documents.
  • Discount L/C – the importer’s bank commits to pay to the beneficiary the L/C amount which becomes a loan raised by the Ordering party. In this case, the bank undertakes to purchase for cash the dated draft which is drawn on account of the importer by the exporter.
  • Acceptance L/C - is the letter of credit whereby the importer’s bank commits to accept the dated draft. When it happens, the bank's B/E obligation in relation to the acceptance becomes effective. This means that the exporter grants a loan to the importer, while the bank becomes the guarantor of the loan repayment by accepting the B/E.
  • Stand-by L/C - is the letter of credit whereby the exporter finances the importer, while the bank acts as the guarantor of the loan repayment. By opening the L/C the importer’s bank guarantees the acceptance by the importer of the dated draft drawn by the exporter on account of the importer and guarantees the timely payment of the draft on its maturity date.

Taking into account the rights of the L/C's beneficiary

  • Transferrable L/C – the L/C whereby the L/C’s beneficiary has the right to transfer receivables arising from the L/C partially or in full onto another entity or entities. The receivables can be transferred once only and partial deliveries must be permitted to enable the transfer of the L/C.
  • Non-transferrable L/C – the L/C which needs to be executed by one, specific beneficiary. However, in the case of the irrevocable L/C, the beneficiary may change when all interested parties accept the change during the L/C’s validity.

Taking into account the role performer by the advising bank:

  • Confirmed L/C – the letter of credit whereby the intermediating bank, apart from advising the L/C, commits to repay the L/C amount to the exporter when the latter meets specific requirements. Therefore, it is a unilateral commitment of the intermediating bank to pay to the beneficiary the L/C amount on conditions identical to the conditions of the L/C. The intermediating bank is obliged to make the exporter’s payment on its own behalf. Settlements between banks do not refer anyhow to the L/C’s beneficiary because they are independent one from another.
  • Advised L/C – the L/C whereby the intermediating bank solely informs the exporter about the opening of the L/C and sends its wording to the exporter. The bank does not make any commitments and solely intermediates in correspondence between the importer’s bank and the L/C’s beneficiary.
  • Negotiable L/C – the letter of credit whereby the intermediating bank receives an instruction from the importer’s bank to advise the L/C and to make a payment against documents presented by the exporter. The intermediating bank makes the due payment with funds earlier received from the importer’s bank. The beneficiary cannot make claims against the intermediating bank which acts solely as the representative of the importer’s bank.

Special types of L/C

  • The L/C in the form of the credit letter is applied when the L/C is advised without engaging the intermediating bank. The L/C’s beneficiary issues a draft drawn on account of the importer’s bank which makes an irrevocable commitment to repurchase it on the condition that the beneficiary fulfils the L/C-related requirements.

Documentary and simple/clean collection

Collection is an unsophisticated form of payment ensuring higher security of transactions than standard transfers. Exporters may decide to make a payment with the use of collection even after sending goods and imported do not have to engage their funds before the payment term.

A bank acting on behalf of an exporter/seller intermediates in issuing to an importer/buyer specific documents on conditions consistent with a relevant collection instruction, i.e. either after making a payment or accepting a B/E. Collection is initiated by the exporter after sending goods, while the payment decision is taken by the importer. In view of the nature of documents being the subject of the service, there are two types of collection: simple/clean collection (covers such financial documents as bills of exchange and cheques) and documentary collection (covers trading documents - invoices, transport documents, certificates and, alternatively, financial documents, e.g. B/E).

Benefits of the service:

  • numerous possibilities – we offer various types of collection: simple/clean and documentary collection, export and import collection, cash collection and deferred payment collection,
  • low costs,
  • quickness – all collection-related activities are performed within 24h.

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