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Hello! In this article we will talk about the system of settlements by letters of credit.

Today you will learn:

Where can a letter of credit come in handy;
What types of letters of credit are most common;
How is an agreement drawn up using a letter of credit;
How to use a letter of credit.

Letter of credit: the essence of the concept

The business sphere is not only full of bona fide companies that operate in accordance with the law and the terms of the contract. There are also scammers the main objective which - and leave the counterparty with nothing. You give them a product or money for it, and as a result you are left without both.

However, the expansion of the enterprise's production volumes implies that it will cooperate with new business partners, whose integrity cannot always be verified.

What to do if you enter into an agreement with a company unknown to you and are worried about the outcome of the transaction? What if there is a delay in payment by the other party or if there is no shipment of goods in response to your advance? Such issues and the resulting problems are easily resolved with the help of a letter of credit.

Letter of credit - This is a special settlement system that guarantees both parties to the transaction its positive outcome. This is a banking product with the participation of two banks: in the first, an account is opened for the seller, and in the second for the buyer. The credit institution transfers funds from the account only if the terms of the agreement between the parties to the transaction are fulfilled and supporting documents are provided.

The letter of credit implies the presence of two participants in addition to banks:

Applicant (or buyer);
Beneficiary (seller).

The initiator of the contract is the buyer. It is he who is interested in obtaining the object of the transaction, and therefore applies to the bank with an application for opening a letter of credit.

This service is provided on a reimbursable basis: banks charge commissions, which in some cases are quite impressive. However, a letter of credit is a guarantee of the performance of the contract, which plays an important role for both parties to the agreement.

The buyer's bank will transfer funds to the seller's account only when the terms of the signed agreement are fulfilled (for example, when goods are shipped). If the seller violates the clauses of the agreement, the bank will return the funds to the buyer's account.

A letter of credit is a rather complicated operation that requires complex registration. However, it is very popular, as it is the key to successful cooperation between participants in different transactions.

What payments are used for a letter of credit

A letter of credit is a fairly universal concept that can be used in transactions between:

Individuals.

Legal entities are the main users of such a banking service. Often, companies are involved in transactions, the name of which is not well known, and therefore one of the parties to the transaction tries to play it safe.

One firm delivers the goods, and the second purchases it. The letter of credit allows them to avoid disputable situations when making settlements. The same applies to providing various services or performing work.

Individual entrepreneurs can also offer the counterparty to issue a letter of credit if they doubt its reliability. When planning the shipment of goods for a large amount, it is better to fix the process of mutual settlements in an extremely clear contract so as not to lose your own funds.

The use of a letter of credit is also found among individuals. Most often it accompanies large purchases. For example, you. A seller was found, however, for some reason you doubt that he will fulfill his obligations under the contract.

To be sure of his integrity and accurately receive funds from the sale, you should contact the bank and conclude an agreement on the terms of a letter of credit. Most often, scammers immediately disappear with such offers, since the bank will require them to deposit the full amount into the account at.

If the buyer is a decent person, then there are no problems in the process of issuing a letter of credit.

The essence of a letter of credit for various participants in transactions is the same: the fulfillment of obligations under it is insured. The use of this banking service is relevant to any items of sale and purchase: from small goods to expensive real estate.

Types of letters of credit

Letters of credit are a settlement tool used not only for domestic trade.

Based on this, there are two varieties of it:

International (used in transactions involving export or import);
Internal Russian (used exclusively for the sale and purchase within the country).

You can also select letters of credit:

revocable. You can cancel the effect of an already opened letter of credit at any time by one of the parties to the transaction. However, this type of calculation is extremely unreliable and does not inspire confidence among market participants. Therefore, in our country their use is limited. regulations. This is done in order to avoid fraudulent activities one of the parties to the agreement;
irrevocable. Once the letter of credit has been signed, it cannot be cancelled. This type of settlement gives confidence to the parties to the transaction in its successful outcome.

Depending on the terms of the transaction, letters of credit are divided into:

Confirmed. In this case, the executing bank (the one that transfers funds to the seller's account) credits the money to the second party to the transaction, even if there are none on the account. In other words, the bank is looking for a third party to the transaction as credit institution, which will transfer the required amount when the terms of the agreement are met. However, in this case, the executing bank bears the risks of non-return of the transferred funds. As a result, this form of letter of credit is not so often used;
Unconfirmed. Transfer of funds to the second party of the transaction is carried out only if there are any on the account. Banks prefer this form of payment in order to avoid losing their own money.

The procedure for writing off funds divides letters of credit into two types:

Coated. The issuing bank transfers funds to the nominated bank when the agreed conditions are met. The amount credited is called coverage, hence the name of the letter of credit. The covered form of payment is used exclusively in Russia;
Uncovered. The issuing bank gives the executing bank the right to debit funds within the amount of the letter of credit. This form of payment is widely used abroad, where covered letters of credit are not found at all.

Also exists letter of credit with a red clause. It implies that an advance payment is transferred to the supplier's account before the start of the execution of the terms of the contract. At the same time, documents for shipment, performance of work or provision of services are also provided after the advance payment has been transferred.

Revolving letter of credit means that only part of the services specified in the contract is paid as they are performed. As soon as the next shipment occurs or other work is performed according to the agreement, the next transfer is carried out. This form of payment is convenient for a contract concluded for a long period and implying regular interaction between its parties.

If the bank has the right to transfer funds in favor of several other beneficiaries, then there is transferable letter of credit. If the funds are transferred to the account of one party to the transaction in violation of the terms of the contract of the other, then we are talking about a standby letter of credit. It is an additional guarantee for the parties to the agreement. This type of settlement is used in countries where it is forbidden to use a bank guarantee.

We draw up a letter of credit

To apply settlements under a letter of credit between the parties to the transaction, it is necessary to draw up an agreement. It is compiled on a documentary basis and necessarily indicates the form of calculations.

The agreement includes the following items:

Name of the parties to the transaction (supplier and its buyer);
Type of settlement and its type (for example, an irrevocable uncovered letter of credit);
The amount of funds that will be transferred to the supplier upon fulfillment of the terms of the agreement;
The term for which the contract is concluded;
The amount of commissions;
The procedure for making payments (immediately the entire amount or advance payments);
Actions of the parties in case of non-fulfillment of the conditions for which the payment letter of credit was applied;
The rights of participants, as well as their obligations.

In order for the signed contract to come into force, the buyer must contact the bank and write an application indicating the letter of credit form of payment.

The statement also states:

Reference to the agreement according to which the letter of credit will be applied between the parties;
The name of the supplier's organization, as well as its data according to the information;
Type of letter of credit;
The amount due to the seller;
The term of the contract and, accordingly, the letter of credit;
Method of realization of a monetary letter of credit (advance payment or the entire amount, and under what conditions they rely);
Name and quantity of goods, the delivery of which is indicated in the contract (or maybe these are services or some kind of work);
The name of the bank that will fulfill the obligations;
A list of documents that will be accepted by the bank as confirmation of the fulfillment of the terms of the agreement.

From the moment of signing and registering the application, the letter of credit comes into force. An executed letter of credit can be extended for new term by mutual agreement of the parties.

Benefits of paying with a letter of credit

Letter of credit payment under an agreement is convenient, despite the high commission rates from banks when registering this service.

Among the advantages of mutual settlements with the help of letters of credit, the following can be distinguished:

Transaction guarantee for the seller and the buyer. If the terms of the contract are met, the funds will go to the seller. If the terms of the agreement are violated, the money will be returned to the buyer's account. In other words, the risk of contacting unscrupulous persons zero. In this case, both parties to the transaction will deal with by bank transfer which also greatly simplifies the process of buying and selling);
The seller will receive the funds due to him under the contract even if the financial condition of the buyer has deteriorated after the shipment of the goods (the money is already in the bank account. This required condition for settlements by letters of credit);
The nuances of the contract, forms of payment and types of letter of credit are negotiated independently by the participants in the transaction (they are prescribed in the contract based on the preferences of the parties. Accounting for such features is very important so that the interests of the participants are not violated during the execution of the agreement);
It is possible to refuse the accepted letter of credit at any time, if the seller and the buyer decide so (it is also allowed to change the terms of the signed agreement);
The contract has legal force, unlike an oral agreement, and if the conditions of one of the parties to the transaction are not met, the issue can be settled in court;
A guarantee that the buyer will receive the goods in a timely manner (after all, the seller is interested in receiving funds in a short time, prescribed in the terms of the contract);
If credit funds act as a letter of credit, then the buyer can save money, since the rate on them is much lower than on a regular bank loan.

Of course, the main advantage of a letter of credit is a guarantee that the supplier will receive money or return it if the buyer fails to fulfill the terms of the transaction. Thanks to this advantage, letters of credit are popular.

Settlement scheme through letters of credit

Letter of credit is not a simple procedure. But if you use it at least once, then all its rules will become clear to you, and in the future you will easily apply such a system of calculations.

The transaction process based on a letter of credit is built on several stages. We will highlight the most important of them, which are taken as the basis for any type of letter of credit.

So, the steps for concluding a letter of credit agreement:

Two parties to the transaction draw up a contract and indicate in it a letter of credit as a settlement system (important nuances of interaction are also described here, as well as the responsibility of the parties to the agreement);
The buyer applies to the issuing bank to open a letter of credit and draw up an application (this bank is considered the issuer in relation to the other party to the transaction);
As soon as the buyer deposits money in the amount of the contract into the account, the bank registers a letter of credit;
The issuing bank then notifies the supplier's (seller's) bank of the seller's action;
The executing bank notifies the other party to the transaction of the successful opening of a letter of credit account;
The supplier ships the objects of the transaction to the address of the buyer and takes the confirming papers to the executing bank (this step is called issuing a letter of credit);
The bank checks the documentation, and if there are no errors in them, and the terms of the agreement are met, then it transfers funds to the seller's account by means of a payment order.

If the contract between the parties is concluded for a long period and includes several deliveries of goods, each of which is paid separately, then the supplier must go to the bank each time and provide the accompanying documents.

In the future, if the buyer and seller are confident in cooperation, they can refuse the letter of credit and make settlements on their own. While they do not know each other well, a letter of credit is the most preferred payment option for both parties.

With letters of credit, three groups of participants can be distinguished. These are applicants - payers under a letter of credit, beneficiaries - recipients of payment under a letter of credit, the bank itself, which acts as a guarantor of the transaction between the parties. This form of payment is practiced in foreign and domestic trade.

How does a letter of credit work in practice? For example, the seller and the buyer have entered into a supply agreement, but they are not ready to work due to the high risks of non-delivery or non-payment of goods. Then the buyer applies to the bank to open a letter of credit for the amount of the contract. The conditions under which the money is to be debited to the seller's account are stipulated. This is, for example, the provision of shipping documents (waybill,). The less trust between companies, the wider the list of documents. The application for a letter of credit also contains the name, type of letter of credit, date of opening and other parameters.

The seller, having received a notification of a letter of credit received, provides the bank with the documents provided for in the contract and receives his money for the goods.

Such services are not provided by banks free of charge. The commission for opening a letter of credit is paid by the buyer, it varies depending on the bank.

The advantages of the letter of credit form of payment are additional guarantees of payment for the supplier, control over the fulfillment of the terms of delivery by banks. Disadvantages - in a complex document flow and high commissions of banks.

Classification of letters of credit

Today, there are many varieties of letters of credit, among which the payer can choose the best one for himself.

In Russia, letters of credit are divided into the following groups:

Revocable and irrevocable - today all letters of credit are irrevocable;

Confirmed and unconfirmed;

Covered (deposited) and guaranteed.

Under a confirmed letter of credit, another bank (other than the issuer) is obliged to pay the entire amount in favor of the beneficiary upon presentation of documents corresponding to the terms of the letter of credit, regardless of the transfer of money to him. If there is no obligation of another bank, then the letter of credit is unconfirmed.

Under a covered letter of credit, the entire amount is transferred by the bank to the cover account in the beneficiary's bank at the expense of the payer or the loan.

Most of the letters of credit are uncovered. According to them, the bank does not transfer money to the beneficiary's account, but provides him with the opportunity to write off the required amount from his correspondent account.

There are other types of letters of credit. Under a letter of credit with a red clause, the supplier can receive an advance payment until the shipping documents are submitted. A revolving letter of credit is used for regular deliveries and tends to be automatically renewed.
A transferable letter of credit allows transfers of part of the letter of credit to other beneficiaries.

The meaning of a letter of credit as a form of payment is to obtain firm guarantees of payment by the seller, and by the buyer - full rights to the shipped goods. This is possible when the money is transferred by the payer only if its counterparty fulfills certain conditions, which creates the advantages that the seller has, who has agreed with the buyer on a letter of credit form of payment.

This form is especially common in international trade especially when exporting goods. Therefore, a letter of credit is often considered not only as a form of payment, but also as a kind of security for payment for goods (works, services). Its convenience lies in the fact that the seller can receive funds from a letter of credit already at the time of submitting to the bank a set of documents indicating the shipment of goods, and the buyer can enter into the rights of the owner of the goods from the moment they receive these documents (hence the name - “documentary letter of credit”).

Currently, Russian rules on settlements under a letter of credit reflect world practice circulation of these payment documents and, first of all, the Uniform Rules for Letters of Credit. When settling under a letter of credit, a bank acting on behalf of the payer to open a letter of credit and in accordance with its instructions (issuing bank) undertakes to make payments to the recipient of funds or pay, accept or discount a bill of exchange or authorize another bank (executing bank) to make payments to the recipient funds or pay, accept or discount a bill of exchange (Article 867 of the Civil Code). The above definition is largely based on the text of the Uniform Rules for Letters of Credit, which makes it possible to single out the following features of a letter of credit:

1) a letter of credit is a monetary obligation, the execution of which usually occurs under the condition of providing the documents specified in the letter of credit;

2) the letter of credit is a transaction separate from the agreement, which provides for the letter of credit form of payment, and the bank does not participate in the execution of this agreement;

3) the bank makes payment under the letter of credit on its own behalf, but on behalf of its client;

4) the bank makes payment under the letter of credit at the expense of its own funds or the client's funds;

5) issuance of a letter of credit and payment from a letter of credit generate a single chain of transactions between various participants in credit and settlement relations.

As a rule, there are four participants in a letter of credit:

1) payer (buyer or applicant of a letter of credit);

2) the payer's bank (issuing bank);

3) beneficiary's bank (executing bank);

4) recipient of funds (seller or other beneficiary).

Schematically the relationship between the participants of the letter of credit

calculations include four stages. The first stage is the payer's instruction to the issuing bank to open (issue) a letter of credit with payment instructions. The second stage consists in the transfer of powers to make payments from the issuing bank to the executing bank (the recipient's bank). The third stage is the presentation by the seller (beneficiary) of the documents specified in the letter of credit and indicating the shipment of the goods. The last stage is the payment by the executing bank against the documents accepted by it. In certain cases, settlements between the seller and the buyer can be localized in one bank (for example, if it has accounts of both parties to the agreement). Then the rules on the executing bank (Article 867 of the Civil Code) apply to the issuing bank making payments to the beneficiary (or paying, accepting or accounting for the bill in his favor), and there is no second stage of settlements under the letter of credit.

Payment under a letter of credit can be made in two ways: money and a bill of exchange. The bill payment method includes payment by the bank of a bill of exchange presented by the beneficiary, acceptance by the bank of such a bill (unconditional consent to pay it) with subsequent payment or accounting of the bill in favor of the beneficiary.

International banking practice has developed different kinds letters of credit that differ in the source of financing of this form of payment and the rights of participants in the corresponding obligations. The most important is the division of letters of credit into revocable and irrevocable. The fate of a revocable letter of credit depends on the will of the issuing bank and, accordingly, the payer. Such a letter of credit may be changed or canceled without prior notice to the recipient of the funds. At the same time, the withdrawal itself does not give rise to any obligations of the issuing bank to the beneficiary. The obligation of the nominated bank to make payment under a revocable letter of credit exists until it receives notification of a change or cancellation of the letter of credit. The Civil Code, unlike the Uniform Rules for Letters of Credit, proceeds from the tacit assumption of the revocable nature of any letter of credit, unless otherwise expressly stated in its text. In contrast, an irrevocable letter of credit cannot be changed without the consent of the recipient of the funds. An irrevocable letter of credit may acquire the character of a confirmed letter of credit. To do this, the executing bank participating in the letter of credit transaction assumes an obligation, in addition to the obligation of the issuing bank, to make payment to the beneficiary in accordance with the terms of the letter of credit. Thus, along with the payment obligation of the issuing bank, an additional firm obligation of the executing bank arises, which creates the effect of double security of payment for the beneficiary. At the same time, the confirmed irrevocable letter of credit becomes dependent not only on the discretion of the recipient of funds, but also on his bank: it cannot be changed or canceled without the consent of the latter (clause 2 of article 869 of the Civil Code).

There are also covered (deposited) and uncovered (guaranteed) letters of credit.

A covered letter of credit creates an obligation for the issuing bank to transfer the amount of the letter of credit (coverage) at the expense of the payer or to provide the latter with a loan by transferring funds to the disposal of the executing bank. An uncovered letter of credit is based on the right of the nominated bank to write off the entire amount of the letter of credit from the correspondent account of the issuing bank.

In foreign trade relations, the so-called transferable (transferable) letters of credit are used (Article 48 of the Uniform Rules for Letters of Credit). This is such a letter of credit under which the first beneficiary has the right to instruct the issuing bank to transfer all or part of the rights under the letter of credit to another person (the second beneficiary). Typically, a transferable letter of credit can only be transferred once. It should be distinguished from the assignment of proceeds (payment) under a letter of credit, when not the rights of the beneficiary, but the funds themselves are transferred to a third party.

The letter of credit form of payment must be provided for in the agreement between the payer (buyer) and the recipient of funds (seller), which indicates: the name of the issuing bank; type of letter of credit and payment scheme; method of notifying the seller about the opening of a letter of credit; complete list and the exact characteristics of the documents submitted by the seller to receive funds under the letter of credit; deadline for submission of documents after shipment of goods; other conditions agreed by the parties (clause 5.1 of the Regulations on non-cash payments).

To open a letter of credit, the payer submits to the issuing bank an application for prescribed form indicating the number of the agreement under which the letter of credit is issued, the validity period of the letter of credit, the name of the beneficiary and the nominated bank, the place of execution of the letter of credit, the list of documents against which payment is made, the type of letter of credit, its amount, etc. All expenses associated with the execution of the letter of credit are reimbursed by the payer (preliminary expenses of the seller's bank are reimbursed by the issuing bank). To implement the order of the issuing bank, a separate account "Letters of credit" is opened in the executing bank. Then the recipient of funds submits to the executing bank documents confirming the fulfillment of all the conditions of the letter of credit. These usually include a commercial invoice ("invoice") for the goods, documents of title (bill of lading, waybill), transport and insurance documents. The seller's bank verifies that the latter complies with all the positions of the letter of credit, the compliance of the seller's signatures and seals and other conditions. If at least one of these conditions is violated, the letter of credit will not be executed. In the event that the instructions of the payer are completely identical to the submitted documents, the bank makes a payment to the beneficiary. However, banks following the buyer's instructions are not required to carry out a detailed examination of the documents received. They check only their external compliance with the terms of the letter of credit, as well as the requirements usually imposed on documents of the corresponding type (bills of lading, insurance policies, commercial invoices, etc.). Sometimes such a letter of credit is used, the payment of which is made only with the consent (acceptance) of a person authorized by the payer.

If the executing bank refuses to accept documents that, according to outward signs do not comply with the terms of the letter of credit, he is obliged to immediately inform the recipient of funds and the issuing bank about this, indicating the reasons for the refusal. In such a situation, the payer or his bank may give special instructions to the executing bank to make payment against documents that are not quite adequate to the terms of the letter of credit. However, if the payment is made, and subsequently the issuing bank determines that the documents accepted do not correspond to the terms of the letter of credit on external signs, it itself has the right to refuse to accept them. All adverse consequences of such a refusal fall on the executing bank, which is obliged to compensate the issuing bank for the amount paid to the beneficiary in violation of the terms of the letter of credit. When paying for an uncovered letter of credit, the issuing bank has the right to refuse to reimburse the executing bank for the amounts spent (Article 871 of the Civil Code).

In certain cases, the letter of credit may be closed in the executing bank. The reasons for closing are the expiration of the letter of credit, the beneficiary's statement about the refusal to use the letter of credit before the expiration of its term (if such refusal is provided for by the text of the letter of credit) or the demand of the payer under the revocable letter of credit for its full or partial cancellation. The beneficiary's bank shall notify the payer's bank of the closing of the letter of credit. After the letter of credit is closed, the amount deposited with the executing bank is immediately returned to the issuing bank, and the latter credits it to the payer's account.

The principles of bank liability for violation of the terms of a letter of credit are based on the scheme of a letter of credit obligation. The issuing bank is liable to the payer, and the executing bank is liable to the issuing bank. The stage-by-stage scheme of bringing responsibility to the guilty person has two exceptions that are typical for settlement legal relations. Firstly, in case of unreasonable refusal of the executing bank to pay Money under a covered or confirmed letter of credit, liability to the beneficiary may be assigned not to the seller or his bank, but to the executing bank, which is not the payer, but is bound by the order of the issuing bank. Secondly, in case of incorrect payment by the executing bank of funds under a deposited or guaranteed letter of credit due to violation of the terms of the latter, direct liability to the payer (seller) may also be assigned to the executing bank (Article 872 of the Civil Code).

Letters of credit are instructions from the paying bank to the receiving bank to make payments to individuals or legal entities of funds within the specified amount on the terms specified in this instruction. This general definition this term. It should be considered in more detail in order to have a complete picture.

Basics

When it comes to establishing new partnerships between organizations and businesses, individual entrepreneurs and individuals, a completely logical question arises: how not to face the loss of money when concluding a deal with an unfamiliar company and subsequent settlements with it? Everyone wants to insure their business against dishonest or unscrupulous partners, especially when it comes to large sums of money or long periods of time. In this case, the answer is quite simple: letters of credit can be used. This is a convenient form of interaction, but due to its complexity, few people use it. A bank client who was not too lazy once to carefully study this form of interaction begins to use it and rarely refuses it. So, letters of credit are a form of payment that involves the work of two banks, while completely eliminating the failure to fulfill the conditions under contracts concluded earlier, both from the supplier of products and from the position of the buyer. The result of this is security for both parties.

Character traits

Letters of credit are the most secure form of mutual settlements between clients. An example can be given when the use of such a form of mutual settlements allowed all participants to benefit. IN Soviet times the majority of consumers of caustic soda switched to a letter of credit form of interaction with the enterprise, which at that time was on the verge of bankruptcy. The company, although it was on the verge of bankruptcy, still continued its activities. The bank credited the funds to the current account under the letter of credit only after the supplying enterprise provided the necessary documentation in accordance with the instructions of the payers and concluded contracts. The submitted documents were carefully checked. It was the letter of credit that gave confidence to the parties. What is it, plain language can be described like this. Consumers get confidence that if there is no shipment at the right time, payments will be successfully returned to their accounts, and the factory that produces the goods gets confidence that the next consumer will not leave without payment.

How it works?

Letters of credit are settlement documents on paper, on their basis, the bank, which acts on behalf of the payer to open a letter of credit, undertakes to make payments in favor of the recipients of funds when the latter are provided with documents that comply with the terms of the concluded contract, or transfers authority to the second bank to make such payments.

In the case of using this form of mutual settlements, it is very important to choose the most suitable type. Any types of letters of credit are opened by banks in accordance with the instructions of the payers, therefore, the selected type is indicated in the draft agreement. All existing forms are prescribed by regulations Central Bank country. In case of Russian Federation there is a Regulation that provides for the possibility of opening the following types of letters of credit:

covered (deposited);
uncovered (guaranteed);
revocable;
irrevocable;
confirmed (revocable or irrevocable).

You can consider each of them separately for a better understanding of their essence.

A covered bank letter of credit is such a form, upon opening which the issuing bank transfers the amount at the expense of the payer to the disposal of the executing financial institution for the entire duration of the contract. This type is the most common.
Next, you can consider an uncovered letter of credit. What it is, in simple terms, can be described as follows. When opening a letter of credit, the issuing bank does not transfer funds, but grants the executing bank the right to debit funds from the correspondent account maintained by it, within the agreed amount. The procedure by which funds are debited from an account with the issuing bank is determined depending on the existing interbank agreement.
A revocable letter of credit is a form of interaction that can be changed or canceled by the issuing bank based on a written order from the payer. At the same time, prior agreement with the recipient of funds is not required, and no banking circumstances are specified before the recipient of funds in the event of a payment revocation.
An irrevocable letter of credit is such an agreement that can only be canceled from the moment the executing bank receives consent to change the conditions from the recipient of funds. Partial acceptance of the terms of an irrevocable letter of credit is not allowed.
A confirmed letter of credit is a form of interaction in which the executing bank undertakes to make a payment of the amount indicated in it, regardless of the receipt of bank funds. The order in which the confirmation is made depends on the agreement between the banks.

Additional varieties

At the moment, there are several more types of letters of credit, which are varieties of those described above.

A red clause letter of credit is an agreement whereby the issuing bank authorizes the executing bank to pay an advance payment to the product supplier in an amount specified specifically before all Required documents, that is, until the moment when the goods are shipped or the service is provided.

There is also such a type as a revolving letter of credit. What it is, in simple terms, can be described as follows. This is a letter of credit that is opened for part of payments from the total amount under the concluded contract, automatically renewed as payments are made for the next batch of goods or services rendered. The opening of a revolving letter of credit is carried out with uniform deliveries, which are stretched over time in order to cyclically reduce the contract amount.

The recipient of funds in one of these ways has the opportunity to refuse to use the letter of credit before the expiration of its term, if the terms of the concluded agreement generally provide for the possibility of such a refusal. In addition, the conditions may include the acceptance of a person authorized by the payer.

Settlements by letters of credit

The contracts clearly spell out the procedure and method for making payments for the provision of services and the supply of goods, the performance of work and other activities, as well as the form of payment. When it comes to the use of a letter of credit form of mutual settlements, certain conditions must be reflected in the contract: the names of the banks with which the interaction is carried out are indicated; the name of the recipient of funds is prescribed; amount and type of letter of credit; a way to notify the recipient that the letter of credit is open; method of notifying the payer about the number of the account on which the funds will be deposited; validity; payment terms and liability for non-performance.

Often contracts contain other conditions that relate to the procedure for settlements. For example, partial payments may be provided. Payments are made in non-cash form by transferring the agreed amount of the letter of credit to the recipient's account.

It is important to note that for violations that may be committed in the execution of the letter of credit form of mutual settlements, the responsibility of banks comes in full accordance with current legislation. If this is taken into account, then it can be understood that the executing bank will not accept incomplete documents that serve as evidence of the delivery of goods, the provision of services or the performance of work.

Settlement procedure

As already described earlier, a convenient form of interaction in many situations is a letter of credit. The scheme of the procedure is not particularly difficult. Settlements in this way can be made between legal entities, between individuals and legal entities.

Calculation algorithm for the recipient

As a form of payment under the terms of the concluded agreement, a letter of credit should be included.
After that, you need to contact the bank office where your organization is serviced to fill out an application for opening a letter of credit. A copy of the contract for the supply of goods or the provision of certain services must be provided to the bank.
Upon the delivery of goods to the bank, it is required to provide a package of documents that confirm it. Each transaction uses its own list of documents, which must be indicated in the contract concluded when opening a letter of credit.
If the transaction did not take place, and the documents were not provided to the bank after the expiration of the letter of credit, then the entire amount is returned to the recipient's account.

Advantages

Using any form of letter of credit, you can get a whole range of advantages, including the following. Risk reduction is ensured by the fact that after submitting a package of supporting documents to the bank, the seller will receive funds, regardless of the financial condition the seller is located. The terms of mutual settlements can be determined independently. The participants in the transaction have the right to change the terms of the letter of credit or completely refuse it in case of mutual agreement.

International practice

International letters of credit are the most civilized terms of payment, which are widely used in the calculations for international level. Speaking from the standpoint of protecting the interests of the parties involved, such conditions for interaction can be called ideal. For international settlements, there are certain rules that should be considered. So, what are letters of credit, it was described in detail earlier, but how do they work in the case of international relations? At the moment, there is a list of unified rules that spell out all the features of the process.

In the system of international settlements, only one form is most often used - a simple covered irrevocable documentary letter of credit. The advantages of this calculation method were described earlier, however, in the case of such an interaction, certain disadvantages can also be identified.

Complexities of the international procedure

In such a transaction, four parties appear, and not two, as in ordinary mutual settlements. In addition to the customer and the supplier, the customer's bank and the supplier's bank are also involved here. This will be difficult to understand for a novice participant in foreign economic activity.

Requirements for documents and deadlines

Such a form of payment is always a requirement for strict adherence to deadlines, documentation requirements, as well as a complication of the registration procedure. With each change in the terms of fulfillment of obligations by any participant in the transaction, documentary confirmation with the signatures of all parties is always required. In addition to the contract between customers and suppliers, it is required to make an additional exchange of documents between banks. While now it is all done in in electronic format and happens instantly, it takes time, as well as control of all procedures.

Letter of credit cost

Another disadvantage is the cost of this form of payment. From the moment the letter of credit is opened, the buyer's funds are frozen in the bank account, and the cover of the letter of credit or the payment for the bank guarantee in the case of an uncovered letter of credit is formed. A supplier that does not have the funds to purchase materials for production has a need for borrowed funds, for which the buyer also pays in the end. Bank commissions are charged for all transactions related to letters of credit.

Afterword

So, now that you have an idea of what letters of credit are, you may think that it is very difficult, but when you decide to go through the whole procedure step by step, it will become clear to you that this form of payment is quite convenient and reliable. When choosing a reliable bank, most of the work will be done for you. When working with foreign partners, the use of a letter of credit will allow you to declare yourself as a specialist, which will cause respect for your entire company.

How to ensure the security of the transaction when working with new partners? Get low-cost financing when purchasing equipment and lacking collateral? What about buying real estate? This procedure can also be greatly simplified and will allow you not to lose your money, avoiding the tricks of deceivers and dishonest realtors. Can it be done? The answer is simple - a letter of credit form of payment.

What is a letter of credit?

The generally accepted definition of a letter of credit is an instruction from the payer's bank, the beneficiary's bank, to make payments to an individual or legal entity within the specified amount and on the terms specified in the order. Settlement under one letter of credit is carried out with only one recipient of funds.

Brief terminology used in the letter of credit form of payment:

Payer- he is the applicant, the principal - the person on the basis of whose instructions the payment under the letter of credit is made.

Beneficiary- beneficiary of funds under a letter of credit.
Issuing bank- a bank issuing a financial obligation, in this case - a letter of credit.
Executing bank- the bank appointed by the issuing bank in accordance with the instructions of the applicant, to carry out the execution of the letter of credit. The executing bank can be either the issuing bank or any advising bank. In cases where there is a confirming bank in the transaction, the execution of the letter of credit, as a rule, is given to it.
Confirming bank- as a rule, a first-class bank that assumes obligations to pay the amount specified in the letter of credit, regardless of the receipt of funds from the issuing bank, the presence of a confirming bank in the structure of the transaction increases its reliability and guarantee of payment. IN Russian practice confirmation by a foreign bank is required in most cases.

There are four main types of letters of credit:

Covered letter of credit (deposited)- this is when, when opening a letter of credit, the issuing bank transfers at the expense of the payer's funds, or the credit provided for these purposes, the amount of the letter of credit (coverage) at the disposal of the executing bank for the entire period of the letter of credit.
Uncovered letter of credit (guaranteed)- this is when, when opening a letter of credit, the issuing bank does not transfer funds, but gives the executing bank the right to write off funds from its correspondent account within the amount of the letter of credit. The procedure for writing off funds from the correspondent account of the issuing bank under a guaranteed letter of credit is determined by agreement between the banks.
Revocable letter of credit- this is a letter of credit that can be changed or canceled by the issuing bank on the basis of a written order of the payer without prior agreement with the recipient of funds and without any obligations of the issuing bank to the recipient of funds after the withdrawal of the letter of credit.
Irrevocable letter of credit- this is a letter of credit that can be canceled only with the consent of the recipient of funds. An irrevocable confirmed letter of credit is when, at the request of the issuing bank, the executing bank can confirm an irrevocable letter of credit, and such a letter of credit cannot be changed or canceled without the consent of the executing bank. The confirmation procedure for an irrevocable confirmed letter of credit is determined by agreement between the banks.

As a rule, covered irrevocable letters of credit usually exist in the practice of Russian banks. You can learn more about the types of letters of credit from open sources, each of these types has certain specifics associated with the peculiarity of the transaction.

The standard scheme for using a letter of credit is as follows:

The seller and the buyer enter into a contract (purchase / sale agreement, supply of equipment, provision of services), the terms of which provide for the form of payment through a letter of credit and the conditions for its disclosure
The buyer submits a copy of the contract and an application to the bank. The bank opens a letter of credit based on the submitted documents. If necessary, the letter of credit is confirmed by the seller's bank or any bank, the requirements for which are provided for by the contract.
When opening a letter of credit, coverage is formed either at the expense of the client's funds or at the expense of a credit line provided to the client by the issuing bank or another bank, incl. foreign.
The seller ships the goods, sends the documents on the basis of which a letter of credit is opened to the bank and receives payment.
The buyer receives the documents and goods.

As you can see, the scheme is simple and obvious - on the one hand, the supplier sees the issued letter of credit, which is a guarantee of payment, if the delivery complies with the terms of the contract, on the other hand, the buyer does not risk his money, as in the case of an advance payment to an unknown counterparty, while the bank acts as the guarantor of the transaction checking its purity.

But, as they say, there is a nuance.

Firstly, The contract must contain the following clear parameters:

name of the issuing bank,
name of the bank serving the recipient of funds,
name of the recipient of funds,
name of the executing bank
letter of credit amount,
type of letter of credit
method of notifying the recipient of funds about the opening of a letter of credit,
method of notifying the payer about the account number for depositing funds opened by the executing bank,
validity period of the letter of credit,
the period for submission of documents confirming the supply of goods (performance of work, provision of services), and the requirements for the execution of these documents, as well as their list and characteristics,
name of goods (works, services) for payment of which a letter of credit is opened, the term for the carriage of goods by road, the term for the shipment of goods (performance of works, provision of services), consignor, consignee, destination of the cargo,
terms of payment (with or without acceptance);
liability for non-performance (improper performance) of obligations

Secondly, it is recommended to clarify where the bank will check the authenticity/compliance of the submitted documents, since this can significantly delay the payment terms due to the time spent on sending the documents.

And most importantly - the formation of cover on the letter of credit. As mentioned above, it can be formed from two sources:

payer's funds
bank funds, i.e. at the expense of credit funds provided by the bank to the payer.

First option used in most cases for letters of credit with payment at sight.

The second option it is advisable to use such a form of payment as a letter of credit with post-financing, as a rule, this type of letter of credit is used for long-term transactions and allows you to attract inexpensive financial resource for long periods (more than three years), for example, the purchase of equipment.

The procedure for issuing this letter of credit is also good because financing can be obtained with a formal pledge, since the purchased equipment will be the main pledge. The credit scheme for this form of payment is as follows:

A contract for the supply of equipment is concluded, the terms of the contract and letter of credit are agreed with the issuing bank.
An application for a letter of credit is submitted to the issuing bank and a loan agreement is signed for the purpose of forming a cover on a letter of credit and a pledge agreement
The issuing bank coordinates the transaction and opens a letter of credit in a foreign financing bank
The foreign bank confirms and advises the letter of credit to the supplier.
The supplier delivers, submits the documents specified in the contract for the purpose of opening a letter of credit
After verifying the authenticity of the documents and their compliance with the terms of the letter of credit, the foreign bank pays the supplier at the same time opening a credit line to the issuing bank, which in turn reissues it to the buyer.

As a rule, such financing is carried out for a period of 2 to 7 years, the standard is 5 years with a line set up according to the 3 + 2 scheme. When financing for a longer period, it is necessary to involve the Export Credit Agency (ECA). ECAs are public financial institutions that provide guarantees or insurance against state support in favor of national companies intending to export goods and services abroad. ECA guarantees or insures long-term (investment) loans provided by national banks to issuing banks (in our case, Russian) under contracts for the purchase by Russian importers of technological equipment, means of transport, installation, commissioning and other services by specialists of these countries.

The main conditions for this form of attracting resources:

Loan term - from 2 to 7 years
Amount - has a minimum value in each bank, its own threshold, and, as a rule, no more than 80-85% of the contract value
The interest rate is determined as the sum of the following values - LIBOR/EURIBOR (6 months), the margin of the issuing bank (%% per annum), the cost of financing a foreign bank. ECA's insurance premium is additionally paid, which is calculated from the loan amount and must be paid before receiving the loan. At the request of the Client, ECA's insurance premium can be financed. In this case, the loan provided to pay the ECA insurance premium is repaid together with the principal amount on similar terms. In general, the rate rarely exceeds - 10/11% per annum in foreign currency and can be fixed for the entire period after the withdrawal of the loan in agreement with the issuing bank and the financing bank
Interest payment - monthly
The repayment of the principal debt is carried out in equal semi-annual tranches, the first repayment is 6 months after the agreed date, which is determined in accordance with the terms of the contract and the project itself, for example, the date of shipment or the date of commissioning of the equipment.

The advantages of the letter of credit form of payment are obvious:

The buyer is guaranteed to be protected from the risks of non-receipt of the paid goods, because the executing bank will pay only for those documents that will comply with the terms of the letter of credit.
The Seller, fulfilling its obligations to the Buyer in a timely manner and submitting the documents corresponding to the terms of the letter of credit to the bank, is guaranteed to receive payment regardless of the Buyer.
The Buyer reduces the risk of violation by the Seller of the terms of delivery or provision of services, since the bank will not pay for documents indicating a violation of such deadlines.
In cases where the Seller violates the terms of delivery and / or the provision of services, the decision to pay is made by the Buyer.
In cases where the documents submitted by the Seller do not comply with the terms of the letter of credit, the bank will not pay for such documents without the consent of the Buyer.
Banks are more willing to finance a transaction if a letter of credit is used as a form of payment, because. the possibility of misuse of funds is completely excluded.
Lending to foreign trade transactions using documentary forms, the so-called trade finance, has lower interest rates, because. such operations are less costly for banks, both in terms of the sources of funds used for such financing, and in terms of risks.

The disadvantages are:

firstly, higher cost compared to other unsecured forms of payment
secondly, the complexity in design.

These shortcomings are eliminated by the reliability and guarantee of calculations, as well as the right choice jar.