Export Letters of Credit

Documentary letters of credit, or as they are more commonly referred to as letters of credit, can help minimise the exporter’s payment risk.

What is a letter of credit?

  • It is a conditional payment guarantee given by the importer’s bank and sent to the exporter through a nominated bank in the UK
  • The letter of credit may be ‘confirmed’ which gives the exporter protection against payment default by the foreign bank or country
  • Payment will be made to the exporter provided the documentation presented complies with the terms and conditions of the letter of credit
  • Danske Bank can provide finance for the period between presentation of documents and the due date of payment.

How can letters of credit help your business?

  • Comfort of knowing payment is guaranteed by the buyer's bank prior to shipment
  • Secure method of payment, knowing when payment will be received
  • Enhanced security as letters of credit are irrevocable and cannot be cancelled or amended without the agreement of both the buyer and seller
  • Can help improve liquidity as documentation may be discounted prior to payment provided the terms and conditions of the letter of credit have been complied with.

What is the process for letters of credit?

  1. A contract is made between the importer and the exporter where the method of payment agreed is a letter of credit.
  2. The importer requests their bank to issue a letter of credit which is then sent to the exporter through a nominated bank in the UK.
  3. The exporter ships the goods and presents documentation to the UK bank.
  4. The documents are checked against the terms and conditions detailed in the letter of credit.
  5. Payment will be made as per the letter of credit terms provided the documents are compliant. However if there are errors in the documents, the UK bank requires agreement from the importer’s bank before payment can be made as per the Letter of Credit terms.

Other types of letters of credit

Standby letters of credit

A standby letter of credit, is a guarantee that a bank or a financial institution provide. This is an undertaking which is activated only if something goes wrong between the buyer and the seller such as the buyer defaulting and the expected payment does not take place. It therefore allows the seller to enforce a claim.

A standby letter of credit is similar to a bank financial guarantee, with the main difference being that they are governed by UCP600 or ISP98 rules.

Transferable letters of credit

If a letter of credit is issued as a transferable credit, the beneficiary may ask the bank that is authorised to carry out the transfer (usually the advising bank) to transfer the letter of credit, completely or in part, to a subcontractor. When a letter of credit is transferred, a number of conditions can be changed.

  • The amount and any unit price may be reduced
  • Validity, shipment and presentation can be shortened
  • Any insurance percentage rate can be raised.

Documents presented under a transferred letter of credit
When documents are presented under a transferred letter of credit, it is possible for the beneficiary to replace the invoices and any bills of exchange with his own. If the terms of the letter of credit have been met, the beneficiary will receive the difference between the two invoices (less the bank’s commission, if applicable) and the balance is then paid to the subcontractor.

Pros and cons of transferable letters of credit
One of the main advantages of a transferable letter of credit is that the credit exposure lies with the subcontractor. One of the main risks with transferring a letter of credit is that the beneficiary is forced to use the other documents presented by the subcontractor. Consequently, any mistakes in these documents might be repeated under the original letter of credit, possibly resulting in some of the security provided by using a letter of credit being lost.

Important information

  • Rules

    Documentary credits are subject to a set of international rules called Uniform Customs and Practice for Documentary Credits (UCP), Publication No. 600. The rules are set by the International Chamber of Commerce (ICC) in Paris and are used by banks worldwide.

    ISBP
    International Standard Banking Practice (ISBP) for the Examination of Documents under Documentary Credits is a checklist of best practice worldwide for checking documents under UCP.

    ISP98
    Standby Letters of Credit are covered by the same rules as letters of credit, UCP600 or ISP98 which deal specifically with this type of letter of credit.

Export letter of credit forms for downloading

Cover Letter

Bill of Exchange (Draft)

Application for transfer

These documents (where applicable) should be completed and returned to:

Danske Bank, Trade Finance,
Donegall Square West,
Belfast
BT1 6AX

We're here to help

We have a team of specialists, skilled at making more possible for local businesses through our trade finance solutions.

If you are interested in finding out how our Trade Finance solutions could help your business, please contact Ruth Graham, Head of Trade Finance:

Telephone: 07718 153904

Email: ruth.graham@danskebank.co.uk

If you are an existing Trade Finance customer, you can speak to one of our Trade Finance specialists

Telephone: 028 9004 8133

Calls may be recorded. Lines are open between 9am and 5pm Monday to Friday except for bank holidays or other holidays in Northern Ireland when the bank is not open for business.