Letter of Credit Meaning, Amended After Expiry and Bank charges Calculation

Letter of credit meaning

What Is Meant By A Letter Of Credit?

Companies utilize letters of credit as a financial tool to ease import/export transactions. These letters are documentation issued by the Importer’s bank (issuing bank) to guarantee the imported goods payment. The letter is written and sent to the Exporter’s bank (accepting bank) to represent an agreement to pay for the goods if certain conditions are met. These criteria are frequently documented in trade tax forms, certificates of origin and invoices, among other things. If all of these conditions are met, the issuing bank must release the previous money of agreement on its time.

How Is A Letter Of Credit Raised?

The buyer must first approach the bank for a letter of credit.

  • An advising bank, usually an international bank, receives the letter of credit sample from the buyer’s bank. The advising bank verifies and authenticates the information in the letter of credit.
  • After authentication, the advising bank assures the seller that his money will be processed as the concerned will handle the transaction.
  • After the buyer ships the acquired things, the seller receives a bill of landing for exporting the purchased articles.
  • From here, the banks take over as the landing bill is submitted to the bank for negotiations, which then inspects the exported items and pays them.

Read More about How Important Is A Letter Of Credit To The Exporter?

Can The Letter Of Credit Be Amended After Expiry?

After an LC has been granted but before its expiration date, an amendment can be made at any time. As the issuing bank, you have received a request from your customer to modify the terms of the letter of credit. As the advising bank, you have received instructions from the issuing bank to change the terms of an LC you advised.

Does The Letter Of Credit Have Interest?

. No, there is no interest in the letter of credit. A letter of credit does not charge interest to the customer. Instead, the bank makes money by charging fees and commissions for acting as an intermediary. You’ll usually have to pay an opening and yearly charge when you get a line of credit.

Read Also About Is A Letter Of Credit A Legal Document?

Letter Of Credit Charges Calculation

The charges of bank are non-refundable fee that is calculated by using the given formula:

{Face Amount * FEE * (Term in Days/360)}.

The used of FEE in the formula is depending upon the SLOC Face Amount and the current annual percentage rate is 11.5 basis points.