Opening documentary Credits and payment orders:
To open a documentary credit, the following documents are required:
– A proforma sealed by the Ministry of Commerce at the time of order registration.
– Shipping and freight Insurance policy
– Letter of Commitment for entrance, clearance, and presentation of the landing order for the commodities purchased from abroad
– Commitment letter for currency rate volatility
– Inspection admittance form
– order registration in the Sabtaresh system
– Application Form for Opening documentary Credit
– A transaction account and validation of the applicant account
After the advance payment, the bank assigns an 8-digit code to the letter of credit and the text of the letter of credit (the text of the letter of credit is in fact the translation of the application form filled out to open a documentary credit, which covers the seller’s obligations and the documents he is supposed to present. In other words, this letter is the buyer’s instructions to the bank) the LC text is sent to the related bank in SWIFT format, and then the bank lets the seller know about the amount. In case the seller rejects the credit letter, he can call for credit correction.
Deposition and settlement of documentary credit
If the payment is made with documentary credit, the bank will be designated as the official owner of the goods in the bill of lading. After settlement, the bank endorses the bill of lading, as the title deed of the commodities, and transfers ownership to the credit applicant or the buyer. Since the currency rate is not constant, the currency rate on the day of the transaction will serve as a criterion for settlement. In term documentary credit, the currency rate in the maturity date serves as the settlement criterion.
After receiving the documents, the bank is required to take the necessary measures regarding the documents within 5 banking days. the opening bank and the broker bank each have a maximum of 5 banking days to determine if the presented documents are in conformity with the terms of the credit.
Banks act on documents, rather than commodities and services, and must pay or make deals with documents when the confirming bank verifies that the documents presented are in conformity with the terms of credit.
Important points in the documents provided for the documentary credit:
At least one copy of the original documents listed as the terms of credit.
The commercial invoice shall be set based on the currency listed in the credit terms.
Please call 09138202264 in case you need consultation on how to import commodities and open a letter of credit
Different ways of Opening a letter of credit
– Opening currency-based LC
Opening at sight letter of Credit (cash): in this case, part of the money is received as a prepayment at the time of opening the credit and the remaining part shall be collected at the time of delivery of the documents.
– Opening of term letter of credit: All importers, including manufacturers and traders, who intend to import raw materials, spare parts, machinery of production lines, can open letters of credit using inter-bank credit lines.
– Opening domestic letter of credit: this credit can be used in manufacturing (industrial and mineral, agriculture), service and commercial sectors.
– Opening a usance letter of credit
The main documents in the letter of credit
۱-Bill of lading 2-commercial invoice 3- Certificate of Origin 4-shipment invoice 5-Certificate of International Inspection
Documents required to open a letter of credit:
Legal person: (Company Registration Statute, the latest Official Gazette of Board of Directors and Signatories, the minutes of a meeting of the Board of directors indicating their consent with credit collection, the list of Company Financial Statements, and Audit Report by the Official Accountant of the Association of Official Accountants, Copy of exploitation License, Production and sales figures over the last three years and forecasts of production by the end of the year)
Natural persons: (business license, tax return, statement of profit and loss over the past 3 years,
The production and sales rate over the past 3 years, the order registration form received from the Ministry of Commerce, the insurance policy covering the freight fare plus the total value of commodities, Proforma, the clearance sheet for commodities purchased from abroad, the commercial card, the feasibility study report for receipt of facilities, the production And sales rate over the past 3 years, operating budget reports)
Payment Terms and methods
– advance payment or cash
-letters of Credits
– Sight payment letter of credit or acceptance letter of credit
In this way, the total sum of money is received by the seller in the first hand
LC is commonly practiced in all businesses.
In fact, the letter of credit guarantees the payment of the price of goods by the bank to the seller.
LC guarantee is a guarantee provided by the buyer’s bank for payment of the amount to the seller through the buyer’s bank, provided that both parties have already come to agreement over the terms of payment by letter of credit. Simply put, if the letter of credit is opened in your name as a beneficiary, you will be able to receive the amount from the buyer’s bank at the agreed time.
There are several types of credentials, such as cancellation, irrevocable, certified, unverified, documentary, fixed, rotating, transferable, back-to-back, and …. The most common and secure credentials for the buyer and seller are irrevocable. Is.
Letters of credit are of several types: revocable, irrevocable, confirmed, unconfirmed, documentary, fixed, revolving, transferable, back-to-back, and …. with irrevocable letter of credit being the most common and secure LC for the buyer and seller.
Since international transactions are difficult due to differences in rules and regulations, distance and geographic locations, etc., LC can play a significant role in business prosperity. These documents that are issued by bank, provide the seller with the necessary guarantees on behalf of the buyer who holds the credits. However, before the receipt of the confirmation from the buyer, the payment will not be made.
Benefits of L / C
– provides the ground for conducting international transactions by the bank
– Provides security for the parties to the transaction
– Guarantees payment to the seller’s bank provided that all obligations specified by the seller are fulfilled
– The bank guarantees payment only in return for the receipt of the documents, rather than services and commodities
Types of LC
Letters of credit are divided into several classes. Some of the most important types of LC are listed below:
From buyer’s point of view:
Revocable letter of credit: In this type of LC, the buyer can make any change to the terms and conditions without sending any notice to the seller or beneficiary. This is used when the seller is completely assured of the buyer. Note that the buyer cannot revoke the amount paid to the seller and can only do something about the remaining amount of credit which is not paid yet. If the Iranian buyers are willing to buy revocable credit, the bank will provide them with this letter of credit only if the buyer has a special permit from the Central Bank. But for irrevocable letter of credit, the Central Bank permit is not required.
– Irrevocable letter of credit: this credit can only be changed or modified when both parties agree. Thus, in case the buyer wishes to request for revocation or change of the terms, the agreement of the issuing bank is a necessity. According to the rules of the International Chamber of Commerce, in case nothing has been mentioned about the revocability or irrevocability of the letter of credit, the letter of credit shall be deemed as irrevocable.
Different types of LC in terms of confirmation:
– confirmed LC: in some cases when the buyer has no credibility, the seller may ask for a third-party bank to confirm the amount of credit usually in an irrevocable way. In case the country’s economic position is undermined and the seller cannot trust the bank introduced by the buyer, they can suggest another bank.
– Unconfirmed LC: If the term “confirmed” is not stated in the credit terms, the LC shall be deemed unconfirmed.
Different types of LC In terms of transferability (from the beneficiary to a third party):
Transferable LC: The Beneficiary may request the Buyer’s Bank to totally of partly transfer the credit to the second beneficiary or owner.
– Non-transferable LC
In terms of divisibility
Divisible LC: The beneficiary can split the credit among several other beneficiaries, for example in cases where the seller of the commodities must supply the commodities from several sources in order so that he/she can transfer the money to other suppliers.
– Non-divisible credit
Term or Usance LC: The seller’s bank shall receive the money within 30 days, 6 months, one year and…as specified in the LC
Import or Export LC: This kind of LC allows buyers and traders to import more commodities into the country. This kind of credit is known as import credit among traders, but is referred to as export LC among sellers in other countries.
When does the exporter of goods receives credit under the letter of credit?
The exporter of goods shall receive credit according to the buyer – seller agreement and the time plan specified by them.