Letters of Credit, one of the methods of commercial financing


International trade is a relatively conservative approach that companies can use to penetrate markets through export or to obtain supplies at a low cost by importing. The risks In this approach are minimal since the company does not risk part of its capital.

If the company suffers a decline in its exports or imports, it can normally reduce or suspend that part of its business at a very low cost.

There Are Several methods of commercial financing through which the companies carry out their businesses, the most used are: financing of accounts receivable, factoring, letter of credit, bank acceptances, financing of working capital, Purchase of effects to be charged, against negotiation.

In The present work we intend to explain one the methods of commercial financing: LETTERS OF CREDIT that still persist due to the protection and the benefits that it provides to both the exporter and the importer, is a critical element of many transactions International commercials. It Also analyses aspects such as the regulation of this issue with regard to the practice of international standards, mention is made of the parties involved in the transaction, the internationally established procedures, the required documentation, the Types of credit cards and their different modalities and finally the advantages, disadvantages and/or risks that may be incurred in the trade finance transaction for the exporter as for the importer.

The present work seeks to cover one of the objectives set by the Chair of international finance that allows to analyze theoretically one of the topics of total topicality and relevance in the current financial world, established in the Silabus. The Documentary Credit, specifically the Letters of Credit, is an instrument of great demand and acceptance in the current finances. It Will Be described from its basic concepts and historical review to aspects related to its negotiation. The recognition of the importance of this subject depends on our interest in the projection in the labor market, in addition to the methodological contribution it provides in our academic-professional training.


The intermediary use to pay bills derived from the purchase of international merchandise apparently began in the 12TH century, then, in the 17TH century, the letter of payment arose. But it is not until the NINETEENTH century that the documentary Letter of credit appears as we know it today. Its generalization as a mechanism for the payment of obligations deriving from international trade occurred in the late NINETEENTH century and the first two decades of the TWENTIETH century. This led to the need to look for uniform rules and uses that would be acceptable to all commercial banks in the world and those that would serve to standardize the mechanics and use of the letter of credit, as well as the responsibilities of the banks to each other. To this end, the International Chamber of Commerce (ICC) was created, which adopted, in 1933, the first set of uniform Rules on documentary credits (Uniform Rules), today have been adopted in most of the countries of the Americas, in Europe West, Asia and Africa. The Uniform Rules apply in most countries of the world as use of international trade.

In General, the reasons for the development of the documentary credit as a payment mechanism in international trade include:

In The documentary credit, the exporter transfers the risk of piglet he had against the importer at a credit risk from the issuing bank of the documentary credit.
At the time of the rotation of the documentary credit and as an essential requirement of this, the exporter must present the shipping documents and other documents specified in the text of the letter of credit. This helps the importer to ensure that the necessary documents, which he has requested and described in the letter of credit, are presented in a timely and complete form by the exporter.
The documentary credit is issued in a given currency and the bank that is paying the documentary credit is committed to pay it in this currency. In this way, the exporter protects against foreign exchange risks and currency shortages that the importer may have.
The Documentary credit is a separate instrument of the underlying purchase-sale relationship. Banks dealing with a documentary credit are limited to dealing with documents and us with goods. This «documentary» character that is the very essence of documentary credit, is what allows banks to participate in the operation. If the banks had to meddle with the goods, they would be assuming risks that they could not control (example, that the merchandise is in bad condition, does not correspond to what the importer requested, etc.).
On the one hand We Will touch the Documentary Credit, specifically the Letters of Credit, instrument of great demand and acceptance in the finances Are addressed from its basic concepts and historical review to aspects related to its negotiation.


LETTER OF CREDIT: Document granted by banks or financial institutions to a client for a certain period of time and that authorizes a certain commercial operation or a discovery on it up to a specific figure and by an agreed interest.

EXCHANGE RISKS: Risk arising from the fluctuation of currency parities to which exporters or importers are set up when they fix their contracts in currencies other than their own

FLUCTUATions: Variation in the value of a currency over a certain period of time.

PARITY: Relations between the quotation or exchange, of one monetary unit and another or others with which it is compared; The relationship between the price of a title and its nominal or facial value.

ORIGINATOR: O (Taker). The importer, who’s buying merchandise.

The ISSUEr: The Bank, issuing the letter of credit.

THE BENEFICIary: The exporter, who will receive the payments under the letter of credit.

STAND BY: Contingency Agreement.


The Letter of Credit, is the promise given by a Bank (Issuing Bank), acting on the instructions of its client (Originator), to pay up to a certain sum of money to a person or company (Beneficiary), through one of its correspondents (Notifier Bank), As long as certain requirements are fulfilled, these, as a general rule, are the delivery of documents within a stipulated date.

The Letter of credit is always a documentary credit, that is to say, that the beneficiary (exporter) will only be able to turn on it by means of the presentation. These documents show the shipment of the goods and the fulfillment of any other formalities demanded by the importer of the Charter of (insurances, payrolls, etc.).

The International trade Letter of credit creates a triangular relationship where one or more banks serve as mechanisms for the payment of the price, while the transfer of goods continues to be a direct relationship between the exporter and the importer, but In which the bank assures the importer that it only pays if the beneficiary presents the documents, (boarding certification, commercial invoices, etc.) required in the letter of credit.


The documentary Credit had a development that made it necessary to have a clear and precise regulation in this respect, since in the Codes of the majority of the countries there are not contemplated provisions directly concerning them.

The legal order of the letter of credit is based substantially on concepts and norms arising from international practice, but in commercial matters the situation is not the same as article 9 of the Trade Code contemplates that «commercial customs supplements The silence of the law when acts that constitute it are uniform, public, generally carried out in the Republic or in a certain locality. »

For The purpose of regulating Them internationally, they were drafted. The «Uniform Rules and Uses for Documentary Credits», which were established for the first time in 1933, at the 7TH International Chamber of Commerce Congress and were revised at 1951, 1962, 1974 and 1983, which are currently in force and have been Adopted by most countries.


Originator: Person or entity that requests the opening of the credit to his bank, committing to make the payment. Is Usually the Importer,

Issuing Bank:
Bank chosen by the importer or agent that makes and proceeds to the opening of the credit makes the payment of the credit if the conditions demanded in the same are fulfilled.

Warning or notifier Bank:
Correspondent Bank in the country of the exporter of the issuing bank. Notify the Beneficiary of the credit opening.

Beneficiary Credit:
Person in whose favor the credit is issued and who may require payment to the issuing bank, once it has complied with the stipulated conditions.

Confirming Bank:
When requested by the originator and indicated in the credit, there may be a bank that makes an intermediary between the issuing bank and the beneficiary. Extending the guarantee of the beneficiary’s collection by assuming the same responsibilities as the issuing Bank. It Is advisable to always ask for a confirmed documentary credit.

Refunder or Payer Bank:
Bank that will receive the instructions of the issuing Bank to make effective the requests for reimbursement by the bank warning or bank through which the exporter negotiates the documents (Bank Negotiator).

Essential Information of the Letter of Credit

Letters of credit in general must contain a series of data, including, as indispensable, the following:

Time Determination
Amount for which credit is opened
The autograph signature of the taker


Both Parties, buyer and seller must hold a sales contract and an order in agreement with the general conditions of the transaction, and payment of the same by a letter of credit.
The Buyer or importer shall notify the Bank of its preference in its locality to issue a credit in favor of the seller or exporter.
The issuing bank must in turn request another correspondent bank in the country of the seller to notify or confirm the credit to the seller in accordance with the agreed conditions.
The confirming Notifier Bank, as the case may be, shall inform the seller of the existence of a credit in its favour.
The seller must go to the bank in which the credit is available to present all the documentation that proves that the shipment of merchandise has been made in accordance with the stipulated in order to be able to request the payment according to the specified maturity.


Letter of Credit or Documentary credit.

It Is a bank payment order, open at the request of the importer in favor of the exporter. The issuing Bank acquires a firm commitment to pay it, provided that its terms and conditions have been fulfilled by the exporter.

Certificate of Origin

Accredits the source and origin of the goods. It is Generally required by the Customs of the importing country to apply the customs liens that proceed. Some products can benefit from the Generalized system of Preferences (S.G.P.), for which they need a Certificate of Origin extended in the corresponding form.

If the destination of the goods is a member country of the Latin American Integration Association (ALADI), the Certificate of Origin shall be required in the form ALADI.

If the destination of the goods is a member country of MERCOSUR, the certificate of Origin on the MERCOSUR form shall be required.

Phytosanitary Certificate.

Document normally required in exports of agricultural products. It Is issued by the competent health authority of the country of origin of the product. This document certifies that the products have been examined and that they conform to the phytosanitary provisions in force in the importing country.

Bill of Lading.

Shipping Document (Chartering Contract) issued by the shipping company (carrier) and signed by the captain of the ship certifying the shipment, with date, port of origin and destination, quantity and conditions of the merchandise received on board. It Constitutes a title of ownership for the consignee and enables it to request the delivery of the goods at the point of destination.

It is always required that the bill of Lading «clean», that is, without notes of the Captain regarding the quality, packing or presentation of the goods.

When the transport is aerial, the document is called an Air Waybill. When the transport is terrestrial, it is called Letter of Port or Rodoviario Bill of Lading.

Export Shipping Permit.

A Document of customs destination through which the Customs Office certifies the legal exit of the goods to the outside.

This document is prepared by the Customs Broker and legalized by the information, such as the exporter’s background, financial background (sales modality, sales clause, payment modality, branch of the warning Bank that will control the Returns, export amount, return liquid value), date of shipment, port of embarkation and disembarkation, country of destination, route of transport and description of the goods.

Commercial Invoice

A private Document that the seller of a merchandise extends to your buyer.

It Contains information that differentiates commercial invoices for local transactions, such as: condition in which the merchandise will be delivered, clause of sale, route of transport used, name of the exporter and foreign buyer, etc.

Pro form Invoice.

Document in which the exporter indicates to the importer the price (quotation) and the conditions in which the sale of the sale of the merchandise will be made (route of transport, quantity of shipments, delivery period and modality of payment).

It Is A written commitment, not a collection invoice, and has a certain term of validity set by the exporter.

Shipment Order.

Document extended by the transport company or by the agency in case of maritime transport. It Is used when an exporter requires the reservation of a physical space on a ship or other type of vehicle to ship a merchandise. It must be signed by the Customs Broker, constituting a request before the National Customs Service to authorize the shipment of the goods.

Packing List (Packin list)

Certificate containing detailed information on the characteristics of the goods that are deposited on board the means of transport, such as: weight, dimensions, characteristics of the packages and even their location within the container. It is Not an official document and is issued by the exporter when requested by the importer. If the importer requests it via letter of credit, the document must be officialized by a competent body. It Is generally used for products such as: salmon, sawn and sized wood, hortofrutículas and frozen products.

Insurance Policies.

A Policy corresponding to the contract that serves as proof of the agreement between the insurer or Insurance Company and the insured, in exchange for the collection of a premium.

The value of the goods is expressed in export price (CIF) (cost, insurance and freight).

The date of this document must be the same or prior to the date of shipment.

Consular Visas

For the export of certain products is required the visa of some documents (commercial invoices, knowledge of shipment, certificate of origin, etc.,) by the Consul of the country of destination.


Letters of credit can be used for both import, export and local operations are classified by:

As The Parties Contract:

Revocable: Are those that can be modified or cancelled at any time, without the prior consent of all parties.
Irrevocable: Are those which cannot be modified, cancelled or altered in any way, without the conformity of all the parties involved in the transaction.
Traveler: They Are Those issued by traders and Banks to facilitate the beneficiary of the same money availability, particularly abroad, when going on a trip.
According To the Commitment:

Confirmed: Are those in which a bank of the seat of the beneficiary assumes the commitment to pay the money presented in use of the same, without recourse, ie that assumes a different commitment to the already acquired by the Issuing bank. In other words it constitutes in solidarity and main payer of the commitment assumed by the Issuing Bank.
Unconfirmed: These Are those in which the payment commitment is assumed by the issuing Bank, therefore it does not imply an immediate payment obligation on the part of the notifier Bank and/or confirmer.
According To Your payment method:

In View: They Are those payable to their beneficiaries to the submission of all the documentation required in their text.
With Acceptance: They Are Those payable to the beneficiaries against letters of exchange delivered to a certain period, i.e. to days seen, to so many days date, to fixed date.
Mixed: They Are A combination of the previous two, that is to say that they are payable a part in cash and another part against acceptance of a bill of exchange.
Deferred Payment: They are similar to those established with acceptance only that these cases there is no acceptance of the bill of exchange if the commitment is not assumed by a letter containing the amount to be paid and the date on which it will be made.
According To their clauses:

Revolving Credit: As Its name implies, it is a credit that when used, its amount is automatically reinstalled to the original conditions.
Red Clause Credit: Those in which the beneficiary is authorized to receive advances on account of the credit by the delivery of a simple receipt for the amount thereof.
Credit with Green Clause: Of Similar operation to the previous one, but in this case the advances made to the beneficiary according to the credit are usually by goods already acquired and that due to lack of transport have not been able to be dispatched. It is customary in this type of credit to condition the payment of advances to the delivery by the beneficiary of a certificate of deposit stating that the merchandise is ready for shipment and at the disposal of the originator.
Credit Screen (Dummy credit): As Its name indicates it is a false credit because the originator, does not know at the time of its opening if it will be appropriate or not that it is used, reason why it will include in the same one, clauses that impossible to the beneficiary its uses such as duly signed commercial invoices.
Transferable Credits: This Is the one in which the first beneficiary can transfer the partial or total amount of the letter, in favor of a beneficiary or several beneficiaries.
According To its Purpose in:

Forms of letters of credit

Revolving Credit/»Revolving Credits»
The Revolving credit may be of periodic use, that is to say, that it automatically regenerates in its original value every certain period (monthly, quarterly, etc.) within the validity period, as indicated in the original credit. It Can in turn be cumulative or non-cumulative. In The first case, the originator wishes that the dispatches not made in a certain period can be carried out in the next lapse or in subsequent periods. In The second case, the originator wishes, that in the case of the beneficiary does not embark the merchandise in a certain one is prohibited to dispatch it in the next period or in subsequent periods.

Red clause Credit/»Red clause»
Subsequently, against the submission of documents intended for use, the bank will pay its value prior to deduction of the anticipated amount or percentage.

It Is Current that the manufacturer needs to cover part of the production costs or the cost of the raw material used in the elaboration of goods expressly required by the buyer, by virtue of which the beneficiary is allowed to include in the letter of Credit the following indication or similar authorization: «This credit is subject to Red Clause up to 25%», in which case, it is understood that the bank can anticipate the beneficiary up to 25% of the amount of the credit, against simple receipt or turn in sight.

Green Clause Credit/»Green Clause»
This clause on the form of use of the credit is incorporated in the instructions of the originator and is generally requested by industrialists who need working capital to produce the product intended for export or to be manufactured expressly for the purchaser, guaranteeing the transaction to the paying bank and/or confirmer by means of a real guarantee or the pledge of the merchandise related to the shipment.

Subsidiary Credit/»Back to Back Credits»
In The subsidiary credit, the exporter or beneficiary may obtain from his bank a financing for the export of his product by obtaining an advance, by ordering a second credit in favor of a third party (Supplier) with the support and guarantee of the first Credit.

Transferable Credit
In Order For a documentary credit to be transferable, it must have been expressly indicated by the originator in his application or subsequently requested a modification to make it transferable, for the purpose of the issuing bank and/or the chain of banks to notify The amendment and include in the word «Transferable» RRUU. Art. 48 A.

Uniform Rules and Uses state that terms such as «divisible», «Fractionatable», «asSignable» and «Transmissible» do not add anything or replace the sense of transferable and should not be used.

Features: The guarantee letter of credit is a documentary credit subject to the same requirements of the commercial letter of credit (RRUU Atr. 1.


Of Loans: It can be issued by a national bank in favor of foreign banks to guarantee loans granted by the local bank to a foreign currency company. In this way, the national company or the multinational’s subsidiary can borrow a national bank in any type of currency.
OF Future change operations: a future Operation May Be advisable to guarantee future contracts in certain currencies and to protect against any possible exchange risk on the date set.
Of exports: It is usual for an exporter to require an importer to open a guarantee letter of credit when exports are made in «open account». The Letter of credit will only be used against submission of documents certifying that the importer has not paid the S invoices in «open account» at maturity.
Issuance of obligations: powerful companies or companies leading corporate groups can go to the internal capital market by placing medium-term obligations with the guarantee of a letter of credit issued by a bank in favor of the Holders of obligations.
Of Faithful fulfillment: Used to guarantee to the beneficiary the faithful fulfillment of contracts to make by a company.

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