what is the LC and how does it work 21 type of letters of credit five banking broker which covered the NC process message option definition what is the UCP and compared to other same rules and all useful data that you need to learn letters of gradients let's assorted hello guys I'm so happy to welcome you with another lesson as a short introduction to new members this is Ali master in business law and I'm here to share with you international business lesson okay today we are going to talk about letters of credit as a definition a letters of credit is contractual commitment by the foreign buyers Bank to pay once the exporter achieves the goods and cargo and present the required documentation to the exporters bank as proof but how is the process gets a start in business we call the buyer consignee importer or supplier but in the asset process we should say applicant not buyer okay uh don't try to memorize it we will repeat and learn okay I'll come back to a slide seller says that your box should guarantee the payment otherwise we don't do anything there is no deal from now we name the buyer under applicants therefore the applicant meets his bank and ask them to guarantee his payments against the conditions that he prescribed uh guarantee name is Elsie guarantee name is letters of credit applicants should complete his request on a paper and this job is called offering the LC the bank that gives applicant these Services is called issuing Bank issuing Bank under tax to the seller to pay deal months here we have a new word to learn during this process seller or exporter is called beneficiary right the beneficiary will be paid by issuing bank if it provides documents and meets LC terms now we can define a letter of credits about terms of LC who said first the terms in condition in the letter of credit buyer and seller right uh buyer and seller set Force the terms and condition in the LC or applicant and beneficiary or better say SC is independent of other contracts which means the beneficiary gets paid as he completes the necessary document in LC terms LC is independent of other other contracts which means that beneficiary gets paid as it complements the necessary document and LC terms so coupling presentation is LC terms and conditions UCP International standard banking practice here we have three level for the bank to coupling the letters of credit by the beneficiary UCP means International banking rules for letters of credit as you see we have at least three contracts the main contract between seller and buyer applicant contract for opening LC LC contract between bank and beneficiary discharge is not perfect as you know this is international process so let me ask how issuing Bank informed the beneficiary from LC sometimes issuing bank has a broker in beneficiary land but most of the time issuing Bank needs the seller or Beneficial Bank address to contract them and complete the LC process so there will be a second Bank advising bank now let's review the process we applied for LC and the banking system confirmed now the seller should dispatch the goods after loading the shipping company gives the gives the bill of lighting to the seller seller or better shape beneficiary goes to his bank by documents handed his bank that we name it advising back exactly acts as a nominated Bank it means paying a deal amounts to the beneficiary and receive the documents of course here we have a technical point I mean uh nominated bank and Advising by could be different but for now both of them are one advising bank for verse all documents to issuing bank and get reimbursed now issuing Bank informs the applicant that the bill of lighting and other documents are received buyer or applicant to reach the document should pay the LC amount to the issuing Bank without documents and beloved lady is not the owner of Freight and it can deliver a product because the shipping broker will ask beloved lady right it was a simple and basic letters of credit process sometimes it could be complicated relation uh let me explain on the screen if you remember when I talk about advising bank I mentioned that advising Bank could be nominated nominated bank right uh it means here we could have two bank one as a nominated bank and the second as a advising Bank but what is different advising bank or a B is responsible for advising and announcing to the beneficiary that Elsie was opened by issuing bank and is available nominated bank or NP the bank in which the credit is available means the bank that paid deal amount against documents and beneficiaries should leave documents to them should leave documents to nominated back right don't forget that due to the situation we could have a few Bank broker in our LC operation and the previous example we had a bank who is provide advising and nomination banking services as well as sometimes issuing bank and Advising Bank are the same maybe you need to ask a third bank to confirm your LC process in this story confirming bank or CP comes to confirm your LC documents about confirming this service only check your LLC documents and as an example if your bank is bankrupt there will be no responsibility for the confirming Bank services so that is why a large deal we meet another bank who is covered payment risk in LC reimbursing bank or r b this Bank accept to pay the deal amounts the LC amount instead of issuing Bank as you see a letters of credit could be complex process up to now we learned the AC process it was a basic premium process between importer and exporter and banking system as you know LC has a wide range of usage and it is not limited to Import and Export business so it's time to talk about the types of as he if you remember in our example beneficiary meets the nominated Bank with his documents and due to the main contract with the buyer the nominated Bank thus checking the documents and pay the accurate amount of funds provided the provision of the letters of produce are met this type of lce is site Credit payment against documents right about types of LCM the base and purses are same and what makes the difference is or usage so I don't draw a separate chart for each process all of them are same in process anyway I would prepare a short video for each one and you can review all terms by following my YouTube channel okay let's continue we learned that the basic type is site payment the next question is about canceling and edit therefore site LC could be added could be cancel the second type of LCR we can say branch of site LC irvocable site LC in this type there is not any nominated Bank it means issuing Bank should pay the deal a month it cannot be canceled or amended with without the consensus consent of all parties concerned um it means to cancel to edit uh you need all parties agreements on the other hand we have revolving LC it means one letters of credit process one process that could continue for a long time next variable cable LC irritable cable LC can be canceled or commented by the issuing bank at any time and without prior notice to um to consent of that beneficiary it's exactly the opposite of irrevocable and it's not safe for beneficiaries so we learned the site meaning irrevocable and revocable and revolving the next one is yuzon's LC in this type issuing Bank in purchase Bank guaranteed to make the payment by the present date it means disc credit is type of LC wherein the buyer is allowed to make the payment after delivery and within a stipulated grace period unlike with site LC the buyer doesn't have to make payments immediately to receive the document a negotiation credit or else you buy negotiation sometimes seller or beneficiary needs his money and can't stay for the issuing bank settlement at this time he asked another bank to accept his else document and the next type is deferred LC that is same luzon's LC userns and deferred letters are pretty don't have any significant difference both are the metals of paying at some future date however there is a little difference what is the difference between deferred payment and users is more similar to an acceptance letters of credit since users letters of credit involves a draft a different payment letters of credit also known as usans letters of cricket is a commercial letters of credit that provide that provide debts the beneficiary will be paid and not at the time the beneficiary makes a compliant presentation but at later specified and maturity date this is different about the interest rate and commission and discount in the future days I will make a video for payment content and talk about calculation and computation of contract math if you remember we talked about site LC differs for acceptance and negotiation LC but about the last column negotiation LC freely this is exactly negotiation LLC and the only difference is here you can negotiate with any bank and it's not limited to nominated bank right let's continue transferable LC this type of LC allows the first beneficiary to transfer some or all of the credit to another party this is usually done where the first beneficiary is not actual manufacturer of the goods and is sourcing it from other in an LC agreement a seller first beneficiary has a cell to execute with the buyer but is unable to complete the McCandless order from the manufacturer by transferring a portion of transferable letters transferable LC to the manufacturer a third party or supplier the seller provides them an assurance of payment by leveraging the buyer Banker credit and utilize this LC to purchase those Goods those products online so this is a tripath leverage in business once named as a second beneficiary it poses all the same rights as the original dos at the origin of beneficiary then can request the bank to transfer apart or all the credit to the second reflection back to back LC this type is like transferable LC but what is different the difference is that in back to back the first LC serves serves as a collateral for the second in fact back-to-back LC involves two letter of credit to set your financing for a single transaction back-to-back LC are actually made up of two distinct LLC one issued by the buyer's Bank to the intermediary and the other you should buy the intermediary Bank to the Salah with the original LC from the buyers Bank in place the broker goes to his own bank and has a second LC issue oh with the seller as the beneficiary the seller is just in short of payments upon fulfilling the terms of the contract and presenting the appropriate documentation to the intermediary Bank to the intermediary Bank in some case the seller may not even know who the um or teammate buyer of the goods red close LC sometimes an after opening a type of LC the seller or better say beneficiary says that I'm short of working capital in this situation the Importer or better say applicant can pay a percentage of LC to the exporter even before the loading and shipping process and as a financial support this amount will be mentioned in red color and that is why we name it red clouds so in this close beneficiary will be paid with percentage as an advanced payment during this process the nominated Bank could ask for a type of undertaking um from the beneficiary and this job name is the documentary Red Cloud on the other hand if the nominated Bank only asked for a simple recipe this is killing red colors right so we learned two types of red colors killing and documentary red colored LC right um during close letters of crazy experts often consider Green close LCS to be an extension of red colors while a regulus allows for an advance to cover the cost of purchasing realm materials processing and packing of goods again close LC Advance a step further by also taking pre-shipment warehousing at the port at the Port of urging and insurance into account but these unique letters also require a greater amount of documentation in addition the bank that is issuing the letter requires title documents which serve as proof of warehousing stats status in order to advance any payments in general Traders use green clothes LC in transaction from a commodity markets such as a rise such as rice gold or grain a much like red close LC is the name for green clothes comes from the fact that traditionally practitioners printed this special clothes in a green link Inland LC Inland LC used in domestic trade transaction where both the buyer and seller are from the same country it's used for transaction in the Home Country right what we learned was the main types of letters of credit but maybe you are faced with another type for example a standby LC pay attention due to your business LC and other Financial Services could support your demands and it's not possible to define a new word and a new type for each one because in this situation we have a wide range of SC on the other hand you can also Define a new type for example we have the LC under the name transferable so shall I Define a new one as a non-transferable LLC so other types are new usage of LC not a new type anyway I'd like to have a review on other names that maybe you find it in Google or meet and paste in your commercial negotiation as I said some words in fact are not a type but but better to talk about them this is very important to consider this point when your business partner talks about healthy conditions you should explain and specify in detail but is acceptance LC seller leaves a Time draft or better say a time will have exchanged to the nominated by the bank accept will have exchanged around on the bank by the debtor discounts discounts then an aggregate to pay for them when they major it's the same a few zones and a negotiation as in so it was acceptance LC commercial letter of credit or CLC your company May request a CLC from your bank when one of your supplier is uncertain about your ability to pay and Bank issued document that ensures A supplier to a company gets paid for the goods and services it provides assure the payment if the buyer doesn't pay after fulfilling all the terms under splc as standby LC if the seller proves that the permissed payment was not made in this situation the bank will pay the seller in not sure it doesn't actually take a transaction but guarantees payment it's quite similar to a bank guarantee confirmed LC the exporter can seek additional protection by getting a confirmed LC where the advising Bank also ensures the payment this is primarily to avoid the risk of non-payment from their first bank it will add to the cost of doing business for the exporter discounting the letter of credit this is exactly what we learned about negotiation LC in this case the advising Bank can pay the amount on which day agree to the exporter after deducting a discounting fee before the actual payment by the important direct pay Elsia other credit where the issuing Bank directly pays the beneficiary and then asked the buyer to re to repay the amount sometimes people use direct pay LLC instead of at site so uh it's wrong extension letters of credit means a substitute letter letters of credit from the same bank which issued the existing LC substantially identical to the existing LC except that it has a estate termination date at least one year later than that of existing letters of credit a non-operative LC is one that cannot be used by the beneficiary in the form in which its issued some examples may make this clearer the buyer says he doesn't know where the where he wants the Good Ship to just yet right so the answer is issued saying part of discharge to be advised by amendments but what is a Transit LC ask a third country banking system to announce to advising Bank in the seller country I mean throw a bank abroad to a third Country Bank as such credits are called Transit credits the main reason for opening Transit LC the reputation and credit of the intermediary Bank helped the beneficiary to accept the opening credit the credit opening bank is unknown to the receiving Bank in the beneficial country so we need um a second a Third Bank to uh to do it for us dollar communication between buyer and seller country is not possible mixed payment LC such LCS can have multiple payment terms as well as multiple payment methods for example uh 50 of the payment happened on site another 25 percent payment occurred after 30 days of shipment and remaining 25 payment will happen on receipt of the shipment in the next video we are going to talk about UCP and receive message as you mentioned that field 42 m is about mixed payment and healthy third-party letters of credit the applicant issues their NC for the beneficiary while the third party makes the actual transaction basically transaction parties and the beneficiary can be different in such type of LC in the previous video that we uh that was about the logistic process we learned about 3pl or third-party Logistics and so third party LLC could be useful for this type of logistic process there is another same Metro of payment that works like a LC and document uh could solve payment challenge exactly like like the healthy process and one of these methods is beloved Exchange bill of exchange has its own definition and words but sometimes um those words used in the LC process for instance DP or document against payment or d a document against acceptance so even better if you learn the bill of exchange process and the worst to prevent misunderstanding your commercial negotiation if you remember we talked about UCP roles we have also the same document for bit of Exchange its name is URC I decide to prepare a separate video for a beloved exchange and one for the UCP if you would like you can follow the next lesson only needs let's next lesson uh only needs to find me on the YouTube platform uh if you don't like to follow me should take more time on other lesson and ensure that you know all necessary knowledge about payment in this section I'd like to have a short and fast review on the safe message as you know the Swift system is a banking process and you don't need to learn technical points but it will be better to know something about it as I said save message have a special format in which bank fulfill this form to connect with each other it means we have a separate framework for each type of banking message Mt 700 is a special shift message type that used by issuing Bank when issuing a letters of credit and issuing Bank sends the terms and conditions of documentary credit with a mt700 so uh this message is sent by the issuing Bank to the advising Bank this form specified or letters of credit details and conditions to the destination Bank or seller Bank okay in this form we have a two type of data um of optional and mandatory as an example the sequence of total this field is specified the number of this message if only mt700 is issued it will say one of one which means we have one paper we have one LC form right if in addition one mt7 Mt 7001 or 701 or mt701 right is sent for the same LC is the same mt700 and in fact it's the second paper and continue of the first LC paper I mean the first LC is mt700 maybe we have two LC during a day if you remember some of the LC could have some change and stream bank opens second one additional documentary credit information should be um transmitted via one or more empty uh seven zero one or seven hundred one uh up to three empty 701 maybe sent in addition to the main message to that mt700 so the sequence of total is a mandatory field so here we meet m right it's easy this column I mean the tag column is the order field in the banking system this calls used to coordinate data and have a fast access a field for t a form of documentary credit this field specified the type of credit as example it was a Cable irrever cable transferable error cable standby eurova cable transferable standby so here you should specify the types of LC documentary credit number this field specifies the documentary credit number which has been assigned by the sender who is the sender issuing bank right according to ICC opinions absence of the letters of credit number on the document is not valid valid ground for a refusal anyway they must give a number reference to pre-advice this is an optional field I'd like to draw your attention to back to back LC this field gives a reference to the pre-advised letters of credit only if a pre-advised LC has been um previously sent to the beneficiary it must case this field is not uh utilized date of issue this field specified the date on which the issuing Bank sender considers the document documentary credit as being issued applicable rules this field means which rules support this contract one of the following calls must be used um eucp latest version ISP 98 latest version if you don't know what is the ISP 98 a return to my YouTube channel which talks about it and the different with the UCP Institute of international banking law and practice right anyway in this part we meet the legal software these parts don't need definition because titles are easy understanding uh date and place of expiry applicant Bank details applicant um details address number right beneficiary a currency called amount this will mention the currency code and amount of the letters of credit if you would like to know about currency codes a research for easo 42 17. the currency must be valid currency called fifth 39 a percentage current amount tolerance this is an optional field it mentions allows tolerance of the LC amount and in the additional conditions are presented Clause of penalty relevance to the Quality specification of goods for example a tolerance not exceed five percent more or five percent less than the quantity of the goods is allowed field 39 B maximum credit amount not nine 39 B further qualifies the documentary credit amount is the term used and no inquiries in LC amount is allowed by way of Tolerance but feel a deck rise tolerance is allowed field 39c additional amount covered this is an optional field in most cases it's not utilized it's to State the maximum amount covered by the letters of credit field 41A available read by this field identifies the bank with which the credit is available as example available with identifier called pic by Dev payment def payment Bic means a bank identifier code Bank identification code right f means deferred payment field 42 draft at this is an optional field this field specified the tunnel of draft to be drawn under the documentary credit I mean other documents which back to this LC as an example beloved exchange so in this section this the issuing Bank mentioned the pilaf exchange data field 42 drawing to complete the previous topic in this field Bank should mention the person um Industrial Bank should mention the person who should pay by pilaf Exchange in the next video we are going to talk about the Beloved Exchange you will learn about it as an example what means drawing and how it works these parts specify more details about or payment methods these parts are about shipping time these parts don't need my definition right titles are understable as a person who is going to have a commercial negotiation with a foreign it's enough to know how else it works and what is different between the types so this lesson this video is enough but if you would like to have a more detail for example how to apply for a lot of letters of credit it depends on the country that you live you should ask your bank system about these services and a positive message if you are Financial expert you can download this electronic book and here you have all Swift message in details in the next video we will talk about the bill of action process URC 522 and what is the difference between LC and beloved exchange and have a short review on other payment methods as a final Point don't forget that LC is the same process but maybe you find a new usage for this process under a new name for example a special LC to build your house so this is not word and all we talked about LC it was International topics and maybe you find the different name in your land in your country well if you are interested in following these types of topics find me on the YouTube platform and smash on subscribe button I'm waiting for your feedback see you soon