Letters of Credit (LC)
A documentary Letter of Credit substitutes a bank’s undertaking for the buyer’s own promise to pay. The buyer (applicant) instructs its bank to issue the credit in favour of the seller (beneficiary); the seller’s bank advises the credit and, where agreed, adds its confirmation. The issuing bank pays when documents that comply with the terms of the credit are presented within the stated period.
Documentary credits are customarily issued subject to the ICC Uniform Customs and Practice for Documentary Credits (UCP 600), the standard banking rules that govern how credits are examined and honoured. 3FB coordinates the drafting of the LC terms so they are consistent with the commercial contract, the delivery terms and the document set the cargo will produce.
Documentary collections (D/P and D/A)
Where the parties prefer a collection to a credit, the seller’s bank forwards the documents to the buyer’s bank for release against payment or acceptance. Under documents against payment (D/P), the buyer receives the documents only on paying; under documents against acceptance (D/A), the buyer receives them against accepting a time draft that falls due later. A collection relies on the parties’ own standing rather than a bank’s payment undertaking, so the choice between a credit and a collection reflects the risk the parties are willing to carry.
Payment against documents
In a documentary transaction, title and the right to payment move with the document set. The key documents typically comprise the Bill of Lading, the commercial invoice, the certificate of origin and the independent inspection certificates of quantity and quality. Payment is triggered by presentation of a complete, conforming set rather than by physical arrival of the cargo, which is why the composition and accuracy of the documents matter as much as the underlying goods.
- Bill of Lading (B/L) — evidence of shipment and, where negotiable, of title to the cargo.
- Commercial invoice — the priced statement of the goods shipped.
- Certificate of origin — the country in which the product originated.
- Inspection certificates — independent quantity and quality determination at load.
Bill of Lading and document presentation
The Bill of Lading is central to a documentary payment: it evidences that the cargo has been loaded, sets out its description and quantity, and, when issued to order, can transfer title by endorsement. Documents must be presented to the bank within the presentation period and must comply strictly with the credit; discrepancies can delay or block payment until they are resolved or waived. Further detail is set out in what a Bill of Lading is and how Letters of Credit work in oil trading.
Banking coordination and the commercial contract
3FB structures the commercial contract so that its payment and delivery provisions can be mirrored cleanly in the banking instruments, and it coordinates between the parties and their banks during issuance, amendment and document presentation. The objective is a document set that conforms on first presentation.
3FB does not provide financing, does not extend credit and does not hold credit facilities on behalf of counterparties. Any credit, confirmation or discounting is provided by the parties’ own banks on terms agreed directly with them. All arrangements are subject to KYC and compliance review and to definitive written agreements.