Letter of credit is a banking tool facilitating international trade. It decreases the exporter risk of not receiving the payment for the exported goods. Issuing bank is irrevocably obliged to transfer the payment after all shipping documents listed in the letter of credit have been submitted by the exporter. In the process of shipping cargo with the letter of credit banks are only responsible for examining documents not the goods or services.
Letter of credit is issued according to the Uniform Customs and Practice for Documentary Credits - UCP. UCP are published by the International Chamber of Commerce in Paris - first edition was issued in 1933. The latest revised edition UPC 600 is effective on 1 July 2007 and introduces the following changes:
- clarifications of terms used in the letter of credit such as: about, approximately regarding the quantity of goods and price; on or about - regarding dates; to, untill, from, between; first half, second half - regarding the month division; begining, middle, end - regarding the days of the month,
- letter of credit is always irrevocable even if this term dos not appear on it,
- nominated bank has maximum 5 banking days to examine presentation,
- only clean documents will be accepted by the bank, however writing the word clean on transport documents is not obligatory even if words "clean on board" are included in the letter of credit,
- transport documents must be signed in the way allowing identification whether the signing party is a carrier, master, carrier's agent or master's agent,
- transport documents may indicate transshipment of goods; provided that for the whole carriage one transport document is issued, it will be accepted by the bank even if the letter of credit prohibits reloadings.