An important point in a purchase and sale transaction is the method of payment between the parties. To avoid possible risks, the seller and buyer often use a letter of credit payment system. It does not matter whether the payment is made using your own funds or a mortgage.

What is a letter of credit in simple words

A letter of credit is another method of non-cash payment that can be used by the parties to a purchase and sale agreement, supply, etc. In simple words, a letter of credit is a financial instrument offered by banks associated with the control of payment between the seller and the buyer. The bank acts as a guarantor of an honest transaction and issues funds only subject to compliance with contractual obligations between the participants. During the transaction, the money is kept in a special bank account.

Accreditation scheme

Two credit organizations can take part in such transactions: the issuing bank and the executing bank. The issuing bank opens a letter of credit based on the application of its client and undertakes to make a transfer in favor of its counterparty under the agreement. For this purpose, an order is transmitted to the executing bank. Such an order is possible only after documentary confirmation of the fulfillment of all agreements on the transaction. The transfer occurs on the basis of an order from a Bank client to transfer funds to a third party. Advantages of the service:

1. Cashless payment. There is no need to carry a large amount with you, count it and check for authenticity.
2. The operation is safe. The parties do not risk anything. The seller is guaranteed the transfer of the full amount of funds after fulfilling the terms of the contract. For the buyer, this is an opportunity to purchase an apartment or other real estate and not lose money. Also, return the money in full if the terms are violated by the seller or the agreement is terminated.

For the seller, a documentary letter of credit is an additional guarantee on the part of the bank that funds will be received under the agreement as soon as it fulfills all the conditions. And the buyer is sure that the money will be transferred after providing the documents he named in the application.

Necessary actions to use the service

1. The parties to the transaction enter into an agreement, which spells out in detail all the conditions and circumstances of the fulfillment of obligations.
2. An agreement on settlement using a letter of credit is signed at the bank. Personal and passport details of both parties must be indicated. Conditions for payment of funds.
3. After signing the banking agreement, the buyer fills out an application for a letter of credit.
4. After checking the documents, the bank employee opens an account in the name of the buyer. It is fully credited with funds for real estate, goods, and services. Subsequently, they will be transferred to the correspondent’s account, bank card, or issued in cash.
5. The transfer to the seller will occur after the transaction is completed. He must submit to the bank documents confirming the registration of the purchase and sale agreement and the transfer of ownership.

The letter of credit agreement completely regulates the relations of the participants. It must contain all the necessary information to complete the transaction:

• buyer and seller data. For individuals - this is passport data, full name, residential address. With the participation of an organization, the name, TIN, address, and account details are indicated;
• guaranteed amount of funds placed in a bank account;
• period of fulfillment of obligations;
• the amount of bank commission and the cost of additional services;
• the procedure for transferring money after fulfilling the conditions and providing documents;
• procedure for dealing with unforeseen circumstances, non-payment of debt, etc.;
• rights and obligations of the parties to the transaction.

After signing the agreement, a special account is opened at the bank to reserve money. To open an account, the client writes an application with the obligatory indication of the following data:

• details of the purchase and sale agreement – ​​number, place and date of signing;
• details of the real estate seller, supplier of goods;
• type of account, amount placed on it and period of its validity;
• method of transferring funds;
• information about the acquired property, goods, work, etc.;
• details of the contractor's bank;
• list of documents required to execute payment in favor of the seller

Type of service

Due to different terms of the transaction or changes in circumstances, its participants may use different types and features of the letter of credit payment system:

1. An irrevocable letter of credit is a condition under which the obligation is canceled by the buyer only with the consent of the seller. It is recognized as the most reliable way to conduct a transaction. Termination of banking services is possible only with a bilateral refusal. When a service is revocable, the bank has the right to change the obligation or cancel it without the consent or notification of the recipient.
2. A deposited letter of credit is the right of the bank to write off the client’s own and credit funds at its disposal for the period of settlement. Otherwise, this service is called a covered letter of credit. When the executing bank is involved in the settlements, money can be transferred to its account for the entire duration of the agreement with the bank.
3. An obligation with a red clause is the right of the bank to transfer the authority to make payments to another credit institution.
4. An uncovered letter of credit is the ability of the executor's bank to write off money from the buyer's account or use it in another way. Such an obligation is considered guaranteed. The executing organization is given the right to write off finances from the issuer's correspondent account.
5. A confirmed commitment is a guarantee of receiving money from the bank in the amount stipulated in the agreement. Moreover, for the seller the fact of receipt of funds from the buyer does not matter. Usually occurs when lending.
6. A direct letter of credit is an opportunity to receive money without the participation of the buyer. After the transaction is completed, only the seller can contact the bank.
7. Revolver. Opens for an incomplete amount. As the work progresses, the buyer pays in installments. Such a commitment is convenient when purchasing goods on a schedule.
8. Spare. The seller receives an additional payment guarantee from the bank. Convenient when the buyer is unable or refuses to make a full payment.

Buying an apartment through a letter of credit

Such a transaction is in many ways similar to buying real estate through a safe deposit box. However, using a safe is an easier way with less control from the bank. When considering the topic of what a letter of credit is from a bank when buying an apartment, it is worth keeping in mind the purchase of an apartment on the primary or secondary market. In the first case, housing can be purchased in a house under construction. When settlements with the developer are carried out through a letter of credit, the buyer receives a guarantee of becoming the owner of an apartment in a completed building. The developer will be able to receive funds only after completion of construction and commissioning of the house.

The reliability of this payment method is related to the value of the bank's services. On average, when making a transaction you will have to pay:

• 0.2% of the cost of the apartment specified in the contract. The minimum payment is 1000 rubles.
• with the participation of other financial institutions, the commission will be 0.3% in the range from 1,500 to 10,000 rubles;
• 2000–5000 rubles for servicing the transaction;
• changing the terms of the contract in terms of terms and amount will cost from 1000 to 4500 rubles.

The service is provided to individuals. The application shall indicate:

• contract amount;
• type and term of the letter of credit;
• data on the parties to the settlement;
• purpose of payment;
• list of documents for transfer by the Bank.

In addition to the sale of an apartment, a financial liability can be used for transactions with other real estate (houses, land, parking spaces), expensive movable property (equipment, furniture or art). The service is convenient when paying for services: construction, repairs.

The letter of credit is issued in rubles. The period is set by the buyer and specified in the application. If a mortgage transaction takes place, then on average the period in banks is set at 120 days. Extension is allowed, but not more than 60 days.

An important stage is the control of documents and the issuance of money. In other words, the disclosure of a letter of credit is a fact of confirmation that the seller has fulfilled the terms of the agreement. The bank reviews and verifies the submitted documents within about a week. This bank service is included in the scope of the letter of credit and may be paid additionally. If the control results are positive, the credit institution opens the letter of credit. The former owner receives the right to collect money for the apartment. Usually they are transferred to his account.

Some banks may have restrictions and deadlines for receiving money. Thus, Sberbank charges 1% of the amount for cash withdrawal. If the transaction amount is more than 5 million rubles, the funds must be in the account for 1 month. If the seller takes the funds earlier, 10% will be deducted from him.

In case of an obligation with acceptance, the issuance of money is possible after the buyer confirms the fulfillment of its conditions. The buyer informs the bank in writing that all requirements of the agreement have been met. Credit institutions are responsible for violations of the settlement process. Therefore, it is beneficial for banks to accept only correctly executed documents. Worth taking into account:

• the bank is not responsible for establishing the compliance of the clauses of the main agreement between the parties with the letter of credit agreement;
• the bank does not actually control the execution of the main transaction (the actual transfer of property, the release of the apartment by the seller, etc.).

When the obligation expires and the agreed documents are not received from the seller, the letter of credit is closed. The recipient of the money is notified of this by the bank without fail.

Operations on letter of credit transactions

Services for transactions with a letter of credit can be provided in different options, depending on the credit institution. Typically banks carry out the following operations:

So, the payment system for purchasing real estate under a letter of credit is a reliable guarantee of compliance with the terms of the agreement. Long processing times, payment of money and cost justify the risks that participants in transactions involving large amounts are exposed to.

Hello! In this article we will talk about the system of payments using letters of credit.

Today you will learn:

1. Where can a letter of credit come in handy?
2. What types of letters of credit are most common;
3. How to draw up an agreement using a letter of credit;
4. How to use a letter of credit.

Letter of credit: the essence of the concept

The business sphere is full of not only conscientious companies that operate in accordance with the law and the terms of the contract. There are also scammers whose main goal is to leave the counterparty with nothing. You give them a product or money for it, but as a result you are left without both.

However, expanding the production volume of an enterprise implies that it will cooperate with new business partners, whose integrity is not always possible to verify.

What to do if you enter into an agreement with a company unknown to you and are worried about the outcome of the transaction? What should you do if the other party is late in payment or if goods are not shipped in response to your advance? Such issues and resulting problems are easily resolved with the help of a letter of credit.

Letter of Credit is a special settlement system that guarantees both parties to the transaction a positive outcome. This is a banking product with the participation of two banks: in the first an account is opened for the seller, and in the second for the buyer. The credit institution transfers funds from the account only if the terms of the agreement between the parties to the transaction are fulfilled and supporting documents are provided.

A letter of credit implies the presence of two participants in addition to banks:

• Applicant (or buyer);
• Beneficiary (seller).

The initiator of the contract is the buyer. It is he who is interested in receiving the object of the transaction, and therefore applies to the bank with an application to open a letter of credit.

This service is provided on a fee basis: banks charge commissions, which in some cases are quite impressive. However, a letter of credit is a guarantee of contract performance, which plays an important role for both parties to the agreement.

The buyer's bank will transfer funds to the seller's account only if the terms of the signed agreement are fulfilled (for example, when goods are shipped). If the seller violates the terms of the agreement, the bank will return the funds to the buyer’s account.

A letter of credit is a rather complicated operation that requires complex processing. However, it is very popular, as it is the key to successful cooperation between participants in various transactions.

For which payments is a letter of credit used?

A letter of credit is a fairly universal concept that can be used in transactions between:

• Individuals.

Legal entities are the main users of such banking services. Often, transactions involve companies whose names are not well known, and therefore one of the parties to the transaction tries to hedge their bets.

One company supplies the goods, and the second acquires them. A letter of credit allows them to avoid controversial situations when making payments. The same applies to the provision of various services or performance of work.

Individual entrepreneurs can also offer the counterparty to issue a letter of credit if they doubt its reliability. When planning to ship goods for a large amount, it is better to fix the settlement process in a very clear agreement so as not to lose your own funds.

The use of letters of credit is also common among individuals. Most often it accompanies large purchases. For example, you. A seller has been found, however, for some reason you doubt that he will fulfill his obligations under the contract.

To be sure of his integrity and accurately receive funds from the sale, you should contact the bank and conclude an agreement on the terms of a letter of credit. Most often, scammers immediately disappear with such offers, since the bank will require them to deposit the full amount into their account.

If the buyer is a decent person, then no problems arise in the process of issuing a letter of credit.

The essence of a letter of credit is the same for different parties to transactions: the fulfillment of obligations under it is insured. The use of this banking service is relevant to any items of purchase and sale: from small goods to expensive real estate.

Types of letters of credit

Letters of credit are a payment instrument used not only for domestic trade.

Based on this, there are two types of it:

• International (applied for transactions involving export or import);
• Domestic (used exclusively for purchase and sale within the country).

Letters of credit can also be distinguished:

• Revocable. You can cancel an already opened letter of credit at any time by one of the parties to the transaction. However, this type of calculation is extremely unreliable and does not inspire confidence among market participants. Therefore, in our country their use is limited by regulations. This is done in order to avoid fraudulent actions by one of the parties to the agreement;
• Irrevocable. Once a letter of credit has been signed, it cannot be cancelled. This type of calculation gives confidence to the parties to the transaction in its successful outcome.

Depending on the terms of the transaction, letters of credit are divided into:

• Confirmed. In this case, the executing bank (the one that transfers funds to the seller’s account) offsets the money to the second party to the transaction, even if there is no money in the account. In other words, the bank is looking for a third party to the transaction as a credit institution that will transfer the required amount upon fulfillment of the terms of the agreement. However, in this case, the executing bank bears the risk of non-return of the transferred funds. As a result, this form of letter of credit is not used very often;
• Unconfirmed. Transfer of funds to the second party of the transaction is carried out only if there are funds in the account. Banks prefer this form of payment to avoid losing their own money.

The procedure for writing off funds divides letters of credit into two types:

• Coated. The issuing bank transfers funds to the nominated bank when the agreed conditions are met. The amount credited is called coverage, which is where the name letter of credit comes from. The covered form of payment is used exclusively in Russia;
• Uncovered. The issuing bank gives the nominated bank the right to write off funds up to the amount of the letter of credit. This form of payment is widely used abroad, where covered letters of credit are not found at all.

There is also letter of credit with red clause. It implies that an advance payment is transferred to the supplier’s account before the terms of the contract begin to be fulfilled. In this case, documents for shipment, performance of work or provision of services are also provided after the advance payment has been transferred.

Revolving letter of credit means that only part of the services specified in the contract is paid as they are performed. As soon as the next shipment occurs or other work is completed under the agreement, the next transfer is carried out. This form of payment is convenient for a contract concluded for a long term and implying regular interaction between its parties.

If the bank has the right to transfer funds in favor of several other beneficiaries, then transferable letter of credit. If funds are transferred to the account of one party to the transaction when the terms of the contract are violated by the other, then we are talking about a standby letter of credit. It is an additional guarantee for the parties to the agreement. This type of payment is used in countries where the use of a bank guarantee is prohibited.

We issue a letter of credit

To apply payments under a letter of credit between the parties to a transaction, it is necessary to draw up an agreement. It is drawn up on a documentary basis and necessarily indicates the form of payment.

The agreement includes the following points:

• Name of the parties to the transaction (supplier and its buyer);
• Type of payment and its type (for example, irrevocable uncovered letter of credit);
• The amount of funds that will be transferred to the supplier upon fulfillment of the terms of the agreement;
• The period for which the contract is concluded;
• Amount of commissions;
• The procedure for making payments (the entire amount at once or in advance payments);
• Actions of the parties in case of failure to fulfill the conditions for which the payment letter of credit was applied;
• The rights of participants, as well as their responsibilities.

For the signed agreement to come into force, the buyer must contact the bank and write an application indicating the letter of credit payment form.

The statement also states:

• A reference to the agreement under which a letter of credit will be used between the parties;
• The name of the supplier's organization, as well as its data according to the information;
• Type of letter of credit;
• The amount due to the seller;
• Validity period of the contract and, accordingly, the letter of credit;
• Method of implementation of a cash letter of credit (advance or the entire amount, and upon the occurrence of what conditions they are due);
• The name and quantity of goods, the supply of which is indicated in the contract (or maybe these are services or some kind of work);
• Name of the bank that will fulfill the obligations;
• List of documents that will be accepted by the bank as confirmation of compliance with the terms of the agreement.

From the moment the application is signed and registered, the letter of credit comes into force. An executed letter of credit can be extended for a new period by mutual agreement of the parties.

Advantages of settlements using a letter of credit

Letter of credit payment under an agreement is convenient, despite the high commission rates charged by banks when applying for this service.

Among the advantages of mutual settlements using letters of credit are the following:

• Transaction guarantee for seller and buyer. If the terms of the contract are met, the funds will be sent to the seller. If the terms of the agreement are violated, the money will be returned to the buyer’s account. In other words, the risk of contacting unscrupulous persons is zero. In this case, both parties to the transaction will deal with cashless payments, which also greatly simplifies the purchase and sale process);
• The seller will receive the funds due to him under the contract even if the buyer’s financial condition has deteriorated after shipment of the goods (the money is already in the bank account. This is a prerequisite for settlements with letters of credit);
• The nuances of the agreement, forms of payment and types of letter of credit are negotiated independently by the parties to the transaction (they are prescribed in the agreement based on the preferences of the parties. Taking into account such features is very important so that the interests of the participants are not violated during the execution of the agreement);
• It is possible to refuse an accepted letter of credit at any time if the seller and buyer decide so (it is also possible to change the terms of the signed agreement);
• The contract has legal force, unlike an oral agreement, and if one of the parties to the transaction fails to comply with the terms, the issue can be resolved in court;
• A guarantee that the buyer will receive the goods on time (after all, the seller is interested in receiving funds within the short period of time specified in the terms of the contract);
• If credit funds act as a letter of credit, the buyer can save money, since the rate on them is significantly lower than on a regular bank loan.

Of course, the main advantage of a letter of credit is the guarantee that the supplier will receive money or return it if the buyer fails to fulfill the terms of the transaction. Thanks to this advantage, letters of credit are popular.

Payment scheme via letters of credit

A letter of credit is not a simple procedure. But if you use it at least once, then all its rules will become clear to you, and in the future you will easily use this calculation system.

The transaction process based on a letter of credit is structured in several stages. We will highlight the most important of them, which are taken as the basis for any type of letter of credit.

So, the steps when concluding a letter of credit agreement:

• The two parties to the transaction draw up an agreement and indicate in it the letter of credit as a payment system (important nuances of interaction are also described here, as well as the responsibilities of the parties to the agreement);
• The buyer contacts the issuing bank to open a letter of credit and draw up an application (this bank is considered the issuer in relation to the other party to the transaction);
• As soon as the buyer deposits money in the amount of the agreement into the account, the bank registers the letter of credit;
• The issuing bank then notifies the vendor's (seller) bank of the merchant's action;
• The executing bank notifies the other party to the transaction about the successful opening of a letter of credit account;
• The supplier ships the transaction items to the buyer’s address and delivers the supporting documents to the executing bank (this step is called issuing a letter of credit);
• The bank checks the documentation, and if there are no errors in them, and the terms of the agreement are met, then it transfers funds to the seller’s account by means of a payment order.

If the contract between the parties is concluded for a long period and includes several deliveries of goods, each of which is paid separately, then the supplier must go to the bank each time and provide accompanying documents.

In the future, if the buyer and seller are confident in cooperation, they can refuse the letter of credit and make payments independently. While they don’t know each other well, a letter of credit is the most preferred payment option for both parties.

Letter of credit - a form of non-cash payments

When making payments under a letter of credit, the issuing bank (hereinafter referred to as EB), which opened the letter of credit on behalf of the payer and in accordance with the latter’s instructions, accepts the obligation to transfer funds in the amount of the letter of credit in favor of the recipient (beneficiary), subject to the submission by the recipient to the bank of documentation that meets the requirements of the letter of credit (Article 867 of the Civil Code of the Russian Federation). Or, when the beneficiary fulfills the said condition, BE grants another bank (executing bank, hereinafter referred to as IB) the authority to make such a transfer of funds (clause 6.1 of the regulations..., approved by the Bank of Russia dated June 19, 2012 No. 383-P, hereinafter referred to as Rule No. 383-P ).

The letter of credit is independent of the underlying obligation between the parties. When making payments under a letter of credit, the bank should not evaluate the fact of proper fulfillment by the parties of the main obligation between them, but is obliged to check the composition of the documentation, its external characteristics and details for compliance with the terms of the letter of credit and the absence of contradictions between the submitted documents (clause 6.17 of rules No. 383-P). The bank cannot bear responsibility for verifying the actual fulfillment of the main obligation (clause 9 of the information letter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated January 15, 1999 No. 39 (hereinafter referred to as Letter No. 39).

The nuances of this and other types are discussed in the materials in the Calculations section.

Procedure for settlements under a letter of credit: general scheme

The settlement scheme for a letter of credit can be represented as follows:

• establishing the primary obligation between the parties;
• the payer submits an application to the BE to open a letter of credit (clause 6.6 of rules No. 383-P);
• the actual opening of the letter of credit by BE;
• informing about the opening of a letter of credit by the issuing bank of the executing bank (clause 6.8 of rules No. 383-P);
• informing the beneficiary's information security about the opening of a letter of credit (clause 6.9 of rules No. 383-P);
• submission by the beneficiary of the necessary documentation to the IS;
• verification by the IS of the received documents for compliance with the requirements of the letter of credit;
• in case of a positive result of the verification, execution of the IB letter of credit, i.e. transfer of funds in favor of the recipient.

The procedure for making payments under a letter of credit may be more complex depending on the type of letter of credit. For example:

• if there is a need to change the terms of an irrevocable letter of credit, it is necessary to obtain the consent of the beneficiary to such a change (clause 1 of Article 869 of the Civil Code of the Russian Federation);
• if there is a need to change or cancel a confirmed letter of credit, it is necessary to obtain the consent of not only the recipient, but also the confirming bank (clause 2 of Article 870 of the Civil Code of the Russian Federation). You can learn about what a confirmed letter of credit is from the article What is an unconfirmed and confirmed letter of credit.

Settlements through a letter of credit: risks

The qualification of settlements under a letter of credit as one of the safest forms of mutual settlements for both parties to a transaction has unconditional grounds. Thus, payment from the buyer will be transferred to the seller only after the first has submitted documents confirming the fact that he has fulfilled his obligations under the contract. At the same time, the buyer will not be able to evade payment after the seller submits the above documents to the bank.

However, even this form of payment under a letter of credit has its own risk areas, including, for example:

• Ignoring by one party of other requirements for conditions relating to the subject of the contract. Thus, the supplier submitted the proper documentation for the letter of credit to the bank, received payment, but the buyer rightfully refused the goods, since the other party did not fulfill the terms of the assortment agreement. The court sided with the payer (clause 5 of Letter No. 39).
• Refusal of the recipient under an irrevocable letter of credit (and in the case of a confirmed letter of credit, also of the executing bank) to change the terms of the letter of credit or cancel it if the other party has such a need (including an objective one), etc.

IMPORTANT! Even if the main agreement is declared invalid, IB is still obliged to make a transfer under it in accordance with the terms of the letter of credit. In this case, restitution should be applied specifically to the payer and the recipient, and not to the payer and the bank (clause 8 of IP No. 39).

So, the basis for the process of making payments under a letter of credit is the following operations:

• the actual opening of the letter of credit;
• submission by the recipient of documentation that meets the requirements of the letter of credit to the bank;
• verification by the bank of the submitted documentation;
• if the result of such verification is positive, funds are transferred to the recipient.

15.10.2016 17 607 0 Reading time: 11 min.

Today we will continue our conversation about banking services and consider what is a letter of credit, where such a service can be used, why it is interesting. This service is more popular for representatives of large and medium-sized businesses, however, recently it is increasingly spreading to small entrepreneurs, and even to individuals who are not involved in business. Therefore, knowing what a bank letter of credit is and what types of letters of credit there are will be useful for everyone, even just for general development.

What is a letter of credit?

A letter of credit is an obligation of the payer's bank to make a payment to the recipient's bank only after the payee provides his bank with certain documents required by the terms of the letter of credit.

Letters of credit belong to the so-called. documentary operations of the bank, that is, operations based on document flow. Most often, documentary operations, in particular letters of credit, are used by enterprises engaged in export-import activities, but this is not the only area of ​​their application.

Why are letters of credit needed? In simple words - in order to prevent fraud between the parties to a certain transaction. The bank simply acts as a legal guarantor between the parties to the transaction, for which it receives its commission.

Letter of credit - basic terms and concepts

Let's look at the basic terms and concepts associated with opening letters of credit.

Letter of Credit Issuer- the bank to which the client applied to open a letter of credit.

Beneficiary bank- the bank that services the client in whose favor the letter of credit is opened.

Beneficiary- recipient of payment under a letter of credit.

Deal- a specific purchase and sale transaction for which a letter of credit is opened for settlement.

Letter of credit amount— the amount of the transaction for settlement of which a letter of credit is opened.

Letter of credit term- a limited period during which the letter of credit is valid.

Type of letter of credit— conditions for opening a letter of credit (I’ll look at the most common options in more detail below).

Fee for opening a letter of credit— the cost of opening a letter of credit, established by the bank’s tariffs. Typically calculated as a percentage per annum of the amount of the letter of credit, it may also include some kind of fixed or minimum payment. In this case, the issuing bank pays part of the received commission to the beneficiary bank for its services.

Let's look at the operation of a letter of credit using an example. Let's say we have a supplier and a buyer of a certain product who do not trust each other and want to insure themselves. The buyer is afraid to send money without seeing the goods, and the supplier is afraid to send the goods without seeing the money.

In such a situation, opening a letter of credit can help. The buyer opens a letter of credit at his bank, deposits the payment amount into a special account, and instructs the supplier to send it to his bank, but only after the supplier provides documents confirming the fact of sending the goods.

The buyer's bank sends a notification to the supplier's bank about the opening of a letter of credit, and the supplier's bank notifies the supplier about this. The supplier, knowing that funds to pay for the goods have already been reserved and will be sent to him, sends the goods and provides documents confirming this fact to his bank. The supplier's bank checks the legal purity of these documents and, based on this, makes the necessary payment, which is reported to the buyer's bank. After this, the buyer's bank transfers the reserved funds of its client to the supplier's bank. The supplier gets his money, the buyer gets the goods, and the banks get their commissions. Everyone is happy. This is the classic scheme of a letter of credit, and depending on the type of service, some actions may vary.

For clarity, an approximate scheme of the operation of a letter of credit can be presented in the following figure (the numbers indicate the order of actions):

Types of letters of credit

Let's look at the most common types of letters of credit - they can be divided according to several criteria.

Based on whether the letter of credit can be canceled, revocable and irrevocable letters of credit are distinguished.

Revocable letter of credit implies the ability of the issuing bank to withdraw (cancel) its order to transfer funds before the submission of the necessary documents by the opposite party, that is, to cancel the operation, without notifying the recipient bank.

Irrevocable letter of credit does not imply the possibility of its cancellation without notifying the receiving bank and without the consent of the direct recipient of the payment. That is, it can also be canceled, but only with the consent of the two parties, and not unilaterally like a revocable letter of credit.

Irrevocable letters of credit are used in practice much more often than revocable ones, since they better satisfy the interests of both parties to the transaction.

According to the degree of responsibility of both banks, confirmed and unconfirmed letters of credit are distinguished.

Confirmed letter of credit guarantees that the recipient's bank, or another third bank, will pay the recipient the amount due, even if the sender's bank does not transfer the money to him.

Unconfirmed letter of credit assumes that the payment will be received by the recipient only if it is actually transferred by the issuing bank.

According to the possible source of funds for payment execution, covered and uncovered letters of credit are distinguished.

Covered (deposited) letter of credit means that the issuing bank transfers the payment amount to the recipient's bank for the entire validity period of the letter of credit. This amount is guaranteed coverage and is immediately at the disposal of the recipient's bank.

Uncovered (guaranteed) letter of credit means that the issuing bank allows the recipient's bank to debit the payment amount from its correspondent account, or stipulates some other conditions for receiving reimbursement. In practice, this type of letter of credit is most often used.

Let's look at some other well-known types of letters of credit.

Letter of credit with red clause means that the issuing bank undertakes to make the agreed amount of the advance payment to the recipient's bank even before receiving supporting documents from the recipient.

Revolving letter of credit opens when it is necessary to regularly perform homogeneous operations. Each time it acts on a specific batch of goods and then resumes its effect on the next batch.

Transferable letter of credit implies the possibility of transferring its part to another beneficiary, if necessary.

Standby letter of credit or stand-by letter of credit- this is a kind of symbiosis of a letter of credit and a bank guarantee, under which the supplier receives payment for the goods, even if the buyer refuses to pay him - the payment is made by the bank at its own expense.

Advantages and disadvantages of letters of credit

All the advantages and disadvantages of the letter of credit form of payment come down to one thing. The advantage is the bank’s guarantee that the client will receive the necessary product or service, his money will not be lost, and the opposite party to the transaction is not a fraudster and will not deceive him. The disadvantage is that opening a letter of credit costs money, usually a few percent of the payment amount. Thus, you simply have to pay extra for an increased level of transaction security.

Where are letters of credit used?

Let's consider the most common areas of application of letters of credit:

• Export-import operations;
• Trade operations within the country;
• Large transactions between individuals (for example, the purchase and sale of real estate).

Now that you know the concept and essence of a letter of credit, let's summarize and highlight the most important thing.

A bank letter of credit is a kind of guarantee of the legal purity of a transaction, eliminating almost all risks of fraud, because documents confirming the fact of transfer of goods from the seller to the buyer are checked by experienced bank lawyers. Opening a letter of credit when carrying out export-import operations is also interesting because, regardless of the countries where the supplier and buyer are located, such operations are regulated by a universal document - international Uniform Customs and Practice for Documentary Credits UCP-600, which eliminates the risk of non-compliance of the laws of different countries with the conduct of a certain transaction. Opening a letter of credit will cost the buyer a certain amount, but this amount is significantly lower than, for example, when receiving a loan, and a letter of credit of a certain type includes many parameters of a credit transaction, but also ensures a safe transaction. That is, this is a fairly profitable service, but it requires additional costs.

Now you have an idea of ​​what a letter of credit is, why it is needed, and what types of letters of credit can be found in practice.

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Payment by letters of credit is a method of non-cash payments between organizations, the essence of which is as follows. The payer's bank instructs the bank serving the payee to pay the agreed amount of money within the agreed period, subject to the fulfillment of the conditions stipulated in the payer's letter of credit.

The letter of credit form is very similar in appearance to the payment order form presented above.

A letter of credit is convenient to use in situations where large payments are involved, but business partners do not really trust each other.

In business relationships, the moment of payment, as a rule, does not coincide with the moment of receiving the goods or services, that is, what is paid for. This creates risks.

If money is paid earlier, the payer risks losing it and not receiving the product or service. If a product or service is provided earlier, the recipient runs the risk of not receiving the money due to him for it. To resolve this contradiction, the recipient and the payer involve two intermediaries - the recipient's bank and the payer's bank. And the letter of credit becomes a document that formalizes the relationship between the payer and the recipient through the mediation of two banks. Despite the fact that banks sometimes go bankrupt, we can safely say that the average Russian bank is much more reliable than the average Russian organization. This is not explained by the fact that some special people work in banks, but by the principles of organization of the banking system.

Therefore, in a situation of complex relationships between organizations, it makes sense for them to trust the intermediation of more reliable banks. The word “letter of credit” itself comes from the Latin word accordifivus - trusting.

In accordance with the letter of credit, a certain amount of money is transferred from the payer's current account opened in his bank to the recipient's bank. But this amount is not transferred to the payee’s bank account.

The letter of credit stipulates the conditions under which money can be credited to the recipient's bank account. For example, the recipient must submit to his bank an invoice issued in a certain way or a delivery acceptance certificate confirming that the goods were received by the payer or services were provided to him and the payer has no claims.

The letter of credit has a validity period.

If the terms of the letter of credit are not met during its validity period, the recipient's bank will return the money to the payer's bank and the payer's bank will credit the money back to the payer's current account.

Partial payment under a letter of credit is allowed. Letters of credit can be revocable or irrevocable. A revocable letter of credit can be withdrawn by the payer from the recipient's bank at any time before its expiration without giving reasons. And the payer will be able to get an irrevocable letter of credit back only after the expiration of the letter of credit.

According to the terms of payment, letters of credit can be with or without acceptance. The condition of payment with acceptance provides for the following: in order for the money to be credited to the recipient's bank account, in addition to fulfilling the terms of the letter of credit, the payer's acceptance or the acceptance of a person authorized by the payer will be required.

An irrevocable letter of credit can have an additional positive property: it can be confirmed. The letter of credit is confirmed by the recipient's bank.

The most logical version of a letter of credit is an irrevocable letter of credit, confirmed and without acceptance. It is this version of the letter of credit in its purest form that expresses its very idea: business partners eliminate all risks associated with their possible mutual dishonesty, transferring the final execution of the payment to a pedantic neutral intermediary.

There is another type of letter of credit, unimportant for the recipient, but important for the payer: letters of credit can be covered or uncovered. A covered letter of credit for the payer means that the corresponding amount of money is immediately withdrawn from his current account. An uncovered letter of credit means that payments under the letter of credit are undertaken to be secured by the payer's bank, and the amount of money will be withdrawn by the bank from the payer's current account only after the letter of credit has been executed. That is, the bank provides the payer with some service by providing him with a cash loan for the duration of the letter of credit. Banks do not provide such services for free, of course.