LC Available by Negotiation vs LC Available by Payment: What’s the Difference?

Intro

In trade finance, the little phrases in an LC like “available by negotiation” or “available by payment” can make a world of difference to the beneficiary. While both are standard availability options under UCP 600, they don’t work the same way in practice—and sometimes, banks issue LCs with unusual terms that leave the beneficiary puzzled.

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QUESTION

Dear Mr. Old Man,

It is very common that we see the LC available with “any bank” or with the name and address of a bank by negotiation.

Today, I received an LC available with any bank in India by “Payment.”

What does it mean? How does it work? Is it beneficial for the beneficiary?

Request you to throw light in detail. Urgent please.

Thank you.

A.

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ANSWER

Hi,

An LC available by negotiation allows the beneficiary to obtain payment by presenting drafts and documents to a nominated negotiating bank, usually located in the beneficiary’s country. Such negotiation may be on a with- or without-recourse basis. However, if the LC is confirmed, the confirming bank must negotiate on a without-recourse basis.

By contrast, an LC available by payment does not involve drafts. Instead, payment is made at sight by the issuing bank or by a nominated paying bank once complying documents are presented. If the LC is available by payment only at the issuing bank or at a nominated paying bank outside the beneficiary’s country, the beneficiary cannot obtain early funds by discounting the documents with his bank.

It is common to see “available with any bank by negotiation,” but “available with any bank by payment” is highly unusual. Although UCP 600 (Article 2) treats “any bank” as a nominated bank, in practice such banks rarely undertake to pay. Instead, they usually act as presenting banks, simply examining the documents and forwarding them to the issuing bank for settlement.

For this reason, a prudent beneficiary would generally prefer an LC available by negotiation rather than by payment—unless the LC is available by payment with a confirming bank located in the beneficiary’s own country.

Best regards,

Mr. Old Man