TYPES OF CREDIT

QUESTION

Dear Old Man,

This is Rookieboy,works as an international trader, I wanna ask you a question, and hope get your help.
Before create a new LC, the applicant should send a apply letter to the issuing bank, and in the letter, there is the form as follows:

Credit Available With advising bank
[ ] By Payment
[X] By Negotiation
[ ] By Acceptance
[ ] By Deferred Payment
Against The Documents Detailed Herein
Negotiation Restricted To
[X] Advising Bank [ ] Other Bank [ ] Any Bank
Transferable With
[ ] Advising Bank [ ] Other Bank
Confirmation
[ ] Add By Advising Bank [ ] Add By Other Bank:

I always choose the same as the sample shows, and never choose other option.
And now I want to know that what do the other three options mean? for example, if I choose "By Payment", then the Beneficiary should get the money once the bills required in LC handed onto the advising bank. is it right? and what do the other options mean?

Thanks very much. if you have work just do it first, I'm not standing waiting for the answers, I just kindly hope you can reply when you feel not so busy. Thanks very much in advance.

Best Regards.
Rookieboy
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ANSWER

Dear Rookieboy,

I ever posted my answer to Neville Dcosta’s question regarding the L/C availability in Letter of Credit Forum in 2007. I think this post can help you differentiate all types of L/C including Negotiation L/C, Payment L/C, Acceptance L/C and Deferred Payment L/C.

For your reference, please click here: http://letterofcreditforum.com/content/i-need-some-clarification-regards-lc or read the below attachment.

Back to your specific question. Can the beneficiary under the L/C available by payment with the advising bank get payment at sight once the complying documents are presented to the advising bank?

The answer is Yes and No.

Yes if the advising bank agrees to act on its nomination, i.e., agrees to pay as nominated by the issuing bank, and so communicates to the beneficiary. And No if the advising bank refuses to act on its nomination. However, if the advising bank is simultaneously a confirming bank (i.e., has added its confirmation to the L/C), it must pay once the documents presented are complying. Please see UCP 600 sub-article 12 (a) which reads as follows: “Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary”.

Hope it is helpful.

Best regards,
Mr. Old Man

Attachment:

Dear Neville Dcosta

As you may know, an LC may be stipulated available by payment, available by negotiation, available by acceptance or available by deferred payment.
LC available by (sight) payment does not require sight drafts to be presented and normally the payment is to be effected at the counter of the issuing bank or at its nominated bank upon receipt of the complied documents. The beneficiary under LC available by payment normally may not obtain the payment in advance by negotiating (selling at a discount) the documents at his bank.
Different from LC available by payment, LC available by negotiation allows the beneficiary to receive the payment by negotiating the sight drafts and documents at a nominated negotiating bank which is normally located in his country. The negotiation may be effected on a with or without recourse basis. However, under a confirmed LC, the confirming bank must negotiate the documents on without recourse basis.
Acceptance LCs and deferred payment LCs are usance LCs. The difference is that the acceptance LC requires a time draft, whereas the deferred payemt LC does not.
Under acceptance LC, the beneficiary may receive the payment before the draft is due by discounting the accepted draft at its bank or discounting it on forfaiting markets (as the accepted draft is a financial instrument which can be transferable).
Under deferred payment LC, after his presentation of complied documents, the beneficiary receives a deferred payment undertaking incurred by the issuing bank or its nominated bank. Deferred payment undertaking is not largely accepted as a financial instrument, therefore, normally the beneficiary may not discount the deferred payment undertaking. However, in some cases, the beneficiary can use the deferred payment undertaking incurred by the issuing bank or nominated bank as a security for the advance given by his banks.
UCP 500 was silent on negotiating/discounting deferred payment uindertakings. The dispute between Banco Santander and Banque Paribas in connection with the discounting of a deferred payment undertaking led to the change in UCP. Under UCP 600 Art. 12 (b), the nominated bank is allowed to purchase (buying at a discount) its own deferred payment undertaking.

Hoping the matter has been clear.

Best regards,