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Import Payment Types

Letter of Credit

What is a Letter of Credit?

A letter of credit (LC) is a conditional payment guarantee given by the importer's bank to the named seller upon the importer's request for goods or services. LC ensures that the bank will pay the specified amount within the maturity date in return for the presentation of documents relating to the goods or services in accordance with the specific conditions detailed by the importer.

Letters of credit are subject to the "Uniform Customs & Practice for Documentary Credits" (UCP 600) guide issued by the International Chamber of Commerce.

Within the context of UCP 600, a Letter of Credit means an arrangement, regardless of its name or designation, which constitutes a firm obligation on the part of the issuing bank (the buyer's bank) to honor a proper presentation.

Types of Letter of Credit

Letters of Credit According to Payment Methods

LC at Sight: These are the letters of credit in which the letter of credit amount is paid following the presentation of the documents, in accordance with the terms of the LC, to the issuing bank or the bank authorized by the issuing bank.

  • Deferred Payment LC: These are the letters of credit that stipulate that the LC amount will be paid at the maturity specified in the LC following the submission of the documents, in accordance with the terms of the LC, to the issuing bank or the bank authorized by the issuing bank.
  • Mixed Payment LC: These are letters of credit in which more than one payment method is used. A part of the LC amount is paid in advance, and the remaining balance is paid in the specified term.
Letters of Credit According to Their Classifications

There are four main types of letters of credit according to their classifications:

  • Confirmed LC: These are letters of credit in which the beneficiary is given a conditional payment guarantee by a secondary confirming bank as well as the issuing bank.
  • Unconfirmed LC: These are letters of credit in which the payment guarantee is not backed up by another confirming bank other than the issuing bank.
  • Revolving LC: These are the letters of credit used in case of a continuous purchase and sale agreement between the buyer and the seller. Instead of opening an LC for each shipment separately, a single arrangement is made to cover all shipments to be made during the agreed period. Revolving LCs can be opened depending on time or quantity and automatically renewed and used.
  • Transferable LC: These are the letters of credit used in export transactions where the exporter is in the position of intermediating the purchase and sale transaction on behalf of the manufacturer. A transferable LC can be transferred to one or more than one beneficiary at a time. The LC transferred by the first beneficiary cannot be transferred to another seller by the second beneficiary.

Advantages of Letter of Credit

For the importer:

  • Banks examine on behalf of the buyer whether the conditions of the LC have been fulfilled. Therefore, the buyer can be certain that the seller who does not fulfill the conditions of the LC will not get paid.
  • The ability to determine the latest loading date enables the goods to be delivered on time. The issuer can specify when, where, and how the goods will be loaded.
  • The letter of credit offers the possibility of deferring payment when agreed upon with the exporter.

For the exporter:

  • It gives payment assurance through a bank.
  • If the exporter's bank adds confirmation to the LC, the foreign country and bank risk is minimized.

What are the steps involved in a letter of credit?

  1. The importer and exporter sign a contract.
  2. The importer, the issuing bank, instructs its bank to open an LC per the contract terms.
  3. The issuing bank receives the necessary instructions from the importer and creates the LC text.
  4. The issuing bank sends the letter of credit text to its correspondent in the exporter's country via MT 700 swift message.
  5. The exporter examines the terms of the LC. If there is a conformity between the terms of the LC prepared by the issuing bank and the terms of the contract signed with the importer, the exporter prepares and ships the goods specified in the LC.
  6. After sending the goods, the exporter prepares the documents (papers) specified in the LC and submits them to the nominated bank. The place of submission may be the advising bank, the confirming bank, or a third bank.
  7. Upon receipt of the documentary evidence in conformity with the letter of credit conditions or with reserves, the nominated bank sends the documents attached to the instruction to the issuing bank.
  8. Upon receipt of the submission, the issuing bank examines the document and makes the payment on the due date if the document is in conformity. If the document has reserves, the bank requests information from the importer as to whether they will accept the reserves. The issuing bank delivers the document to the importer according to the terms of the LC.
  9. The importer finalizes the process by realizing the import after receiving the document.

Advance Payment

Advance payment is the payment of the price of the goods to the exporter before the shipment or delivery of the goods subject to import.

Advance Payment Advantages

For the importer:

  • It allows bargaining and discount opportunities.
  • It does not give rise to Resource Utilisation Support Fund (RUSF, KKDF in Turkish) liability.
  • Bank costs and commissions are low in advance payment.

For the exporter:

  • It is the safest form of payment.
  • It provides a pre-financing opportunity.
  • It does not cause exchange rate or maturity risk.

Cash Against Documents Payment

Cash Against Documents (CAD) payment is a form of payment in which the exporter loads the goods and sends the documents representing the ownership of the goods to the importer's bank on condition that the price of the documents is collected through the bank.

Types of Cash Against Documents Payment

  • Against Payment: The importer can receive the documents after making the payment.
  • Payment Against Acceptance Credit: The importer can take delivery of the documents if they accept the policy indicating that the payment will be made later.
  • Payment Against Acceptance Credit with Bill Surety: The delivery of the documents to the importer depends on both the importer's acceptance of the policy showing that the payment will be made later and upon the importer's bank guaranteeing the payment.

Cash Against Documents Payment Features

  • Banks do not guarantee any payment to the exporter except for valid transactions.
  • The importing bank does not deliver to the importer the documents necessary for the customs clearance of the goods before the payment is made or the policy is accepted.
  • It is subject to the rules of the internationally recognized URC 522 standard. These rules set the limits on the rights and obligations of the parties involved in the CAD transaction.

Advantages of Cash Against Documents

  • It is easier, faster, and more cost-effective for both the importer and exporter than LC transactions.
  • Transactions are subject to URC 522 rules and carried out within the framework of the obligations and rights of the parties.
  • The importer is not obliged to make payment before the collection document reaches the bank.

Payment Against Goods

Payment against goods is a transaction in which the exporter sends the goods and all documents to the importer without receiving the goods' price.

Payment is made to the exporter on a date determined by the parties after the delivery of the goods.

In this form of payment, also known as an open account, there usually is a long-term, confidence-based commercial relationship between the exporter and the importer.

The method is used in cases where the exporter believes that their goods will be accepted by the importer, they will collect the export price on the agreed date, and the importer's country is economically and politically stable.

Advantages of Payment against Goods

This type of payment is less costly than CAD or LC. Since the documents come directly to the importer, the importer can clear the goods from customs more quickly and without making any payment.

Contact the nearest Kuveyt Türk branch for detailed information about the payment methods you can use in your import processes!

Frequently Asked Questions About Import Payment Types

Which type of payment is considered the most reliable in international trade?

Letter of Credit is the most reliable type of transaction because the payment is guaranteed to the exporter by a bank.

Which Import Payment Types have bank assurance?

A letter of credit has a bank guarantee.

Who are the parties in the Letter of Credit, and what are their roles?

Following is a list of the parties in the letter of credit and their roles:

  • Applicant, Orderer, Principal: Also known as buyer or importer, this is the party requesting the issuance of the LC.
  • Beneficiary: Also known as seller or exporter, the beneficiary is the party in whose favor the LC is issued.
  • Issuing Bank: Upon the applicant's instruction, the applicant prepares the letter of credit text, submits it to the exporter's bank, and enters into a payment commitment to the exporter.
  • Advising Bank: The Advising bank is the bank that advises the LC in line with the request of the issuing bank.
  • Confirming Bank: Confirming bank is the bank that adds its confirmation to the LC upon the request or authorization of the issuing bank.

Reimbursing Bank: Reimbursing bank is the bank where the account of the issuing bank is located.