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Trade Financing -
Letters of Credit Glossary

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ACCEPTING BANK
The bank named in a term Letter of Credit on which drafts are drawn that has agreed to accept the draft. By accepting the draft, the Drawee Bank signifies its commitment to pay the face amount at maturity to anyone who presents it at maturity. After accepting the draft, the Drawee Bank becomes the Accepting Bank.

ADVISING BANK
The bank to which the Issuing Bank sends the Letter of Credit, with instructions to notify the Exporter (Beneficiary).

APPLICANT
The party that has contracted to buy goods; the Importer in the Letter of Credit process.

"AVAILABLE WITH" BANK
The bank authorized in the Letter of Credit to effect payment under, accept or negotiate the Letter of Credit.

BENEFICIARY
The party that has contracted to sell the goods; the Exporter in the Letter of Credit process.

BILL OF EXCHANGE
An unconditional order in writing addressed by one person to another, signed by the person giving it , and requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a certain sum of money to or to the order of a specified person or bearer. Also referred to as draft.

COMMERCIAL DOCUMENTS
Documents exchanged between the buyer and the seller such as commercial invoices or transport documents that give detail about the goods and/or services contracted.

CONFIRMED LETTER OF CREDIT
Letter of Credit where a Confirming Bank, usually located in the Exporter's country, has guaranteed payment under the Letter of Credit assuming that all terms and conditions of the Letter of Credit have been met. With a Confirmed Letter of Credit, payment risk is assumed by the Confirmed Bank as well as the Issuing Bank, thereby providing more protection for the Exporter.

CONFIRMING BANK
The bank which ,at the request of the Issuing Bank, adds its confirmation to the Letter of Credit. In doing so, the Confirming Bank undertakes to make payment to the Exporter upon presentation of documents under the Letter of Credit assuming all terms and conditions of the Letter of Credit have been met.

DISCREPANCIES
Any inconsistency found in documents presented or failure to comply with the terms and conditions of the Letter of Credit.

DOCUMENTARY CREDIT
Synonymous with Letter of Credit. See Letter of Credit.

DRAFT
An unconditional order in writing addressed by one person to another, signed by the person giving it , requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time a certain sum of money to or to the order of a specified person or bearer. Also referred to as a Bill of Exchange.

DRAWEE BANK
The bank named in the Letter of Credit on which the drafts are to be drawn.

EXPORTER
The party that has contracted to sell goods. Also known as seller or beneficiary.

FINANCIAL DOCUMENTS
Documents used in international transactions that are directly related to payment. E.g. drafts.

IMPORTER
The party that has contracted to buy goods. Also known as buyer or applicant.

INCOTERMS
Standardized contract terms issued by the International Chamber of Commerce that describe the obligations of the Exporter and Importer with respect to freight costs, insurance, taxes, duties, etc. Also called trade terms. Click here for definitions of the most commonly used incoterms.

FAS
Free Alongside Ship. Exporter delivers the goods alongside the vessel on the quay or in the lighters at the named port of shipment.

FOB
Free On Board. Exporter delivers the goods on board the vessel or at the airport at the named port/airport of shipment.

CFR
Cost and Freight. Exporter pays costs and freight to deliver the goods to the named port of destination. This term can be used only for sea and inland waterway transport.

CIF
Cost, Insurance and Freight. Exporter pays costs, insurance and freight to deliver the goods to the named port of destination.

IRREVOCABLE LETTER OF CREDIT
A Letter of Credit that cannot be canceled or changed without the consent of all parties, including the Exporter. Unless otherwise stipulated, all Letters of Credit are irrevocable.

ISSUING BANK
The bank issuing the Letter of Credit at the request of its customer the Importer (Applicant) in favour of the Exporter (Beneficiary), guaranteeing payment under the Letter of Credit if all  terms and conditions are met.

LETTER OF CREDIT
A written instrument issued by a bank at the request of its customer, the Importer (Applicant), whereby the bank promises to pay the Exporter (Beneficiary) for goods or services provided that the Exporter presents all documents called for, exactly as stipulated in the Letter of Credit, and meets all other terms and conditions set out in the Letter of Credit. Also referred to as a Documentary Credit.

REIMBURSING BANK
The bank designated in the Letter of Credit to reimburse the "available with" Bank which submits payment claims under the Letter of Credit.

REVOCABLE LETTER OF CREDIT
A revocable Letter of Credit can be revoked without the consent of the Exporter, meaning that it may be canceled or changed up to the time the documents are presented.

STANDBY LETTER OF CREDIT
A written instrument issued by a bank (Issuing Bank) at the request of its customer (Applicant) on behalf of a beneficiary, whereby the Issuing Bank agrees to provide financial remedy in the event that the Applicant defaults on any terms and conditions specified under the Standby Letter of Credit. Standby Letters of Credit are often issued at the request of Importers in favour of Exporters as financial security for goods purchased on Open Account.

TRANSFERABLE LETTER OF CREDIT
A Letter of Credit that allows the Beneficiary (Exporter) to instruct its bank to transfer the credit in part or in whole to a Secondary Beneficiary.

TRANSFERRING BANK
The bank authorized by the Issuing Bank to transfer at the Beneficiary's request all or part of the Letter of Credit to another party.

UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (UCP)
A set of guidelines, rules and definitions governing Letters of Credit published by the International Chamber of Commerce. For those banks that subscribe, UCP facilitates the standardization of Letters of Credit.
 

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