What is a negotiable letter of credit?

A negotiable letter of credit includes specific terms stating that it is ‘available by negotiation’ or is otherwise deemed negotiable. Learn more in this blog.
Negotiable letter of credit
A letter of credit serves as a guarantee of payment between an importer and an exporter, providing assurance and security in trade transactions. As one of the types of letters of credit, the non-transferable letter of credit stands as a distinct category.

What is a negotiable letter of credit?

A negotiable letter of credit is an important financial instrument used in international trade that offers flexibility and security to both importers and exporters. Unlike non-negotiable letters of credit, a negotiable LC includes specific language or term stating that it is ‘available by negotiation’ or is otherwise deemed negotiable.

Benefits of a negotiable letter of credit

A negotiable letter of credit offers benefits for exporters in international trade. It expedites payment, allowing exporters to access funds promptly. By presenting a negotiable LC to the issuing bank, exporters bypass delays in payment processes, ensuring prompt receipt of payment for their goods or services. Additionally, negotiable letters of credit enable exporters to provide importers with favorable usance terms. Usance allows importers to defer payment for a specified period. By utilizing negotiable letters of credit, exporters can offer advantageous usance terms, enhancing their competitiveness in the market.

Disadvantages of a confirmed letter of credit

Firstly, the process of obtaining a confirmed LC may take longer due to the involvement of an additional bank. Secondly, the fees associated with confirmed LCs are generally higher compared to unconfirmed LCs. The presence of a confirming bank adds an extra layer of financial responsibility, resulting in increased costs for the parties involved. It is important for businesses to evaluate financial implications and weigh the benefits against the potential drawbacks when considering the use of a confirmed LC.

How does a negotiable letter of credit work?

A negotiable letter of credit ensures a secure transaction between exporters and importers. Here’s an overview of how it works:

Step 1

Exporters and importers agree on transaction terms in a sales contract.

Step 2

Importer requests a freely negotiable letter of credit from the issuing bank.

Step 3

Issuing bank issues the negotiable LC in swift format and sends it to the nominated bank (negotiating and advising bank).

Step 4

Negotiating bank advises the LC to the exporter. Exporter reviews and proceeds with production if terms are acceptable.

Step 5

Exporter ships goods within the LC's validity period, adhering to the latest shipment date.

Step 6

The exporter presents required documents to the negotiating bank within the stipulated time frame (typically within 21 days of shipment).

Step 7

Negotiating bank examines the documents, offers the exporter a cash advance, and purchases the documents at a discounted price.

Step 8

Negotiating bank submits the documents to the issuing bank.

Step 9

Issuing bank reviews and, if compliant, accepts the documents for payment to the negotiating bank upon maturity.
A freely negotiable letter of credit provides flexibility and security to both exporters and importers. With a negotiable LC, exporters can confidently engage in cross-border transactions, knowing that their payment is guaranteed, while importers can enjoy the benefits of deferred payment options.

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Frequently Asked Questions

Who should pay negotiation fees?
The negotiation fees are typically borne by the beneficiary (seller/exporter) under customary practices. However, it is subject to negotiation and specified in the letter of credit agreement between the parties involved.
How to understand if a letter of credit is negotiable or not?
To determine if a letter of credit is negotiable, it is essential to review the terms and conditions outlined in the document. Specifically, one should examine the "41A - Available with/by" field in an MT700 swift message. If the letter of credit explicitly states that it is available by negotiation in this field, it signifies its negotiability.
Published on September 29, 2023.


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