Documents of Letter of Credit (LC)

Letter of credit is also known as documentary credit or bankers commercial credit. It is also considered as ” Letter of undertakings (Lou).”

A letter of credit assures the seller that the payment will be realized from the buyer as per the terms and conditions as specified in the letter of credit. If the buyer is unable to pay the amount, the bank will reimburse to the seller on due time, and the contract amount will recover from the buyer as per the undertakings. Commonly, a letter of credit is issued against a pledge of securities or cash. The bank collects necessary commission, charges against issuing the LC.

However, from this article you will know regarding the documents of a letter of credit, and you will also know why these documents is most important in the international transaction.

Considering the stage of letter of credit, the documents of letter of credit can be divided into four types, such as:

  1. Commercial Documents
  2. Insurance Documents
  3. Transport Documents
  4. Official Documents
  1. Commercial Documents:

Commercial documents is the overall guideline of the letter of credit transaction. Both exporter and importer are obliged to follow the condition as mentioned in the commercial invoice. The list of commercial documents are enumerated as follow:

Proforma InvoiceProforma Invoice are issued by the exporter at the beginning of the transaction. This document is not the valid documents in terms of accounting because it is not final documents for creating receivable or payable account from the side of exporter and importer respectively.
International Sales ContractInternational sales contract are using for medium to big size of sales volume where a Proforma Invoice are using for comparatively small international transactions. In a sales contract the role of exporter and importer are clearly stated.
Commercial InvoiceCommercial documents are considered as the final documents of international transactions. In commercial documents every information relating to goods are mentioned and the terms and conditions of payments are clearly stated. The importer and the exporter can give accounting treatment on the base of Commercial Invoice.
Packing ListPacking list are the documents where details of the shipped goods are mentioned in terms of packaging. This is the details list of contents of the shipment and acts as supporting documents.
Inspection CertificateInspection certificate are also called as “Quality inspection Certificate” or “Pre-shipment Inspection Certificate” which minimizes the risk trade risks and minimizes the fraud in international transactions. The most well known inspection companies are : SGS, Bivac/Bureau Veritas, Cotecna and Intertek.
Shipment AdviceShipment Advice are issued by the exporter which is created and dispatched within three to five days from the date of shipment. This documents is quickly send to the importer so that the importer will be able to make the insurance coverage with the information provided.
Other Commercial DocumentsOther commercial documents include-
– Certificate of Analysis
– Pre-Export Verification of Conformity (PVoC) Certificate
– Fiata Documents: FCR, FCT, FWR,SDT

2. Insurance Documents:

Insurance PolicyInsurance Policy is the document that assure/protect the policy holder against the possible damage or loss during transportation. Cargo insurance is one of the most important elements of the international trade.
There are three types of cargo insurance available for the sea and road shipments which is:
– Institute Cargo Clauses (A)
– Institute Cargo Clauses (B)
– Institute Cargo Clauses (C)
Insurance CertificateCertificate of Insurance is the documents that cover the importer/exporter for any possible damage to the goods while in transit.
Open CoverIn Open Cover Marine insurance policy the insurer agrees to provide coverage for all cargo shipped during the policy period. Companies prefer Open Cover because it may help for the frequent shipments. This insurance Policy is considered as a contract of ” utmost good faith.”

3. Transport Documents:

Transport documents usually three types, such as:

  • Bill of Lading
  • Air Transport documents
  • Road Transport, Railway Transport or Inland waterway Transport documents.
Bill of LadingVery common using transport document which is used in the sea shipments, not Air Shipment or Land shipment. This is the concrete evidence of receiving the goods by the master of ship. To comply with UCP 600, a bill of lading must appear to cover a port to port shipment. The types of Bill of lading may include:
– Multi Modal Bill of Lading
– Charter Party Bill of Lading
– Non-negotiable bill of lading.
Air way billThis documents is used when the goods are delivered by Air. In air way bill should includes the following items:
– Conditions
– Limitation of Liability
– Shipping Instructions
– Descriptions of Goods
– Applicable transport Charges
Road Transport DocumentsTransport documents includes all of the land documents such as Road Transport document, Railway document and inland waterway documents.

4. Official Documents:

Office documents includes Certificate of Origin, Health Certificate and the invoice.