Letter of Credit
We’ll help give you security when doing business internationally
- Security of payment when exporting
- Security of delivery when importing
- Strengthens your negotiating position
With a Letter of Credit, you have extra security of payment or delivery of goods. Your customer's bank guarantees payment. As soon as you have met the conditions, you receive your money.
Letter of Credit features
What is a Letter of Credit (L/C)?
A Letter of Credit (L/C) offers both you and your trade partner greater security when doing business. The importer’s bank guarantees payment, which reduces the exporter’s risk exposure. And the importer gets the assurance that they will receive the right documents.
An L/C means that the importer’s bank is obliged to pay a particular amount. The exporter must then satisfy the conditions of the L/C. If the conditions are met, the importer’s bank pays out on the Letter of Credit and releases the documents to the importer.
An L/C is also known as a documentary credit. It’s a kind of documentary payment transaction.
Main parties involved
- Applicant: the importer and party taking out the L/C.
- Beneficiary: the exporter being advised about the L/C.
- Issuing bank: the bank issuing the L/C on the importer’s instruction
- Advising bank: the bank that opened the L/C can engage an advising bank to send the L/C to the exporter, in effect 'advising' (i.e. notifying) them.
There are often also other parties involved in an L/C. Find out more by reading the frequently asked questions on this page.
Here’s how it works
- An exporter and an importer agree that payment is to be made through an L/C. They also agree the conditions that must be satisfied.
- The importer instructs the issuing bank to open an L/C for the exporter. Next, the issuing bank sends it to the advising bank. The advising bank authenticates the L/C to confirm that it was really issued by the issuing bank.
- Once the exporter has received the text of the L/C and everything is as agreed in the trade contract, the exporter delivers the goods and/or services as agreed. The next step sees the exporter draw up the required trade documents and send them to the advising bank, generally after the goods have shipped.
- The advising bank checks the documents and forwards them to the issuing bank. They will also check that all documents are correct.
- If the conditions of the L/C have been satisfied, the importer will receive the documents in exchange for immediate or deferred payment. The exporter receives payment through the advising bank.
Good to know
- The basis of doing business, internationally or domestically, is trust. An L/C provides greater security, but it does not rule out all the risks. It is therefore important that you know your trade partner well enough before doing business with them. Read more about limiting the main trade risks.
- You or your trade partner may set a specific date for a payment obligation in a document. This is known as a ‘bill of exchange’. See the frequently asked questions for details.
- The use of an L/C is governed by international regulations published by the International Chamber of Commerce (ICC). These rules are laid down in the Uniform Customs and Practice for Documentary Credits (UCP 600), a copy of which can be ordered from ICC.
- With a Letter of Credit, there is a chance of trade documents going missing in the post (‘lost in transit risk’). ABN AMRO is not liable for this lost in transit risk, unless ABN AMRO made a manifest error when sending the documents.
- When sending trade documents to ABN AMRO, please give clear delivery instructions to your postal carrier. Make sure your documents are physically handed in at the relevant ABN AMRO branch and not at a service point, if the ABN AMRO branch is closed for example. ABN AMRO will not collect the documents from a service point and does not accept any responsibility or liability for documents dropped off at a service point.
Fees
We charge a fee for an L/C. Take a look at our overview of fees and charges .
Choice guide
If you’re not sure whether a Letter of Credit is right for you, answer the questions in our International Trade Guide (in Dutch) and find out which solution covers your trade risks best.
Alternatively, you can contact our advisers directly by calling +31 (0)10 402 54 44 (local rates apply). We’d be happy to help you further.
Video: How a Letter of Credit works
Watch the video with a brief explanation of how an L/C works.
FAQ
How do I apply for an L/C?
Contact our Trade Finance Operations on +31 (0)10 402 5444 (local rates apply). Or send an email to tradeops@nl.abnamro.com.
What are the different types of L/Cs?
- Commercial L/C (documentary)
The documentary L/C is the commonly used type of L/C and described under 'Features'. - Standby L/C
A standby L/C is like a bank guarantee (provision of security). For details of the standby L/C, see the question ‘What is a standby L/C?’ - Transferable L/C
This type of L/C gives the beneficiary the option to transfer the L/C to a second beneficiary in full or in part. Such a transfer must largely conform to the terms of the original L/C. Transferring an L/C is subject to various terms. ABN AMRO will assess on a case-by-case basis whether transfer is possible. If you want to transfer an L/C contact our advisers. - Back-to-back L/C
With a back-to-back L/C, there are two L/Cs that are jointly used to finance a (trade) transaction. This type of L/C is often used when there is an intermediary/broker between the exporter and importer. It is important to know that the intermediary/broker must have sufficient working capital available to cover the L/C.
For more information contact our advisers.
How do I get even greater security (of payment) with an export L/C?
You can get even greater security by having ABN AMRO confirm the L/C. Confirmation means that we take over the payment obligation from the importer’s bank. If you satisfy all the conditions of the L/C, you’ll be protected against the credit and country risk attached to the importer’s bank.
One of the conditions is that ABN AMRO is willing to accept this risk. We charge a fee for confirmation.
Ask our advisers about the options.
Is there a way for me to receive the money sooner?
You have agreed with your client that payment on the L/C will be made on a certain date in the future, for example 90 days after the date on the transport document. If you decide you want to receive the money sooner, you can ask us to discount the L/C. This means that we will advance you the L/C payment, less our fee and discount interest.
For more information, call our Trade Finance Operations on +31 (0)10 402 54 44 (local rates apply).
What is a standby L/C?
A standby L/C is similar to a Bank Guarantee. It is a form of security that is used only when the applicant claims that the beneficiary is in default.
The difference between a standby L/C and a regular Bank Guarantee is that other documents may be required when submitting a claim on the L/C. The regulations may also be different. Standby L/Cs are more common in the United States.
For more information, contact our advisers.
How do I track the status of my documents with the DHL tracking number?
You can track the status of your documents using the tracking (airway bill) number. A condition for tracking documents is that they must have been picked up and registered by DHL Nederland. Follow the instructions below to track the status of your documents..
Click on the DHL website.
Enter the following details:
- Shipment Reference. DHL uses ABN AMRO’s reference number as the ‘Shipment Reference.’ Example: reference number NLHX1234567E001 or NLHM1234567M003 (i.e. with further additions such as E001 or M003 after our reference number). It is important that you enter all the capital letters indicated.
- Date range (from): select the date when the documents were sent to ABN AMRO.
- Date range (to): this is the current date.
- You do not have to enter anything in the Account Number or Destination fields.
If you have any questions about this procedure, please contact ABN AMRO Trade Operations on +31 (0)10 402 5444 (usual call charges apply).
Where should I send my trade documents?
Send your trade documents by courier to the following address:
ABN AMRO Bank N.V.
Trade Finance Operations
Coolsingel 131-133
3012 AG Rotterdam
The Netherlands
Send all other correspondence to this address:
ABN AMRO Bank N.V.
Trade Finance Operations
Postbus 949
3000 DD Rotterdam
The Netherlands
For whom are L/Cs intended?
Letters of Credit are intended for businesses who want to reduce the payment risk and delivery risk. It is a suitable form of protection in:
- international transactions with new business partners
- high-value transactions
- sending shipments to countries that are less stable economically
Which parties are involved in a Letter of Credit?
You’ll find more information about the main parties involved in ‘What is a Letter of Credit’. The parties mentioned below are often involved too.
- 1st advising bank: this is the bank that receives the L/C from the issuing bank and forwards it to a 2nd advising bank. The 1st advising bank may also be the bank confirming the L/C, meaning that it is also the confirming bank.
- Reimbursement bank: this is the bank that can be engaged by the bank processing the documents to cover the payment on the L/C. This bank will often charge its own fee for this service.
- Transferring bank: this is the bank that transfers the L/C.
What is a bill of exchange and how does it work?
See the document below for more information about bills of exchange.
What does it mean to endorse a bill?
Endorsing a trade bill means that you’re using it as a means of payment. The trade bill can be signed over to another party by placing a signature and company stamp on the back. Bills of Lading and insurance policies can also be signed over in this manner.
What is the difference between a Documentary Collection and a Letter of Credit?
If you and/or your trading partner want greater security when doing business internationally, a Documentary Collection can be a good option. A Documentary Collection means that the banks act as intermediaries for delivery of the trade documents and payment processing, but they do not guarantee payment. With a Letter of Credit, on the other hand, one of the banks involved does guarantee payment. The importer’s bank is obliged to pay a particular amount. But the exporter must satisfy the conditions in the Letter of Credit.
To find out which option would be best in your situation, click here for the choice guide or call our Trade Finance Operations on +31 (0)10 402 54 44 (local rates apply).