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- Amount and currency of the operation: it is important to bear in mind currency fluctuations for operations carried out in currencies other than the euro. Later on we will see the different ways of guaranteeing an exchange rate.
- Type of documentary credit: all documentary credits or letters of credit are irrevocable, meaning that they cannot be cancelled without the consent of all parties. In addition, there are different types of credits, such as: confirmed, transferrable, back to back, etc. Later on we shall see more about this point.
- Method of payment: there are three main types of payment: on demand, differed payment, and mixed payment. On demand payments are made when the documents are provided. Deferred payment refers to when payment occurs after documents have been provided, for example 30 days after the shipment date. Mixed payment occurs when part of the nominal amount is paid on demand and the other is differed.
- Description of the goods: it is important to provide a brief and concise description of the goods, which should be given on the pro-forma invoice, and which will be indicated in the terms and conditions of the documentary credit and, consequently, on all the commercial documents provided by the supplier.
- Expiry date or deadline for the presentation of documents: this date refers to the timeframe the supplier has to present the documents once the merchandise has been dispatched. For shipments, the standard timeframe is 21 days from the date of shipment, and for dispatches by road and plane, the standard timeframe is 15 days.
- Shipment deadline: as the name indicates, this is the maximum date by which the supplier must ship the goods.
- Documents required: a wide range of commercial documents can be requested in the terms and conditions of the documentary credit. The most common ones are: commercial invoice, packing list, transport documentation, insurance policy, and certificate of origin.
- As for the transport documentation, you have to agree the means of transport used to send the goods: ship, truck/lorry, plane, or train.
- Transfers: you have to decide whether you will allow the goods to be transferred from one means of transport to another in the middle of transportation.
- Partial shipments: permitted if the goods covered by the credit are not sent in one go but rather are shipped in batches. For example, tomatoes.
- If the goods are sent in a single shipment, partial shipments would not be permitted. For example, machinery
- Place of origin and destination of the goods: where the goods come from and where they are headed.
- Incoterms: These are the rules and uses defined by the International Chamber of Commerce, establishing a set of international rules for the interpretation of commercial terms pertaining to contracts of sale, defining the rights and obligations of the parties with regard to the delivery of goods.
- Beneficiary’s bank (notifying bank): the importer must know the bank used by their supplier in order to send the documentary credit to that bank, thereby avoiding the intervention of intermediary entities that charge unnecessary fees and slow down the sending of documentation.
- Tolerance: goods can be sent up to a certain percentage above or below the amount stipulated on the documentary credit. Usually 5 or 10 per cent. In this case, we say that a tolerance of X per cent is permitted. This is usually the case of divisible goods, such as vegetables.
- Banking charges payable by whom: it is important to determine which party will cover the banking charges of intervening banks and financial entities in order to keep a check on your expenses and avoid any last-minute surprises.
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