If you raised the question of who pays for the letter of credit charges, chances are you are in deep consideration of using a letter of credit. Either your seller is seeking for payment assurance, or that your country has regulations requiring the use of a letter of credit. Either way, this additional payment assurance by the bank comes at the cost to both the buyer and seller. So, who exactly pays for the Letter of Credit charges?
There are three underlying factors involved in determining a letter of credit charge and who is responsible for those fees. (1) The type of letter credit. (2) The amount that was underwritten by the bank and (3) the pre-existing agreement between the buyer and the seller. In most cases, the letter of credit charges is paid by both the applicant and the beneficiary of the LC. A percentage of the invoice value underwritten in charged, which is from 0.1% to 2.0% of the commercial invoice value per month. The amount charged is dependent upon the risk assessment of the underwriting of the payment guarantee.
There are other ancillary costs that both the buyer and the seller have to consider. In this article, we will refer to the UCP 600 guidelines to ascertain who is recommended to pay the letter of credit charges and compare it with what is practiced by major trade financing institutions.
UCP Guidelines on Who Pays for the Letter of Credit
As a brief introduction, the Uniform Customs and Practice for Document Credit (UCP 600) is a guideline for how a letter of credit is drafted and executed, it is the bible that banks or trade financing facilities refer to.
It has to be said that not all countries refer to the UCP 600 guidelines, the International Standby Practices 1998 (ISP98) also provides a structure for the letter of credit issue for standby letters of credit.
However, upon inspection on both the UCP 600 and the ISP98, there are no apparent structures that inform the bank on how the sellers and buyers should be charged. The UCP 600 deems that the bank charges to its clients are of commercial interest and is entirely up to the banks.
The UCP guidelines only outline the charges liable between: –
- The Issuing Bank (Applicant/Buyer’s Bank)
- Confirming Bank (Applicant/Buyer’s Bank)
- Beneficiary Bank (Beneficiary/Seller’s Bank)
- Secondary Beneficiary Bank (Beneficiary/Buyer’s Bank)
Examples of Fees Charged by Financing Banks
BNP Paribas – Bahrain (Buyer/Importer)
|Import Documentary Credit Fee||0.125% invoice value per month (min 3 months) Or min 30 BHD|
|Amendment Fee||0.125% invoice value per month (min 3 months) Or min 30 BHD|
|Acceptance||0.125% invoice value per month (min 3 months) Or min 25 BHD|
|Revolving Credit||Standard LC Charges on Each reinstatement|
|Settlement/Reimbursement Fee||50 BHD|
|Communication per SWIFT||30 BHD|
|Communication Amendment SWIFT||10 BHD|
BNP Paribas – Bahrain (Seller/Exporter)
|LC Advisory Fee||25 BHD|
|Amendment Advising||25 BHD|
|Confirmation||Case to Case, min BHD 115|
|Negotiation (Document Handling Commission)||0.25% invoice value flat or min 40 BHD|
|Discrepancy Fee||20 BHD|
|Payment / Acceptance Chaser||10 BHD|
DBS Bank – Singapore (Importer/Buyer)
|LC Issuance||1/8% per month, Min 2 months, but not less than SGD 80|
|Pre-advice of LC (Telex/SWIFT)||SGD 50|
|Deferred payment commission||1/8% of invoice value per month, from expiry date of LC to due date. Min SGD 80|
|Discrepancy Fee||SGD 80|
|Amendment Fee||Extension – 1/8% per month on the outstanding balance. |
Min SGD 80 Amount – 1/8% per month on the difference
between the increased amount and the original amount.
Min 2 months. Min SGD 80
|LC Cancellation Fee||SGD 80|
|Withdrawal of application||SGD 50|
|Cable Cost||SGD 100|
|Processing Fee (Advanced Arrangements)||SGD 100|
DBS Bank – Singapore (Exporter/Seller)
|Advising Doc LC / Amendment / |
Pre- Advice (Telex/SWIFT)
|Accountee: SGD 30 Non- Accountee SGD 60|
|Negotiation/Handling Do LC||1/8% per invoice value, min SGD 80|
|Commission in Lieu of Exchange||1/8% Flat fee, min SGD 80|
Charges attributed to Sellers
As we can see from the examples above, the beneficiary bank or the seller’s bank will charge fees that are lower than the issuing bank (buyer’s bank) on average.
We have to debunk the notion that exporters do not need to bear any charges when an LC is involved as we can see above. Exporters have to pay an amount of processing fee to the bank.
Although the description of the charges may vary, in summary, the charges that the sellers are liable for can be broken down to 4 types of charges: –
1. Advising Charges
A fee that the beneficiary bank charges for accepting the applicant’s bank offer for a letter of credit.
2. Amendment Charges
A fee imposed upon the seller if the details of the Letter of Credit have to be corrected to reflect the actual shipment. Those changes are such as: –
- Bill of Lading detail changes (vessel information, shipper, consignee, description, quantity, packaging)
- Invoice amount changes (a fee will be charged upon the discrepancy of the changes)
- Period of LC Change (extension surcharges)
3. Transfer Charge
Amount charged to the seller for the money remittance via Cable/Swift.
4. Other Charges
Ancillary charges that comes from the administration of the Letter of Credit.
Charges Attributed to Buyers
Referring to the list of charges from different banks above, we notice that the charges attributed to the buyer are quite similar to the cost attributed to the buyer.
Ultimately, in international trade, much like in anything in life, everything is up for negotiation. It could be the fact that the importer or the exporter has priced the financing fee into the cost of the transported goods sold.
It is very plausible that despite that the fee is directly charged to the exporter or the importer, the final party that bears the actual cost of the Letter of Credit is only one part of the trade only.
Assurance in payment comes at a fee. Depending on the nature of the business, some form of assurance, albeit in cargo insurance or documentary credits, these tools are there to facilitate and promote international trade.