Plastics : Letter of Credit (LC) in Plastics Manufacturing - Detailed Breakdown -

A Letter of Credit (LC) is a bank's written guarantee to pay a seller on behalf of a buyer, provided the seller submits documents proving they've shipped the goods as agreed. It's like a secure payment method in international trade where the bank checks all documents (shipping papers, invoices, etc.) before releasing payment, protecting both buyer and seller from the risks of dealing with unknown partners across borders.

Below is a beakdown of the elements that the LC consist of.

Document Components:

Basic Information:

• LC number and date
• Expiry date and place
• Type of LC (irrevocable/revocable)
• Applicable rules (UCP 600)
• Currency and amount

Irrevocable LC cannot be changed or cancelled without agreement from everyone involved, the buyer, seller, and issuing bank. This gives strong security to the seller, making it the most commonly used type today.
Revocable LC allows the issuing bank to change or cancel it anytime without telling the seller. These are rarely used now because they don't give enough protection to the seller.
UCP 600 is the current rulebook for Letters of Credit in international trade. Published by the International Chamber of Commerce (ICC), it sets clear standards that banks worldwide follow.
Under UCP 600, all Letters of Credit are automatically considered irrevocable unless specifically stated otherwise. 
The rules explain how banks should check documents, what terms mean, and what each party must do.

Party Details:

• Applicant's full details
• Beneficiary's information
• Issuing bank
• Advising bank
• Confirming bank (if any)

Required Documentation:

Commercial Documents:

• Signed commercial invoice (multiple copies)
• Packing list with detailed specifications
• Weight list (gross/net)
• Certificate of origin
• Inspection certificates

Certificate of Origin (CO) is an important trade document that certifies the country where goods were manufactured, produced, or processed. It is often required by customs authorities to determine if goods qualify for import, or if they're subject to duties. The document is typically issued by a trusted third party usually a Chamber of Commerce and must be included with other shipping documents.

Transport Documents:

• Clean on board bill of lading
• Airway bill
• Marine/air insurance policy
• Freight documents

Clean Bill of Lading is a transport document issued by the shipping company/carrier that confirms the goods were received in good apparent condition, without any visible damage or defects. The term "on board" means the goods have actually been loaded onto the vessel.
When a bill of lading is marked "Clean on Board", it indicates that the cargo was received in good visible order (clean), and that it has been loaded onto the specific vessel (on board). This is particularly important in international trade and Letter of Credit transactions, as banks require a clean on board bill of lading as proof that goods have been properly shipped.

Technical Documents:

• Material test certificates
• Quality inspection reports
• Product specifications
• Safety certifications

Critical Verification Points:

Product Specifications:

• Material grade and type
• Physical properties
• Chemical composition
• Quality standards
• Testing requirements
• Packaging specifications

Shipping Terms:

• Latest shipment date
• Partial shipment allowance
• Transhipment conditions
• Port of loading/discharge
• Mode of transport
• Incoterms version and term

Incoterms 2020 (latest version) are standardized international rules that define the responsibilities of buyers and sellers in international trade. Below are key terms:

• EXW (Ex Works) seller only prepares goods at their location. Buyer handles everything else including pickup.
• FCA (Free Carrier): Seller delivers to a specific location (usually carrier) in their country. Buyer arranges and pays for main transport.
• FOB (Free On Board): Used for sea shipping only. Seller loads goods onto the ship. Risk transfers when goods cross ship's rail.
• CIF (Cost, Insurance & Freight): Seller pays shipping costs and insurance to the destination port, but risk transfers when goods are loaded on ship.
• DDP (Delivered Duty Paid): Maximum obligation for seller - they handle everything including import duties until goods reach the final destination.

Payment Conditions:

• Payment at sight/deferred
• Negotiation period
• Document presentation period
• Tolerance in quantity/amount
• Currency fluctuation provisions

At Sight: payment is made immediately when correct documents are presented to the bank. Like a "pay now" system where the seller gets paid as soon as the bank verifies their documents are in order.
Deferred Payment: payment is made at a specific future date agreed upon by both parties. For example, "payment 60 days after bill of lading date." It's like giving the buyer credit terms while still providing security through the LC.
Tolerance means the acceptable variation allowed in the final quantity or amount compared to what's stated in the LC.

Compliance Requirements:

• Document presentation timeline
• Third-party certifications
• Quality management standards
• Environmental compliance
• Import/export regulations

Common Issues to Watch:

Document Discrepancies:

• Description inconsistencies
• Quantity variations
• Late shipment
• Expired documents
• Missing endorsements
• Incorrect port names

Technical Discrepancies:

• Material specification mismatch
• Quality standard variations
• Testing method differences
• Packaging requirement deviations
• Certification inconsistencies

Financial Aspects:

• Amount calculations
• Currency conversions
• Banking charges
• Amendment costs
• Negotiation fees

Risk Management:

Pre-shipment:

• Document verification
• Specification confirmation
• Timeline monitoring
• Certification validation

During Shipment:

• Loading supervision
• Quality inspection
• Document preparation
• Transport monitoring

Post-shipment:

• Document submission
• Discrepancy resolution
• Payment tracking
• Record maintenance