Negotiation credits
Unconfirmed or confirmed

Description

Under a negotiation credit, the exporter receives an advance or an agreement to advance the funds from the negotiating bank on presentation of the stipulated documents and, where applicable, a draft. If it has not confirmed the credit, the negotiating bank has the right to seek recourse from the exporter if cover is not forthcoming.

This type of credit is most common in Asia.

Features

The credit is available by negotiation. Negotiation means the purchase by the nominated bank of drafts and/or documents. As such, the bank in question (the exporter's bank) is authorized to negotiate the bills of exchange (sight or non-sight) and/or the documents, i.e. to buy them from the exporter.

  • Under an unconfirmed credit, only the issuing bank is liable to the exporter. Credit and country risk are not covered.
  • Under a confirmed credit, the exporter receives an undertaking from the confirming bank to negotiate without recourse. As such, the exporter enjoys first-class security.

The advantages

Advantages of unconfirmed negotiation credits

  • The importer is not required to effect payment until the due date if any. If necessary, however, the goods can be re-sold during the payment period and the proceeds of the sale used to settle the documentary credit.
  • This is a more cost-effective option than a confirmed credit.

Additional advantages of a confirmed negotiation credit

  • This form of credit offers the exporter extensive security as the credit risk is extremely limited – UBS, for instance, is liable to the exporter – and the country risk is eliminated altogether.
  • The credit is available with the confirming bank, meaning that the confirming bank will negotiate the documents and advance the funds on or before reimbursement to the nominated bank (UCP 600, Art. 2). This makes the negotiation credit an excellent financing instrument.
  • The risks associated with postage – late delivery or loss - are eliminated for the exporter as the credit is deemed to have been utilized once the complying documents have been presented to the confirming bank.

The disadvantages

Disadvantages of unconfirmed negotiation credits

  • The nominated bank is not obliged to take on a negotiation, i.e. to advance funds on or before the reimbursement to the nominated bank.
  • Under certain circumstances, the exporter risks non-payment in the event of problems in the country in which the issuing bank is based or credit-related difficulties on the part of the issuing bank.
  • The exporter incurs financing costs during the payment period, where applicable.
  • Compared with payment against open account or documentary collection, the administrative costs are higher.

Disadvantage of confirmed negotiation credits

This is a more expensive option than an unconfirmed credit because the confirming bank effectively guarantees that it will negotiate and charges a commitment fee for the risk it assumes.

Special features

  • The confirmed negotiation credit, payable at a later date, allows for an advance. However, most European banks will not undertake negotiation of an unconfirmed credit within the meaning of the Uniform Customs and Practice for Documentary Credits.

  • Even if a documentary credit does not include a confirmation instruction, the nominated bank can enter into a special agreement with the exporter in the form of a so-called silent confirmation. Such an agreement will set out the risks covered by the nominated bank.

Recommendation

Under a freely negotiable documentary credit, available by negotiation with any bank, the exporter can present the documents for availment at any bank whatsoever, not just the advising bank, and thus at UBS. As such, the exporter does not incur any additional costs. We recommend that the exporter incorporate the following payment clause in the agreement (e.g. for a sight negotiation).

Payment clause

  • Unconfirmed negotiation credits: "… against documentary credit, to be advised through UBS AG, Trade Finance, P.O. Box, CH-8098 Zurich (SWIFT UBSWCHZH80A), in our favour, available until (= date) with UBS AG, by negotiation against presentation of the stipulated documents."

  • Confirmed negotiation credits: "… against documentary credit, to be issued by a prime bank and confirmed by UBS AG, Trade Finance, P.O. Box, CH-8098 Zurich (SWIFT UBSWCHZH80A), in our favour, available until (= date) with UBS AG, available by negotiation against presentation of the stipulated documents."