The key points for the importer

The integrity of the exporter and any risk

  • Before signing on the dotted line, you should be absolutely sure of the exporter's credentials and ability to deliver.

  • Transactions with unknown companies carry hidden risks. A documentary credit might not offer you adequate protection against the delivery of goods which fail to comply with the terms of the contract. One possible solution here is to request an independent inspection prior to shipment of the goods.

The negotiating position of the importer

  • With a documentary credit, the exporter can count on greater payment security and quicker processing. This strengthens your negotiating position as the importer.

  • A documentary credit serves as an indicator of your credit status for the exporter. This allows you, the importer, to negotiate a better price (for instance in the form of a cash discount). This more than compensates for the costs of the documentary credit.

The terms of delivery (Incoterms 2000) and transport insurance

  • It is advisable for contracts to be based on the ICC Incoterms 2000. The terms of delivery determine which obligations, costs, risks and perils each of the parties must take on.

  • The terms of delivery also stipulate who is responsible for the transport insurance. In the case of CIF, CIP, DDU and DDP consignments, the exporter is responsible; in the case of FCA, CFR, CPT, FOB and FAS consignments, it is the importer who is responsible. Note: under Incoterms 2000, the exporter is only obliged to provide minimum cover for CIP or CIF consignments.
    A Swiss insurer will usually offer comprehensive cover, particularly where a door-to-door arrangement is possible (as with CFR or CPT consignments).

    N.B. Under no circumstances should the import goods be transported without insurance!

The documents involved in documentary credit transactions

  • As an importer, you will need to request the documents required for importation and customs clearance of the goods in the destination country.

  • The number and format of the documents to be presented by the exporter will largely depend on the mode of transport, the goods in question and the terms of delivery.

Step by step to a successful transaction

  • Together with your exporter, start by choosing the appropriate type of credit based on the contractually agreed terms of payment.

  • Agree the terms of the documentary credit with the exporter e.g. the type and number of documents.

  • As the importer, you then instruct UBS to issue a documentary credit in favour of the exporter.

  • A sight credit is a contingent obligation and UBS as the issuing bank enters into a payment obligation. As such, UBS will ascertain whether the requisite cover is available in the form of credit balances or unused credit limits.

  • As an importer, you can apply for such a credit line - the so-called documentary credit facility - through your UBS client advisor. Availment under an existing commercial credit line is also possible. For a deferred payment credit, the importer will need a separate credit limit as this type of credit constitutes a dual obligation on the part of the issuing bank:

    • a) up to availment = contingent obligation

    • b) after compliant documents have been presented = fixed obligation to effect payment on the due date.

Amendments

A documentary credit may only be amended at a later date with the consent of the issuing and confirming banks and the beneficiary (exporter) as well.

Recommendations

  • The credit should be clear and uncomplicated.

  • Avoid terms and conditions that make the documentary credit difficult to process, are extremely hard for the exporter to meet or cannot be checked by the bank.

  • A documentary credit does not normally guarantee that you as importer receive the required goods. However, you can take certain steps, such as a neutral inspection of the goods prior to shipment in the form of a certificate of inspection.

  • If documentary credits are in foreign currencies, UBS offers you the facility of hedging the currency risk. Please specify your requirements (such as a forward contract) with your instructions.

  • Bank charges have to be taken into account for small and medium-sized amounts in the form of minimum commissions. It is advisable to deal with the question of costs before concluding the agreement.You should contact our specialists well in advance if this is your first transaction or if you have a complicated one. We will be happy to advise you.