Definition: 

The importer’s bank irrevocably commits for payment provided that the exporter complies with the terms and specifications of the Letter of Credit. Citibank? notifies, negotiates documents and pays to the exporter. If required, can also confirm the Letter of Credit (becoming also an obligor).

Advantages:

The exporter has a bank commitment to pay, instead of running the importer’s commercial risk.

 If Citibank? gives its confirmation, the exporter eliminates sovereign risk from the importer’s country and commerical risk from the issuing bank.

 Is particularly effective when there is not enough credit history between importer and exporter and the exporter does not want to assume the political risk of the importer’s country.

 Citibank? has one of the biggest network of branches and correspondent banks around the world by which it is prepared to provide its confirmation.

Please note that:

The exporter’s credit line is not affected when using Letter of Credits.

 The main concern, as an exporter, should be that the documents presented are exactly within the terms required in the Letter of Credit. This ensures there will be no delay in the reimbursement of funds due to discrepancies/problems.

 When receiving deferred payment Letters of Credit issued or confirmed by well-ranked banks, exporters can secure better terms of financing.

Costs:

Advising fee: generally a fixed amount.

 Confirming fee: percentage on the total amount of the L/C, usually per quarter.

 Negotiating fee: flat percentage on the amount of each negotiation.

 Other costs: discrepancies, amendments, telex, mail, etc.