Quick Answer
L/C negotiation is the process in which, after shipment, the seller presents the full set of documents required by the letter of credit to the negotiating bank; once the bank finds them complying, it advances payment (less interest and fees) and then claims reimbursement from the issuing bank. Three keys: (1) present documents within the L/C deadlines, (2) make sure documents comply with the L/C terms, and (3) deal with discrepancies early. Under UCP 600 Article 14, banks have a maximum of 5 banking days following the day of presentation to examine documents.
The Negotiation Process
- Ship and obtain documents: bill of lading, commercial invoice, packing list and so on.
- Prepare the document set: draft, invoice, packing list, bill of lading, insurance policy, certificate of origin and others as the L/C requires.
- Present to the negotiating bank: complete the negotiation application and hand in the documents.
- Bank examination: the bank checks that documents comply with the L/C terms.
- Advance or forward documents: if complying, the negotiating bank can pay the seller first, then send the documents to the issuing bank for reimbursement.
- Issuing bank pays: after finding the documents complying.
- The buyer pays the issuing bank, takes up the documents and collects the goods.
Common Negotiation Documents
| Document | Watch out for |
|---|---|
| Draft (bill of exchange) | Amount, tenor and drawee as the L/C specifies |
| Commercial invoice | Goods description must match the L/C |
| Packing list | Packages and weights consistent with the bill of lading |
| Bill of lading | Shipment date no later than the latest shipment date; endorsement as required |
| Insurance policy | For CIF/CIP deals, sum insured and cover as required |
| Certificate of origin | As the L/C and importing country require |
| Inspection or health certificate | As the L/C requires |
Mind the Presentation Deadlines
A letter of credit usually has an expiry date and may also require presentation within a set number of days after shipment. Both must be met; missing either can be a discrepancy. Actual deadlines depend on the L/C terms and UCP 600.
What If Documents Have Discrepancies?
Common options:
- Correct and re-present the documents (within the deadlines).
- Ask the buyer to waive the discrepancy: the issuing bank asks the buyer whether to accept.
- Switch to collection: the bank does not advance funds but sends the documents on a collection basis, so payment depends on the buyer’s credit again.
To avoid discrepancies: review the L/C terms as soon as you receive it, make a document checklist before shipment, and keep descriptions, quantities and dates consistent across all documents. See International Trade Documents Explained.
Negotiation in Triangular Trade
In triangular trade, the intermediary may deal with two letters of credit (from the buyer to the intermediary, and from the intermediary to the supplier) or use a transferable L/C. Document requirements and presentation deadlines on both sides must line up, or funding gaps and discrepancies can arise. See the Triangular Trade Process Flowchart.
How Tang Sugar Can Help
Tang Sugar’s triangular and multilateral trade service helps arrange payment terms and document structures so commercial invoices, packing lists and bills of lading match the L/C terms. Contact us.
FAQ
What is L/C negotiation?
After shipment, the seller presents the documents required by the letter of credit to the negotiating bank, which advances payment once they comply and then claims reimbursement from the issuing bank.
What documents are needed for L/C negotiation?
As the L/C requires; commonly a draft, commercial invoice, packing list, bill of lading, insurance policy, certificate of origin, and inspection or health certificates.
What happens if L/C documents have discrepancies?
You can correct and re-present them within the deadlines, ask the buyer to waive the discrepancies, or switch to collection.
How long does a bank take to examine L/C documents?
Under UCP 600 Article 14(b), a maximum of 5 banking days following the day of presentation.
What is the difference between L/C negotiation and documentary collection?
In L/C negotiation, the exporter presents documents under a letter of credit and the bank pays or advances funds after examination, backed by the bank’s undertaking; in documentary collection (D/P, D/A), the bank only forwards documents and collects payment from the importer without guaranteeing it, so risk is higher.
Further Reading
- What Is a Letter of Credit?
- International Trade Documents Explained
- What Is a Bill of Lading? Telex Release Explained
Sources
- ICC Academy: Documentary credits: Rules, guidelines & terminology
- ICC Digital Library: UCP 600
