Sight Draft Letter Of Credit

What is a Sight Draft Letter of Credit and Why is it Used

A Sight Draft Letter of Credit is a financial instrument used in international trade that guarantees payment to a seller (beneficiary) immediately upon presentation of compliant documents to the issuing or confirming bank. The "sight" designation means payment is due "at sight" - as soon as the bank verifies the documents meet all LC terms and conditions.

Primary purposes include:

• Eliminating payment risk for exporters who require immediate funds
• Providing buyers with assurance that payment occurs only when shipment evidence is verified
• Facilitating international trade between parties with limited trust or trading history
• Ensuring cash flow predictability for beneficiaries
• Reducing the time between shipment and payment receipt
• Creating a standardized, bank-mediated payment mechanism that transcends jurisdictional boundaries

Who Should Send Sight Draft LC Correspondence

The Beneficiary/Exporter:

• Sends requests to their advising bank for LC opening
• Presents shipping documents and sight drafts for payment
• Requests amendments when terms need modification
• Confirms receipt of payment

The Applicant/Importer:

• Initiates LC opening applications with their bank
• Authorizes payment or waives discrepancies
• Requests LC amendments or cancellations
• Confirms document acceptance

The Issuing Bank:

• Notifies beneficiaries of LC issuance
• Informs applicants of document receipt
• Confirms payment execution
• Communicates discrepancies

The Advising/Confirming Bank:

• Advises beneficiaries of LC receipt
• Presents documents to issuing banks
• Confirms payment receipt from issuing bank

When Sight Draft Letters of Credit Are Required

Triggering events and scenarios:

• New trading relationships where parties lack credit history or mutual trust
• High-value transactions requiring payment security
• International sales where legal recourse is complicated or expensive
• Buyer's country has foreign exchange controls or payment restrictions
• Seller requires immediate payment upon shipment to maintain cash flow
• Contractual agreements stipulate LC payment terms
• Industries with standard LC practices (textiles, commodities, machinery)
• Government or institutional buyers requiring formal payment instruments
• Situations where the seller's bank requires payment security before financing production
• Cross-border transactions involving politically or economically unstable regions
• Documentary collections prove insufficient for risk mitigation
• Buyer requests evidence that funds are committed before seller begins production

Requirements and Prerequisites Before Using Sight Draft LCs

For Applicants (Buyers):

• Established banking relationship with LC-issuing capability
• Sufficient credit facility or cash collateral to cover LC amount
• Import license if required by local regulations
• Complete beneficiary information including legal name and bank details
• Detailed product specifications and shipping requirements
• Understanding of Uniform Customs and Practice (UCP 600) rules

For Beneficiaries (Sellers):

• Export license and necessary governmental approvals
• Capability to produce required documentation (bills of lading, certificates of origin, etc.)
• Reliable shipping and logistics arrangements
• Quality control systems ensuring goods meet specifications
• Insurance coverage for goods in transit
• Banking relationship for document presentation and payment receipt

General Prerequisites:

• Underlying sales contract detailing all transaction terms
• Agreement on documentary requirements between parties
• Clarity on applicable international trade terms (Incoterms)
• Understanding of costs (LC opening fees, advising fees, negotiation charges)

How to Write and Process Sight Draft LC Correspondence

For LC Application Letters:

• Begin with clear identification of the request (opening, amendment, cancellation)
• Provide complete transaction details including amounts, dates, and parties
• Specify all required documents with precise descriptions
• State sight payment terms explicitly
• Include authorization for account debits
• Attach supporting documentation (invoices, contracts)

For Document Presentation:

• Reference the LC number prominently
• List all enclosed documents systematically
• Certify compliance with LC terms
• Request specific payment instructions
• Provide beneficiary banking coordinates
• Maintain professional, precise language

For Discrepancy Handling:

• Identify specific discrepancies clearly
• Explain impact on payment timeline
• Offer options (waive, correct, refuse)
• Set deadlines for responses
• Document all decisions in writing

Processing workflow:

1. Applicant and beneficiary negotiate sales contract
2. Applicant requests LC opening from bank
3. Issuing bank opens LC and transmits to advising bank
4. Advising bank notifies beneficiary
5. Beneficiary ships goods and prepares documents
6. Beneficiary presents documents to presenting bank
7. Banks examine documents for compliance
8. If compliant, immediate payment is released
9. Documents forwarded to applicant for goods collection

Elements and Structure of Sight Draft LC Letters

Essential components that must be included:

In LC Application Letters:

• Applicant's full legal name and address
• Beneficiary's complete details and bank coordinates
• Precise LC amount and currency
• Expiry date and shipment deadline
• Comprehensive list of required documents
• Goods description matching commercial invoices
• Partial shipment and transshipment permissions or prohibitions
• Payment terms ("at sight upon presentation of compliant documents")
• Account authorization for debits

In Document Presentation Letters:

• LC reference number and issuing bank details
• Itemized list of enclosed documents
• Draft amount and drawing details
• Compliance statement
• Payment instructions and beneficiary account details
• Contact information for queries

Supporting documents typically required:

• Sight draft drawn on the appropriate party
• Commercial invoice
• Transport documents (bill of lading, airway bill)
• Insurance documents
• Inspection certificates
• Certificate of origin
• Packing lists

Structural best practices:

• Subject line with LC number for easy tracking
• Formal salutation appropriate to banking context
• Numbered or bulleted lists for specifications
• Clear payment instructions
• Professional closing with full signature block

Formatting Guidelines for Sight Draft LC Correspondence

Optimal length:

• LC applications: 1-2 pages maximum
• Document presentations: 1 page with document checklist
• Discrepancy responses: Brief, typically under 1 page
• Notifications: Concise, single-page format

Preferred tone and style:

• Formal and professional throughout
• Precise, unambiguous language avoiding interpretation
• Technical terminology consistent with UCP 600 standards
• No colloquialisms or casual expressions
• Courteous but businesslike

Wording requirements:

• Use exact terminology from UCP 600 (Uniform Customs and Practice for Documentary Credits)
• Specify dates in unambiguous formats (DD/MM/YYYY or written out)
• State amounts with currency codes (USD, EUR, GBP)
• Reference documents by official titles
• Avoid vague terms like "approximately" or "around"

Mode of transmission:

• SWIFT messaging system for inter-bank communications
• Email acceptable for non-SWIFT correspondence with encrypted attachments
• Original paper documents still required for many presentations
• Courier services for physical document delivery
• Electronic presentations increasingly accepted but verify bank capabilities

Etiquette considerations:

• Address bank officers by title and surname
• Acknowledge receipt of communications promptly
• Respond to discrepancy notices within prescribed timeframes
• Maintain copies of all correspondence
• Confirm understanding before proceeding with amendments

Actions Required After Sending Sight Draft LC Letters

After LC Application:

• Await bank confirmation of LC opening (typically 2-5 business days)
• Review LC terms upon receipt for accuracy
• Immediately notify bank of any errors or discrepancies in issued LC
• Forward LC copy to beneficiary
• Monitor account for fee debits

After Document Presentation:

• Obtain acknowledgment of document receipt from bank
• Track examination timeline (typically 5 banking days per UCP 600)
• Be available to address any discrepancy inquiries
• Prepare alternative solutions if discrepancies arise
• Monitor account for payment credit

After Payment Confirmation:

• Reconcile payment amount with LC terms
• Archive all LC-related correspondence and documents
• Update accounting records
• Close any related financing facilities
• Confirm with buyer that goods were received satisfactorily

Follow-up requirements:

• LC applications require confirmation receipt from bank
• Document presentations need acknowledgment within 24-48 hours
• Discrepancy notifications demand responses within specified periods (usually 3-5 days)
• Amendment requests require tracking until formal amendment issued
• Payment confirmations should be verified against bank statements

Ongoing monitoring:

• Track LC expiry dates to ensure timely document presentation
• Monitor shipment schedules to meet latest shipment dates
• Maintain communication channels with all parties
• Review exchange rates if multi-currency transactions involved

Common Mistakes to Avoid with Sight Draft LCs

Documentary errors:

• Presenting documents after LC expiry date (most common rejection reason)
• Inconsistent descriptions of goods across different documents
• Mathematical errors in invoices or drafts
• Misspelled party names or addresses
• Missing required documents or signatures
• Late presentation beyond allowed days after shipment date

Application mistakes:

• Ambiguous or contradictory terms creating interpretation issues
• Unrealistic document requirements the beneficiary cannot fulfill
• Insufficient validity period for production and shipment
• Vague goods descriptions allowing substitutions
• Omitting critical documents needed for customs clearance

Communication failures:

• Not notifying banks immediately of errors in issued LCs
• Failing to respond to discrepancy notifications within deadlines
• Inadequate coordination between applicant and beneficiary before LC opening
• Not confirming beneficiary's bank details accurately

Financial oversights:

• Insufficient funds or credit limits to cover LC amount
• Underestimating total LC costs (opening, advising, negotiation fees)
• Not accounting for currency fluctuation impacts
• Forgetting amendment fees in budget calculations

Procedural mistakes:

• Assuming electronic copies suffice when originals required
• Not obtaining copies of all presented documents for records
• Failing to examine LC terms immediately upon receipt
• Accepting discrepant documents without proper authorization

Advantages and Disadvantages of Sight Draft Letters of Credit

Advantages:

For Beneficiaries (Sellers):

• Immediate payment upon compliant document presentation eliminates waiting periods
• Minimal credit risk as bank guarantees payment, not buyer
• Enhanced cash flow predictability supporting financial planning
• Reduced collection costs compared to documentary collections
• Protection against buyer insolvency or payment default
• Ability to use LC as collateral for pre-shipment financing

For Applicants (Buyers):

• Payment only released when shipment evidence verified
• Control over transaction through documentary requirements
• Reduced risk of paying for goods never shipped
• Bank examination provides quality control layer
• Can negotiate longer payment terms than prepayment alternatives

Disadvantages:

For Beneficiaries:

• Strict compliance burden - minor discrepancies can delay or prevent payment
• Cannot receive payment without completing exact documentary requirements
• Administrative complexity and documentation costs
• Bank fees reduce profit margins (advising, negotiation charges)
• Presentation deadlines create time pressure

For Applicants:

• Higher costs than open account or collection alternatives
• Requires credit facility or cash collateral commitment
• Bank fees (opening, amendment, discrepancy handling)
• LC terms difficult to modify once issued
• Focuses on documents, not actual goods quality

Mutual disadvantages:

• Complex process requiring specialized knowledge
• Amendments costly and time-consuming
• Subject to banking hours and processing delays
• Requires coordination across multiple parties and jurisdictions

Comparison with Alternative Payment Methods

Sight LC vs. Usance (Time) LC:

• Sight LCs provide immediate payment; usance LCs allow deferred payment (30, 60, 90 days)
• Sight LCs better for beneficiaries needing quick cash flow
• Usance LCs offer buyers working capital advantages
• Sight LCs have lower overall costs due to shorter financing periods

Sight LC vs. Documentary Collection:

• LCs involve bank payment guarantee; collections rely on buyer's willingness to pay
• LCs more expensive but significantly lower risk for sellers
• Collections faster and simpler with less documentation scrutiny
• LCs preferred for new relationships or high-risk countries

Sight LC vs. Open Account:

• Open account requires high trust; LCs work for unfamiliar parties
• Open account has minimal administrative costs; LCs incur substantial fees
• Open account fastest and simplest; LCs have procedural complexity
• LCs essential when buyer's creditworthiness uncertain

Sight LC vs. Advance Payment:

• Advance payment eliminates seller risk entirely but rare in international trade
• LCs balance risk between parties more equitably
• Buyers strongly prefer LCs over prepayment to maintain control
• Advance payment requires exceptional seller credibility or buyer desperation

Sight LC vs. Standby LC:

• Sight LCs are payment mechanisms; standby LCs are backup guarantees
• Sight LCs facilitate trade transactions; standbys cover performance or financial obligations
• Sight LCs drawn upon as primary payment; standbys only if default occurs

When to choose Sight LCs:

• Moderate to high-value international transactions
• Parties with limited credit history
• Buyer's country has payment or forex risks
• Seller requires payment certainty to fund production
• Industry standards dictate LC usage

Tips and Best Practices for Sight Draft LC Success

Negotiation strategies:

• Agree on documentary requirements before LC application - preventing costly amendments
• Request copies of similar LCs the beneficiary handled successfully
• Build reasonable timeframes with buffers for unexpected delays
• Specify well-known, commonly available documents rather than specialized certificates

Cost reduction approaches:

• Consolidate multiple shipments under one LC when possible
• Negotiate fee sharing arrangements between parties
• Use advising banks without confirmation to reduce fees
• Minimize amendments by thorough initial review

Efficiency techniques:

• Maintain templates for standard LC applications
• Create document checklists for each LC immediately upon receipt
• Use electronic presentations where banks support it
• Establish relationships with efficient freight forwarders

Risk mitigation:

• For buyers: Include inspection certificate requirements
• For sellers: Request confirmed LCs for high-risk countries
• Always use "irrevocable" LCs (now standard under UCP 600)
• Specify arbitration mechanisms for disputes in underlying contract

Professional secrets:

• Present documents well before expiry even if ready early
• If discrepancies exist, contact applicant immediately to arrange waiver before presentation
• Maintain spreadsheet tracking all LCs with key dates
• Study UCP 600 rules thoroughly - most disputes arise from misunderstanding standard practices
• Build relationships with documentary credit specialists at your bank
• When in doubt, request explicit confirmation rather than assuming

Documentation excellence:

• Use consistent terminology across all documents
• Triple-check dates, amounts, and descriptions before submission
• Obtain documents from reliable, bank-recognized sources
• Keep copies of everything submitted
• Use professional document preparation services for complex LCs

How Much Do Sight Draft Letters of Credit Cost

Bank fees for applicants:

• LC opening fee: 0.125% to 0.5% of LC value, minimum $100-$500
• Amendment fees: $50-$150 per amendment
• Document examination fee: $75-$200 per presentation
• SWIFT transmission charges: $25-$75 per message
• Quarterly commitment fees if using credit facility: 0.25%-0.5%

Bank fees for beneficiaries:

• Advising fee: $50-$150 for receiving LC notification
• Confirmation fee: 0.1%-0.5% per month if confirmed LC requested
• Negotiation fee: 0.1%-0.25% of draft value
• Discrepancy handling fee: $50-$100 per occurrence
• Courier fees for document transmission: $50-$150

Additional costs:

• Document preparation fees: $200-$500 depending on complexity
• Inspection certificates: $300-$1,000+ depending on type
• Insurance: Typically 0.5%-1% of cargo value
• Translation services if documents require multi-language versions: $50-$200
• Legal review for complex LC terms: $500-$2,000

Total cost estimation:

• For a $100,000 LC, total fees typically range from $1,000-$3,000 split between parties
• High-risk countries or specialized requirements increase costs
• Confirmed LCs significantly more expensive than advised-only
• Multiple amendments can double initial costs

Time value considerations:

• Sight LCs minimize interest costs compared to usance LCs
• Faster payment receipt allows reinvestment of funds sooner
• Reduced collection time saves opportunity costs

Frequently Asked Questions About Sight Draft LCs

Can a sight LC be transferred to another beneficiary? Only if explicitly marked as "transferable" in the LC terms. Non-transferable LCs cannot assign rights to third parties.

What happens if documents are presented with minor discrepancies? The bank notifies the applicant, who can waive discrepancies and authorize payment, or refuse documents. Beneficiary may correct and re-present if time permits.

How long does the bank have to examine documents? Under UCP 600, banks have maximum five banking days from presentation to determine compliance.

Can an LC be canceled after issuance? Irrevocable LCs cannot be canceled without consent of all parties (applicant, beneficiary, and banks).

What if goods are shipped before LC is received? Highly risky - beneficiary may be unable to meet LC terms or present documents timely. Wait for LC before shipping.

Are electronic LCs legally equivalent to paper LCs? Yes, when using approved electronic platforms (e-UCP), electronic LCs have same legal standing.

What's the difference between advising and confirming bank? Advising bank merely notifies beneficiary of LC; confirming bank adds its own payment guarantee alongside issuing bank.

Can LC terms be amended after issuance? Yes, but requires agreement from all parties and incurs amendment fees. Complex process should be avoided when possible.

What if the LC expires before documents can be presented? Payment cannot be claimed. Beneficiary must request extension amendment before expiry or negotiate alternative payment with buyer.

Who bears the risk if documents are lost in transit? Depends on when loss occurs. Best practice: use trackable courier services and keep copies of all documents.