Negotiation

Negotiation is a core term in Letter of Credit (L/C) transactions, referring to the act by which a bank authorized to negotiate (usually the advising bank or a nominated bank), upon receiving documents submitted by the beneficiary that comply with the terms of the L/C, advances or commits to advance payment to the beneficiary. The negotiating bank is not the final payer but advances funds based on the issuing bank's payment undertaking, and therefore has recourse against the beneficiary. It is commonly used in usance L/Cs or sight L/Cs where the beneficiary wishes to obtain funds for cash flow purposes in advance. Points to note: 1. Documents must strictly comply with L/C requirements, otherwise the negotiating bank may refuse to negotiate; 2. The negotiating bank must verify the creditworthiness of the issuing bank and the validity of the L/C; 3. Negotiation differs from Payment, as payment is a final payment without recourse, whereas negotiation carries recourse; 4. Negotiation differs from Acceptance, as acceptance is the drawee's commitment to pay at maturity on a usance draft, without involving any advance of funds. Foreign trade practitioners should clearly understand the role of the negotiating bank, avoid negotiation failure due to discrepant documents, and pay attention to negotiation fees and recourse risks.