Legal Definitions - advice of credit

An advice of credit is an official notification sent by a bank, known as the advising bank, to a beneficiary (typically a seller or service provider). This notice confirms that another bank (the issuing bank) has formally established a letter of credit in the beneficiary's favor, guaranteeing payment under specific conditions. It serves as an assurance to the beneficiary that the financial arrangement for their payment is securely in place.

Here are some examples illustrating the concept of an advice of credit:

• International Goods Sale: Imagine a textile manufacturer in Bangladesh (the seller) has secured a large order from a clothing retailer in Germany (the buyer). To ensure the Bangladeshi manufacturer gets paid, the German retailer's bank issues a letter of credit guaranteeing payment upon shipment of the goods and presentation of the correct documents. The Bangladeshi manufacturer's local bank receives the details of this letter of credit from the German bank. The Bangladeshi bank then sends an advice of credit to the textile manufacturer, officially informing them that the letter of credit has been established in their favor and outlining its terms. This notice allows the manufacturer to confidently proceed with production and shipping, knowing the payment mechanism is secure.

• Cross-Border Service Provision: Consider a specialized software development firm in India (the service provider) that has been contracted by a technology company in the United Kingdom (the client) for a major project. To mitigate payment risk for the Indian firm, the UK client arranges for their bank to issue a letter of credit that will release funds upon completion of agreed-upon project milestones. The Indian software firm's bank receives the letter of credit information from the UK bank. The Indian bank then issues an advice of credit to the software firm, confirming that the letter of credit has been opened and detailing the conditions for payment. This provides the Indian firm with the assurance that funds are reserved and will be released as they meet their service deliverables.