Legal Definitions - notation credit

A notation credit is a specialized type of financial guarantee, known as a letter of credit, that includes a critical tracking requirement. Its unique feature is that whenever a payment is made or a financial demand is honored under its terms, the exact amount of that transaction must be physically recorded or "noted" directly onto the letter of credit document itself. This mandatory notation ensures that all parties involved can easily see the remaining available balance at any given time, preventing overpayment or unauthorized use beyond the original agreed-upon limit.

Here are some examples to illustrate how a notation credit works:

• International Trade for Staged Shipments: Imagine a clothing retailer in the United States ordering a large quantity of custom-designed apparel from a manufacturer in Bangladesh. To secure the payment for both parties, the U.S. retailer's bank issues a notation credit to the Bangladeshi manufacturer. The agreement specifies that the order will be shipped in two separate batches. When the first half of the order is shipped, the manufacturer presents a demand for payment for that portion. The bank processes the payment and, crucially, notes the amount paid for the first shipment directly on the notation credit document. When the second shipment is ready, the manufacturer presents another demand. The bank can immediately refer to the notation credit to confirm the remaining balance available before releasing funds for the second shipment, ensuring the total payment does not exceed the credit's maximum.

  This illustrates how the notation credit provides a clear, real-time record of funds disbursed against a total limit, especially useful for transactions involving multiple payments or stages.

• Construction Project with Progress Payments: A property developer is building a new apartment complex and has hired a general contractor. To guarantee payment for the contractor's work as it progresses, the developer's bank issues a notation credit. The credit allows the contractor to draw funds at specific milestones (e.g., foundation completion, framing completion, interior finishing). As each milestone is reached and approved, the contractor submits an invoice. The bank then pays the contractor for that completed phase and records the amount paid directly on the notation credit document. This allows both the developer and the bank to easily track how much of the total project budget has been utilized and how much remains for subsequent phases, ensuring financial transparency and control.

  This example demonstrates how a notation credit facilitates managing a budget across multiple, sequential payments, preventing accidental overspending.

• Equipment Lease with Variable Usage: A large agricultural company leases specialized harvesting equipment from a supplier for a season, with the agreement covering monthly rental fees and potential repair costs up to a certain maximum. The agricultural company's bank issues a notation credit to the equipment supplier. Each month, when the supplier submits an invoice for the rental fee, the bank pays it and notes the amount on the notation credit. If a piece of equipment requires an unexpected repair covered by the credit, that cost is also paid and immediately noted on the document. This system ensures that the total amount drawn against the credit never exceeds the agreed-upon maximum, and all parties have a clear, physical record of all expenditures made under the lease agreement.

  This scenario highlights the utility of a notation credit in tracking multiple, potentially varied withdrawals against a single, overarching credit limit, providing an ongoing balance check.