Download - Basics of letters of credit
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Basics ofLetters of Credit
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Agenda
Topics to be covered Basic terms of Trade Letters of Credit INCOTERMS Applications
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Terms of Trade
Cash in Advance Letter of Credit Collection Open Account
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4Who Should Take the Risk?Who Should Take the Risk?
Pre-PayPre-PayPre-PayPre-Pay
LetterLetterofof
CreditCredit
LetterLetterofof
CreditCredit
DocumentsDocumentsAgainstAgainstPaymentPayment
DocumentsDocumentsAgainstAgainstPaymentPayment
DocumentsDocumentsAgainstAgainst
AcceptanceAcceptance
DocumentsDocumentsAgainstAgainst
AcceptanceAcceptanceOpenOpen
AccountAccountOpenOpen
AccountAccount
??????Buyer TakesAll the Risk
Seller TakesAll the Risk
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Policy Issues
1) Choose Method of Payment
a. Establish country risk criteria
b. Standards for particular buyers
� Payment history
� Size of transactions/credit limit
� Credit History
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Policy Issues
2) Set Policies for Each Method
a. Cash in advance – wire transfers Vs. check
b. Open account – discount policy,controls etc.
c. Documentary Collections – payment at sight
d. Letters of Credit – “Policy Letter”
– L/C Checklist
3) Enforce the Policies That You Set
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A Foreign Check Does Not Represent Immediate Payment
Foreign Checks Must Be Sent Back for Collection
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Documentary CollectionsDocumentary Collections
Buyer/ImporterBuyer/Importer Seller/ExporterSeller/Exporter
Seller’s BankSeller’s BankBuyer’s BankBuyer’s Bank
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Buyer/ImporterBuyer/Importer
Seller/ExporterSeller/Exporter BankBank
Seller/ExporterSeller/Exporter
Buyer/ImporterBuyer/Importer
UPSUPS
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A Letter of Credit is:
A substitution of the bank’s credit for the buyer’s
A bank’s promise to pay upon the satisfactory compliance with the L/C’s terms and conditions by the L/C’s Beneficiary
Note – Banks Deal in Documents ONLY
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Letters of Credit
Parties to a letter of creditLetter of Credit Types
Import Export Standby
L/C cycle
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Parties to a Letter of Credit
SELLER(EXPORTER)
BENEFICIARYORGINAL BENEFICIARYSECOND BENEFICIARY
TRANSFEREEASSIGNEESHIPPERDRAWER
BUYER(IMPORTER)
ACCOUNT PARTYAPPLICANTACCOUNTEE
DRAWEE
PARTY LETTER OF CREDIT TERM
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Parties to a Letter of Credit (Cont’d)
BUYER’S BANK ISSUERISSUING BANKOPENING BANKPAYING BANK
ACCEPTING BANKDRAWEE
ISSUING BANKCORRESPONDENT
ADVISING BANKCONFIRMING BANK
TRANSFERRING BANKNEGOTIATING BANKACCEPTING BANK
PAYING BANK
PARTY LETTER OF CREDIT TERM
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Standby Commercial
Back up in case of non-payment or non-performance
Generally not expected to be drawn
Used for services/goods
“After the fact”
Primary source of payment
Used for actual goods
Somewhat simultaneous
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Standby L/C
Financial
Performance
Bid Bond
Performance Bond
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L/C
L/CL/CApplicationL/CApplication
Buyer/ ImporterApplicant - 1
Buyer/ ImporterApplicant - 1
Seller/ ExporterBeneficiary - 4
Seller/ ExporterBeneficiary - 4
Advising BankConfirming Bank
Negotiating Bank -3
Advising BankConfirming Bank
Negotiating Bank -3Issuing Bank
2Issuing Bank
2
TransactionCycle
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DOCs
DOCs
DOCs$
$
$
MerchandiseMerchandiseBuyer/ Importer - 8,9bBuyer/ Importer - 8,9b Seller/ Exporter - 5,11Seller/ Exporter - 5,11
Advising BankConfirming Bank
Negotiating Bank - 6,10
Advising BankConfirming Bank
Negotiating Bank - 6,10Issuing Bank - 7,9aIssuing Bank - 7,9a
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Sight 20
Pay to the order of $
Dollars
To
At January 5 00
ABC Exporter 8,020.00
Eight Thousand Twenty Dollars and 00/100
Standard Chartered Bank
New York, NY
ABC Exporter
DRAFT
Drawn under Documentary Credit No. M0491110NS00616, of theStandard Chartered Bank, Seoul, Korea, dated September 17, 1999
Endorse the back!
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•Common Documents
DraftTransport Document (b/l)Commercial invoiceInsurance policy or certificatePacking listCertificate of origin, weightBeneficiary statements
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When you receive an L/C
CHECK IT CAREFULLY!!! Review it ASAP L/C mirror sales contract Can you perform Can you provide ALL the documents
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Critical Things to Look For
Latest shipment dateExpiry datePartial shipmentsMerchandise descriptionCan you provide documents required
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Domestic International
Known bankKnown country
riskKnown customs
and language
Unknown bank (??)
Country stabilityCurrency stabilityForeign laws and
usages
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Confirmation
ConfirmingBank
ConfirmingBank
IssuingBank
IssuingBank
Out of Business
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Credit Issues
As Applicant your Credit Worthiness your Collateral
As Beneficiary probably none
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Cost Issues
As Beneficiary minimal cost usually if confirmed, expect to pay
As Applicant based on your credit and/or collateral use of other bank services
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Where to get more information
ICC Uniform Customs and Practice for Documentary Credits (UCP 500)
ICC Guide to Documentary Credit Operations for the UCP 500
INCOTERMS 1990International Standby Practices 1998
(http://www.iccwbo.org)