letters of credit how to avoid discrepancies and ... of credit how to avoid discrepancies and...
TRANSCRIPT
LETTERS OF CREDIT
How to avoid discrepancies and expedite payment
Presented by:
Trade Technologies
Barbara Trupkin – Director Global Sales
©2010 Trade Technologies, Inc. All rights reserved.
1
AGENDA
International Payment Risk
International Payment Mechanisms o Why use LCs?
Letter of Credit Structure o Who Does What – Establish Protocol
o Key LC Terms
Solutions o Process
o People
o Trade Technologies
Q&A as we proceed through process - please mute phones during presentation
©2010 Trade Technologies, Inc. All rights reserved. 2
WHO IS TRADE TECHNOLOGIES
Trade Technologies is world’s largest provider of outsourced letter of credit documentation software and services.
Trade Technologies provides outsourced international trade payment solutions and software as a service to over 1000 global exporters, international freight forwarders and major international trade banks.
Trade Technologies offers a global footprint with 10 operations
offices in the US, Asia and Europe.
Trade Technologies processes over $9 billion of international transactions each year in virtually every industry for some of the world’s largest and most successful companies, including over two dozen Fortune 500 companies.
Patented technology and business process for processing international payments.
First and only company to present original UCP 600 presentations online to major trade banks.
2011 winner of President’s “E Award” for our role in increasing US exports.
©2010 Trade Technologies, Inc. All rights reserved. 3
INTERNATIONAL PAYMENT RISK
Commercial Risk o Buyer history
o Credit reporting limited
o Financial standards different
o Cultural performance and norms vary
Political Risk o Government stability and consistency
Economic Risk o Currency fluctuations
o Foreign Bank solvency
o Sovereign risk
Legal Risk o Contract enforceability
o Goods recoverable
o Time, language and distance
©2010 Trade Technologies, Inc. All rights reserved. 4
INTERNATIONAL PAYMENT MECHANISMS
Cash in Advance
Letter of Credit ***
Documentary Collections
Open Account
©2010 Trade Technologies, Inc. All rights reserved. 5
PAYMENT TERMS RISK CHART
HIGH LOW
LOW HIGH
©2010 Trade Technologies, Inc. All rights reserved. 6
OPEN ACCOUNT
DOCUMENTARY COLLECTION
LETTER OF CREDIT
CASH IN ADVANCE
LETTERS OF CREDIT
LETTERS OF CREDIT ARE STILL THE NO. 1 MEANS OF FINANCING INT’L TRANSACTIONS.
THEY PROVIDE A FORM OF SECURITY FOR THE PARTIES INVOLVED
THEY ENSURE PAYMENT PROVIDED THAT THE TERMS & CONDITIONS OF THE CREDIT HAVE BEEN FULFILLED
HOWEVER, PAYMENT IS BASED ON DOCUMENTS ONLY & NOT ON MERCHANDISE OR SERVICES
©2010 Trade Technologies, Inc. All rights reserved. 7
LETTERS OF CREDIT
Provide an accepted middle ground with significant risk reduction for both sides and also mitigate currency regulations.
Governed by internationally agreed upon rules and regulations (UCP 600).
Corruption mitigated by banks involvement.
Can be complex and not for the unprepared.
©2010 Trade Technologies, Inc. All rights reserved. 8
WHY USE LETTERS OF CREDIT
Letters of Credit
o Letters of Credit assures payment if terms are
complied with.
o In many cases goods cannot be collected until
payment is made.
o Credit Risk is Buyer’s Bank and payment not
contingent on Buyer.
o Rules are well defined and predictable.
o Transport and other risks are governed by INCO
terms.
o Works well for higher risk transactions in difficult
countries and with unknown or untrusted Buyers.
©2010 Trade Technologies, Inc. All rights reserved. 9
Goods Shipped
EXPORT LETTER OF CREDIT CYCLE
©2010 Trade Technologies, Inc. All rights reserved. 10
Buyer / Applicant Seller / Beneficiary Freight Forwarder Goods
Transport Documents
L/C & Documents
Documents Issuing Bank Negotiating Bank
Reimbursing Bank
Advising Bank Seller’s Bank
L/C Application
LETTER OF CREDIT ADVANTAGES FOR EXPORTERS
Eliminate buyer risk and assure prompt payment
in difficult markets.
Predictable outcome – If drafted properly can be
totally under Exporter’s control.
Confirmations eliminate bank risk.
Usance LCs and discounting very cost effective
(perhaps profitable) tools to accelerate payment and
provide sales advantage through extended terms.
©2010 Trade Technologies, Inc. All rights reserved. 11
LETTER OF CREDIT FRICTION
Fewer and fewer trade professionals understand letter of credit requirements.
Letter of credit process is complex and requirements are rigorous.
o Vary by markets and buyers o Time is short and penalties are severe
o Results are binary
Most ERP and sales order systems do not contemplate letter of credit or other trade document requirements – so very little is automated.
Heavy reliance on carrier, forwarder and other third party documents and LC compliance
©2010 Trade Technologies, Inc. All rights reserved. 12
LETTER OF CREDIT FRICTION
Up to 80% of presentations are discrepant.
©2010 Trade Technologies, Inc. All rights reserved. 13
LC PRESENTATIONS
DISCREPANT
CLEAN
Discrepancies – Why they occur and how to avoid them
Late Shipment
Definition
Goods shipped after the latest shipment date
Cause
Delayed shipment
Not enough time to manufacture, package and ship goods
Date of the AWB, BL, FCR or other transport document MUST be on or
before the latest ship date
Solution
Develop a standard operating procedure
Be mindful of delayed shipments
Ensure the LC’s latest ship date allows adequate time for manufacturing,
packaging and transport to vessel
©2013 Trade Technologies, Inc. All rights reserved. 14
Discrepancies – Why they occur and how to avoid them
Late Presentation
Definition
Documents presented after the period of presentation
Cause
Delayed shipment
Not enough time to manufacture, package and ship goods
Waiting on third party documents: BLs, Insurance, Legalization
Pitfall in the flow process
Solution
Develop a standard operating procedure
Follow up with third parties to ensure documents have quick turn around
Ensure LC period of presentation and other key dates allow adequate
time for manufacturing, packaging, shipping and documentation delivery
Track latest ship, latest presentation & expiry date
©2013 Trade Technologies, Inc. All rights reserved. 15
Discrepancies – Why they occur and how to avoid them
Stale LC / Expired LC
Definition
Expired LC: the presentation did not arrive at the expiry location by or
before the expiry date.
Stale LC: the presentation arrived at the expiry location before the expiry
date, but after the period of presentation had passed
Cause
Waiting on third party documents: BLs, Insurance, Legalization
Whole process was delayed, late shipment
Pitfall in the flow process
Solution
Develop a standard operating procedure
Follow up with third parties to ensure documents have quick turn around
Ensure LC period of presentation and other key dates allow adequate
time for manufacturing, packaging, shipping and documentation delivery
©2013 Trade Technologies, Inc. All rights reserved. 16
Discrepancies – Why they occur and how to avoid them
Inconsistent Data / Incorrect Details
Definition per our platform
Data shown on one or more documents do not match each other,
amount in words and figures differs
Goods description not per LC, not issued by beneficiary, beneficiary’s
name differs from LC, Cargo Insurance amount incorrect, etc
Cause
Human error, typos
Miscommunication, Document template, letterhead, assorted reasons
Solution
The Letter of credit is the guideline
Check the documents against the LC
Hire personnel with letter of credit and UCP 600 experience to manage
and/or outsource to qualified provider
©2013 Trade Technologies, Inc. All rights reserved. 17
Solutions -- Process
Establish, document and enforce disciplined process from beginning to end.
o International credit policies and procedures
o LC template and process for approving letters of credit received
o Enforce credit requirements and timing requirements across organization
o Invest in training across organization – especially international sales
©2013 Trade Technologies, Inc. All rights reserved.
Knowledge is Power
18
Solutions -- People
Utilize resources with logistics and UCP 600
experience to manage and/or outsource to
qualified provider
o Specialty providers
o Freight forwarders
o In-house personnel
©2013 Trade Technologies, Inc. All rights reserved. 19
Solutions -- Tools/Technology
Automate as much of process as possible,
including utilizing bank websites and third party
software.
o Reduces errors, delays and costs
o Distributes information across organization
o Provides visibility and control
o Data for reports provide a source of constant improvement
©2013 Trade Technologies, Inc. All rights reserved. 20
©2010 Trade Technologies, Inc. All rights reserved. 21
EXPORTER’S DESIGNATED RECIPIENT
TREASURY, FINANCE, CREDIT
LETTER OF CREDIT DOCUMENT
SALES, MARKETING, CUSTOMER SERVICE
PLANNING & PRODUCTION
PACKING, LOGISTICS
DISTRIBUTE LC AMEND OR RELEASE LC
TRADE TECHNOLOGIES TRADE TECHNOLOGIES
Establish LC recipient protocol
BENEFITS OF OPTIMIZING PROCESS
THROUGH TRADE TECHNOLOGIES.
Sell more internationally with less risk;
Clean documents banked on time;
Accelerated export receivables collection cycle;
Significant reductions in labor costs spent on preparing documents and tracking payments;
Reduced courier expense due to automated document delivery/presentation and third party data exchange;
Reduced discrepancy and other fees;
In-depth reporting for all completed transactions; and
24/7, audit-ready all-inclusive document/data storage
©2010 Trade Technologies, Inc. All rights reserved. 22
PROFITS RISKS
TRADE TECHNOLOGIES – Services Summary
©2010 Trade Technologies, Inc. All rights reserved. 23
Letter of Credit Advice
LC Review and Upload
ISSUED
SENT TO BENEFICIARY
COPY TO TRADE TECHNOLOGIES COPY
TRADE TECHNOLOGIES REVIEWS & INFORMS BENEFICIARY OF INCONSISTENCIES
AMENDMENTS IF ANY REQUESTED & RECEIVED
TRADE TECHNOLGOGIES UPLOADS TO BENEFICIARY’S FILES
Advising Bank
Beneficiary
©2010 Trade Technologies, Inc. All rights reserved. 24
Goods are Shipped
Trade Prepares Documents
TRADE BANKS DOCUMENTS
SAMPLE OUTSOURCED SERVICES SUMMARY
Negotiating Bank
Beneficiary
DSO Report
©2010 Trade Technologies, Inc. All rights reserved. 25
RESULTS – Fast Growing Solar Manufacturing Company
©2010 Trade Technologies, Inc. All rights reserved. 26
Fast Growing Start-up Solar Company New to Asia Market – Relied on Letters of Credit for Prompt and
Certain Payment
DSO reduced by over 60%
Discrepancies virtually eliminated
Asia Customers increased by 10X
RESULTS – Fortune 500 Technology Company
©2010 Trade Technologies, Inc. All rights reserved. 27
.
Fortune 500 Technology Company Experienced Exporter Focused on DSO improvement
DSO reduced by 65% to 7 days
No discrepancies on almost 700 presentations a year
Questions/ Contact Information
Director Global Sales
Barbara Trupkin
516-655-2550 (Mobile)
©2010 Trade Technologies, Inc. All rights reserved. 28
LETTER OF CREDIT STRUCTURE – KEY TERMS
Standard instructions for banks
Issuing Bank o Buyer Selects – based on buyer being credit-worthy
Advising Bank o Provide bank company wants to use for advising / exam
o If random advising bank used Who holds original LC?
Confirming Bank o Role of Confirming Bank
o How risk is transferred to confirming bank
o Cost of confirmation – is it required?
Reimbursement Bank o Why is reimbursement bank used
o Is reimbursement bank required?
©2010 Trade Technologies, Inc. All rights reserved. 29
BUYER’S BANK
GOT CREDIT?
LETTER OF CREDIT STRUCTURE – KEY TERMS
Standard requirements of an LC Key LC Parties
51D: APPLICANT BANK
: : CANARA BANK
: : FOREIGN DEPARTMENTNegotiating Bank
: : PLOT NO. 1, SECTOR 34A
: : CHANDIGARH 160022 INDIA
: :
:50 : APPLICANT
: : PREMIER GOODS AND EQUIPMENT
SECTOR 72,CHANDIGARH NARU
160019,INDIA.
:59 : BENEFICIARY
: : THE STANDARDS COMPANY
1212 GATEWAY PARKWAY
: : HACKENSACK, NJ 11223
:41D: AVAILABLE WITH ... BY ...
: : ANY BANK IN USA
: : BY NEGOTIATION
:57A: "ADVISE THROUGH" BANK
BOFAUS3NXXX
Confirming and Reimbursement bank may or may not be involved
©2010 Trade Technologies, Inc. All rights reserved. 30
Opening Bank
Negotiating Bank
Applicant / Buyer
Beneficiary / Seller
LETTER OF CREDIT STRUCTURE – KEY TERMS
Standard requirements of an LC Key LC Dates START THE CLOCK
:31C: DATE OF ISSUE
: : 111202
:31D: DATE AND PLACE OF EXPIRY
: : 120227USA
:44C: LATEST DATE OF SHIPMENT
: : 120106
:48 : PERIOD FOR PRESENTATION
: : DOCUMENTS ARE TO BE PRESENTED
: : WITHIN 21 DAYS FROM SHIPMENT DATE.
How soon is “soon enough” for LC to be advised?
Make sure LC is received BEFORE order is approved
Missing latest shipping date causes material discrepancy
©2010 Trade Technologies, Inc. All rights reserved. 31
TIMES UP!
Negotiating Bank
LETTER OF CREDIT STRUCTURE – KEY TERMS
Standard requirements of an LC Key LC Finance Terms
:40E: APPLICABLE RULES
: : UCP LATEST VERSION
: :
:40A: FORM OF DOCUMENTARY CREDIT
: : IRREVOCABLE.
: :
:32B: CURRENCY CODE, AMOUNT
: : USD252550,00
: :
:41D: AVAILABLE WITH ... BY ...
: : ANY BANK IN USA
: : BY NEGOTIATION : :
:42C: DRAFTS AT ...
: : AT SIGHT MARKED WITH OUR LC NUMBER
: : AND DATE.
: :
:49 : CONFIRMATION INSTRUCTIONS
: : WITHOUT
: :
:71B: CHARGES
: : COMM/ALL BANK CHARGES OUTSIDE
: : INDIA ARE FOR THE BENEFICIARY'S ACCOUNT.
Time Drafts – Financing Options
©2010 Trade Technologies, Inc. All rights reserved. 32
Promise to pay in time OR
LETTER OF CREDIT STRUCTURE – KEY TERMS
Standard requirements of an LC Key LC Shipping Terms
:43P: PARTIAL SHIPMENTS
: : NOT ALLOWED
: :
:43T: TRANSHIPMENT
: : ALLOWED
: :
:44E: PORT OF LOADING/AIRPORT OF DEPARTURE
: : ANY AIRPORT IN USA
: :
:44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION
: : NEW DELHI AIRPORT, INDIA
: : WHICH AIRPORT?
:44C: LATEST DATE OF SHIPMENT
: : 120106
©2010 Trade Technologies, Inc. All rights reserved. 33
LETTER OF CREDIT STRUCTURE – KEY TERMS
Standard requirements of an LC Key LC Product Description and INCO Terms
:45A: DESCRIPTION OF GOODS AND/OR SERVICES
: : SCIENTIFIC EQUIPMENT AND ACCESSORIES
: : TERMS: FCA BASIS
Key issues with Product Description o No need for line item details
o Simple is best
INCO Terms o Risk elements
o How to decide
©2010 Trade Technologies, Inc. All rights reserved. 34
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 35
46A: DOCUMENTS REQUIRED:
1. Commercial Invoice in duplicate.
Incoterms with itemized relative values
Currency codes
Multiple payments clearly stated
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 36
46A: DOCUMENTS REQUIRED:
2. Packing List in duplicate.
Packing conditions/Containerized?
Boxes? Crates? Wood ? Marks?
Accurate pieces and weights (lbs./Kgs)
Round up to nearest whole lb. or kg.
Partials to reflect exact items shipped
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 37
46A: DOCUMENTS REQUIRED:
3. Certificate of Origin in duplicate
Match all PL details + origin of goods
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 38
46A: DOCUMENTS REQUIRED:
3. Air waybill /Air Consignment Note in duplicate or
F C R – Forwarders Cargo Receipt
or
Received for shipment Receipt
Title per LC to be used
Non-negotiable documents. Consignment based on
opening banks instructions – their risk. Duplicate?
Applicable Incoterms on document and document
determined by Incoterm.
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 39
46A: DOCUMENTS REQUIRED:
or
Ocean Bill of Lading
Clean
Full set to be stated on BL
Applicable Incoterms on document and
. document determined by incoterm
Date on board ( not date of issue)
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 40
Loading on board
“UN”CLEAN ON BOARD
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 41
• 47A: Additional Conditions:
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 42
• 47A: Additional Conditions:
• 1. Documents must be signed and dated by issuer
• 2. Invoice to quote Import is Covered under Non-negative
list of Import-Export Policy 2009-2014 and IE Code
no. 2237800629. INVOICE DETAIL AFTER THE FACT
3. Beneficiary’s Certificate certifying that one set of non-
negotiable documents have been sent to the applicant
immediately after shipment. ANOTHER DOCUMENT
PEN AND INK ONLY ALLOWED
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 43
• 47A: Additional Conditions:
• 4. House or Forwarder Air Waybill not acceptable
• 5. Harmonic code number to be stated on invoice and air waybill.
• 6. Description on invoice must be in Spanish and English.
• 7. Documents dated prior to issuance of LC not acceptable.
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 44
• 47A: Additional Conditions:
8. Third Party documents are not acceptable
9. Short form or blank backed transport document
is not acceptable.
10. All documents must state our LC no. and date
11. Discrepancy fee of $75.00 will apply to each
set of documents presented discrepant and
deducted from proceeds.
LETTER OF CREDIT STRUCTURE – KEY TERMS
©2010 Trade Technologies, Inc. All rights reserved. 45
• 47A: Additional Conditions:
12. Beneficiary to notify shipment details directly
to applicant immediately upon shipment.
13. Air waybill evidencing goods shipped
14. Freight charges must be shown on air waybill
15. Invoice to show air waybill no.