Documentary Letters Of Credit

Basics of Letters of Credit

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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Buyer Takes All the Risk

Pre-Pay

Letter of Credit

? ? ?

Seller Takes All the Risk

DocumentsDocuments Against Against Open Payment Acceptance Account

Who Should Take the Risk? 4

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 6

A Foreign Check Does Not Represent Immediate Payment ❧ Foreign Checks Must Be Sent Back for Collection 7

Documentary Collections

Buyer/Importer

Seller/Exporter

Buyer’s Bank

Seller’s Bank 8

Seller/Exporter

UPS

Buyer/Importer

Seller/Exporter

Bank

Buyer/Importer

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 credit ❧ Letter of Credit Types ● ● ●

Import Export Standby

❧ L/C cycle

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Parties to a Letter of Credit PARTY SELLER (EXPORTER)

BUYER (I MPORTER)

LETTER OF CREDIT TERM BENEFI CI ARY ORGI NAL BENEFI CI ARY SECOND BENEFI CI ARY TRANSFEREE ASSI GNEE SHI PPER DRAWER ACCOUNT PARTY APPLI CANT ACCOUNTEE DRAWEE

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Parties to a Letter of Credit (Cont’d) PARTY BUYER’S BANK

I SSUI NG BANK CORRESPONDENT

LETTER OF CREDIT TERM I SSUER I SSUI NG BANK OPENI NG BANK PAYI NG BANK ACCEPTI NG BANK DRAWEE ADVI SI NG BANK CONFI RMI NG BANK TRANSFERRI NG BANK NEGOTI ATI NG BANK ACCEPTI NG BANK PAYI NG BANK 13

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 15

Transaction Cycle Buyer/ Importer Applicant - 1

Seller/ Exporter Beneficiary - 4 L/C

L/C Application

L/C

Issuing Bank 2

Advising Bank Confirming Bank Negotiating Bank -3 16

Buyer/ Importer - 8,9b DOCs

Merchandise

Seller/ Exporter - 5,11 $

$

DOCs

Issuing Bank - 7,9a

DOCs

$

Advising Bank Confirming Bank Negotiating Bank - 6,10 17

DRAFT At

Sight ABC Exporter

Pay to the order of

January 5

$

Eight Thousand Twenty Dollars and 00/100

20 00

8,020.00

Dollars

Drawn under Documentary Credit No. M0491110NS00616, of the Standard Chartered Bank, Seoul, Korea, dated September 17, 1999

To

Standard Chartered Bank

ABC Exporter

New York, NY 18

Endorse the back!

•Common Documents ❧ Draft ❧ Transport Document (b/l) ❧ Commercial invoice ❧ Insurance policy or certificate ❧ Packing list ❧ Certificate of origin, weight ❧ Beneficiary statements 19

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 date ❧ Expiry date ❧ Partial shipments ❧ Merchandise description ❧ Can you provide documents required

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Domestic International ❧ Known bank ❧ Known country risk ❧ Known customs and language

❧ Unknown bank (??) ❧ Country stability ❧ Currency stability ❧ Foreign laws and usages

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Confirmation Out of Bus iness

Issuing Bank

Confirming Bank 23

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 1990 ❧ International Standby Practices 1998 ♦♦♦

(http://www.iccwbo.org) 26