Method For International Financing

LETTERS OF CREDIT As a Method for International Financing Presented by Laura Kraus April 26, 2005 NCMA World Congress 2005 “ Prime Time: Contract Management at the Core of the Enterprise”

PARTIES TO INTERNATIONAL TRANSACTIONS
Buyer: Seller:
Importer - Exporter
Applicant - Beneficiary
Account Party - Drawer
Drawee
Buyer’s Bank: Seller’s Bank:
Issuing Bank - Advising Bank
Paying Bank - Confirming Bank
Collecting Bank - Negotiating Bank
- Remitting Bank
NCMA World Congress 2005 “ Prime Time: Contract Management at the Core of the Enterprise”

LETTERS OF CREDIT The Basics
Definition: A documentary credit is a conditional bank undertaking of payment. It is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request, and on the instructions of the buyer (applicant) to pay at sight or at a determinable future date up to a stated sum of money, within a prescribed time limit and against stipulated documents. The issuing bank is putting out its credit and good name for the sake of the buyer.

Buyer: Because a documentary credit is a conditional undertaking , payment is made on the behalf of the buyer against documents , which may represent the goods and give him rights in them.
Seller: Because the documentary credit is a bank undertaking, the seller can look to the bank for payment, instead of relying upon the ability or willingness of the buyer to pay.
However, because the undertaking is conditional, the seller only has the right to demand payment if he meets all the requirements of the credit. It is therefore, unwise for the seller to proceed with shipment until he is aware of these requirements and is satisfied that he can meet them.

Summary - Documentary credits, therefore:
Are an arrangement by banks for settling international commercial transactions.
Provide a form of security for the parties involved.
Ensure payment, provided that the terms and conditions of the letter of credit have been fulfilled.
Mean that payment by such means is based on documents only, and not on merchandise or services involved

LETTERS OF CREDIT What They Can and Cannot Do
They can:
Provide a means of prompt payment to the seller provided the credit details are fulfilled.
Eliminate extensive credit investigation of the buyer, since the seller’s credit risk has been assumed by the issuing and/or confirming bank.
Assure the buyer it will only be required to pay if the conditions of the credit are met.
Provide a base for a bank to engage in temporary inventory and receivable cycle financing.

They cannot:
Substitute for the integrity of the seller or make background and integrity checking unnecessary.
Lend soundness to transactions that were not basically sound in their inception.
Absolve the seller or buyer from contractual liability.
Remove the exchange risk.
Guarantee that shipment will be made by seller.

They cannot :
Letters of credit, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s); even if any reference whatsoever to such contract(s) is included in the credit. (Article 3, UCP 500).

LETTERS OF CREDIT
A basic tenet of letters of credit is that banks handling letters of credit deal in documents and documents only. Any dispute with regard to quantity or quality of merchandise bears no relation to the bank’s responsibility to examine documents as presented under the letter of credit, and to make their decision as to the acceptability of the documents solely based upon those documents versus the letter of credit terms and conditions.

TYPES OF LETTERS OF CREDIT
Merchandise, Commercial, Trade : The majority of LCs issued are in payment for goods in shipment or current services performed. Payment is normally made against documents for goods shipped (Article 1,2, & 9 UCP500)
Standby : This type of LC functions like a guarantee. This type of credit can only be drawn against a credit agreement. It is a definite undertaking of the issuing bank, ICC 590, ISP 98

Revocable : A revocable letter of credit may be amended or canceled by the issuing bank at any moment and without prior notice to the beneficiary (Article 6 & 8, UCP 500)
Unconfirmed : Bears only the guarantee of the issuing bank. The beneficiary should look to the credit worthiness of only the issuing bank, and not to any intermediary. (Article 9, UCP 500)
Confirmed : Is a credit in which a second guarantee is added to the letter of credit by another bank. (Article 9, UCP 500)

Sight : Payment is at sight, which means that the drafts and documents are honored, if in order, by making payment without delay.
Time, Usuance : The draft honored by accepting it for payment at a future date. Payment is delayed until the maturity of the draft.
Revolving Credit : One where the amount is renewed or reinstated without specific amendment to the credit being needed. It can revolve in relation to time or value.

Red Clause Credit : Authorizes the advising or confirming bank to make advances to the beneficiary before presentation of the documents.
Transferable Credit : Can be transferred by the original beneficiary to one or more other parties. It is normally used when the first beneficiary does not supply the merchandise himself, but is a middleman and wants to transfer all or part of his rights to the actual supplier (Article 48, UCP 500)
Back-to-Back Credit : The seller, as beneficiary of the first credit, offers it as “security” to the advising bank for issuance of a second credit.

LC Parties - LC Issuance Buyer/ Applicant Issuing Bank Seller/ Beneficiary Advising Bank Seller/ Beneficiary NCMA World Congress 2005 “ Prime Time: Contract Management at the Core of the Enterprise” Buyer applies for LC Buyer’s bank issues LC and sends to seller’s bank Sales contract Seller’s bank authenticates LC and sends to seller Sales contract

LETTER OF CREDIT Instructions
Date:
To: Buyer
Gentlemen:
Following are the particular details we wish to have included in your documentary Letter of Credit, issued in reply to our Pro-Forma invoice number 2005-001, dated April 26, 2005.
Please instruct your bank to open and issue this credit in accordance with the following terms and subject to the Uniform Customs and Practices for Documentary Credits, International Chamber of Commerce Publication 500.

We have made every effort in these instructions to provide you with terms, which can be easily accommodated. If you or your bank are unable to comply with these terms and conditions, please consult with our offices prior to the issuance of the credit to avoid delay or non-shipment.
The Letter of Credit shall be irrevocable and issued under the rules of UCP 500.
The credit shall be advised/confirmed by:
Seller’s Bank
Address, City, State, Zip Code
ABA #, Account Number

The credit shall be freely negotiable.
The credit shall show as the beneficiary the exact name of: _________________
The credit shall be payable in USD, in the amount of $___________.
The credit shall be payable at ____(Sight) ________(Time).
The credit shall show that all banking charges except for Seller’s Bank charges are for the account of the applicant. All reimbursement charges are for the account of the applicant.

Confirmation charges are for the applicant.
The credit shall show that all charges for amendments to the credit, including related communications expenses, are for the account of the applicant.
Partial shipments are permitted.
Transshipments are Not allowed.
Shipment from: Any USA port/airport
The expiration date shall be: ___________
The latest shipping date is: ____________

Full Set “Clean on Board” Ocean bills of lading/airway bills consigned to the Issuing Bank .
Other documents: ________________________ _______________________________________.
Your cooperation is very much appreciated. Please contact us for any questions that you may have.
Sincerely,

BENEFICIARY SHOULD REVIEW LC TO VERIFY:
Correct Name and Address
Sufficient Credit Amount
Documents Required are Obtainable and According to Terms of Sale
Points of Shipment and Destination are Correct
Insurance Coverage Requirements are Obtainable and According to Terms of Sales

BENEFICIARY SHOULD REVIEW LC TO VERIFY:
6. Shipping Date Allows Sufficient Time to Dispatch the Goods
Expiration Date Allows Sufficient Time for Presentation of Draft and Documents
Description of Goods is Correct and Simply Stated

Incoming Admin ,,MESSAGE ADVICE>> PRT: _LTA9978: SEQ: 00231 LOC: intl que: SWFT020prtc TRN: 970404-000249 <<<intranet>>> 26 APRIL_2005 08:27:57.73
{1: FO1FUNBUS33AINT46520884568
{2: 07001522970404KOFBKRSEAXXX2047728792979404044ON}
{3: {108:IAMGR04}}
SWIFT Message Text
Output time: 04:40 Output sequence number: 084568
S/FUNBUS33AINT
WACHOVIA BANK NATIONAL ASSOCIATION
INTERNATIONAL DEPARTMENT
Input time: 15:22 Input sequence number: XXXXXX
S/KOFBKRSEA.XXX
KOREA FIRST BANK – SEOUL
53-1 1-KA CHUNGMU RD.
JOONG KU
Swift Authenticated Message Mac; XXXX
Issue of Documentary Credit (TYPE: 700)
:27 /Sequence of total:
1/1

:40A: /Form of documentary credit:
IRREVOCABLE
:20 /Documentary Credit Number
MI8677 04NU000032
:31C /Date of Issue:
Date: 050426
:31D /Date and Place of Expiry:
Date: 050930 Place AT NEGOTIATION BANK’S COUNTER
:50: Applicant:
PRIZE IMPORTERS
ANYWHERE, KOREA
:59: /Beneficiary:
/XYZ EXPORTERS
SOMEWHERE, USA
:32B: /Currency Code, Amount:
538143.65 USD
:41D /Available with …. By ….
ANY BANK
BY NEGOTIATION

:42C: /Drafts at:
90 DAYS AFTER SIGHT
:42A; Drawee:
S/KOFBUS6L
KOREA FIRST BANK, LOS ANGELES AGENCY
SUITE 800
LOS ANGELES, CA, US
:43P: /Partial Shipments:
NOT ALLOWED
:43T: /Transshipments:
NOT ALLOWED
:44A: /Load on board, Dispatch:
DALLAS, TEXAS US
:44C: /Latest date of ship:
050907
:45A: /Description of goods and/or services:
DETAILS ARE AS PER YOUR PROFORMA INVOICE DATED
MARCH 31, 1997
FCA DALLAS

:46A: /Documents required:
+SIGNED COMMERCIAL INVOICE IN QUINTUPLICATE
+PACKING LIST IN TRIPLICATE
+FULL SET OF CLEAN ON BOARD OCEAN BILL OF LADING MADE OUT TO THE ORDER OF
KOREA FIRST BANK MARKED FREIGTH COLLECT AND NOTIFY ACCOUNTEE
+FULL SET OF INSURANCE POLICIES OR CERTIFICATES, ENDORSED IN BLANK FOR 110
PERCENT OF INVOICE VALUE, STIPULATING THAT CLAIMS ARE PAYABLE IN THE
CURRENCY OF THE DRAFT AND ALSO INDICATING A CLAIM SETTLING AGENT IN KOREA.
INSURANCE MUST INCLUDE: THE INSTITUTE CARGO CLAUSE: (A)
+CERTIFICATE OF ORIGIN
:47A; /Additional Conditions:
ALL BANKING COMMISSIONS AND CHARGES
INCLUDING REIUMBURSEMENT CHARGES OUTSIDE
OF KOREA ARE FOR ACCOUNT BENEFICIARY
:48: /Period for presentation:
DOCUMENTS MUST BE PRESENTED WITHIN 21 DAYS AFTER THE DATE OF
THE SHIPMENT
:49: /Confirmation instructions:
WITH

:53A: /Reimbursement Bank:
S/KOFBUS6L
KOREA FIRST BANK, LOS ANGELES AGENCY
SUITE 800
LOS ANGELES, CA, US
:78: /Instructions to paying bank:
REIMBURSEMENT IS SUBJECT TO ICC URR 525
ACCEPTANCE COMMISSIONS AND DISCOUNT CHARGES ARE FOR BUYER’S A/C
DRAFTS MUST BE SENT TO DRAWEE BANK FOR REIMBURSEMENT AND ALL
DOCUMENTS TO US IN TWO CONSECUTIVE AIR MAILS. PAYMENT UNDER THIS
L/C IS TO BE MADE AT SIGHT BASIS REGARDLESS OF DRAFTS TENOR
:72: /Sender t oReceiver Information:
THIS CREDIT IS SUBJECT TO
U.C.P. (1993 REVISION) I.C.C.
PUBLICATION NO. 500.
-}
{5:
{MAC:FAB53E6E}
{CHK:B637D2DECCDE}
{DLM:}}

78: Instructions to Paying Bank:
REIMBURSEMENT IS SUBJECT TO ICC URR 525
ACCEPTANCE COMMISSIONS AND DISCOUNTS CHARGES ARE FOR BUYER’S A/C
DRAFTS MUST BE SENT TO DRAWEE BANK FOR REIMBURSEMENT AND ALL DOCUMENTS TO US IN TWO CONSECUTIVE AIR MAILS
PAYMENT UNDR THE L/C IS TO BE MADE AT SIGHT BASIS REGARDLESS OF DRAFT’S TENOR.
SPECIAL INSTRUCTIONS TO THE NEGOTIATING BANK:
NEGOTIATING BANK MUST SEND DRAFTS TO DRAWEE BANK AND ALL DOCUMENTS OT US
I.E. THE BANK OF TOKYO-MITSUBISHI, LTD., GLOBAL SERVICE BANKING DIVISION P.O. BOX 191, NIHONBASHI, TOKYO 103-91, JAPAN IN2. SPECIAL INSTRUCTIONS TO THE DRAWEE BANK:’
IN REIMBURSEMENT DEBIT OUR HEAD OFFICE ACCOUNT WITH YOU
________________________________________________________________________________________
T.T. REIMBURSEMENT PROHIBITED
NEGOTIATING BANK MUST FORWARD DRAFTS TO DRAWEE BANK AND ALL DOCUMENTS TO US IN TWO REGISTERED AIRMAILS.
WE AGREE THAT DRAFTS DRAWN IN COMPLIANCE WITH THE TERMS OF THIS CREDIT SHALL BE DULY HONORED ON DUE PRESENTATION.
PLS FORWARD ALL DOCUMENTS TO US.
(NO.264, CHUNG CHENG 4 TH ROAD, KAOHSIUNG, TIWAN, R.O.C.)
UPON RECEIPT OF THE RELATIVE DOCUMENT CREDIT CONFORMED, WE SHALL REIMBURSE ACCORDING TO
NEGOTIATING BANK’S INSTRUCTIONS

LC Parties - LC Issuance Buyer/ Applicant Issuing Bank Seller/ Beneficiary Negotiating Bank NCMA World Congress 2005 “ Prime Time: Contract Management at the Core of the Enterprise” The issuing bank debits the buyers account for the payment and releases the original documents After scrutinizing the documents negotiating bank forwards them to the issuing bank Seller presents documents under the LC to its bank Shipment On checking for compliance with LC terms the issuing bank reimburses the negotiating bank by debiting the buyer’s account On receiving the payment Seller’s account is credited

Incoterms
Considerations to keep in mind
Who has what responsibility?
More importantly who pays for what?
Knowing the terms correctly can be very beneficial
At the contract negotiation stage these issues need to resolved

Range of Responsibilities Seller Buyer EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ DDU DDP Packing Forwarder Fees Loading at Origin Inland Freight Port Charges Export Clearance Insurance Ocean Freight Charges at Foreign Port Custom Clearance Custom Duties Delivery to Destination NCMA World Congress 2005 “ Prime Time: Contract Management at the Core of the Enterprise”

Incoterms 2000
EXW - Ex Works
FCA - Free Carrier
multimodal, container, air, rail, road
FAS - Free Alongside Ship
FOB - Free on Board (maritime only)
use FCA for all other types of carriage

Incoterms 2000
CFR - Cost and Freight
on board only
CIF - Cost, Insurance and Freight
on board only
CPT - Carriage Paid to
in custody of carrier
CIP - Carriage and Insurance Paid to
in custody of carrier

Incoterms 2000
DAF - Delivered at Frontier (rail, road)
DES - Delivered Ex Ship
DEQ - Delivered Ex Quay (cleared for import)
DDU - Delivered Duty Unpaid (place)
DDP - Delivered Duty Paid

Incoterms 2000
General/ Multi-modal/ Container
FCA, CPT, CIP
Maritime Only
FAS, FOB, CFR, CIF, DES, DEQ
Non-existent
FOB Airport (now FCA)
FOR/FOT - Free on Rail/Truck (now FCA)
C&F - Cost and Freight (now CFR or CPT)

LETTERS OF CREDIT Summary
Submit Pro-Forma LC to Buyer
Review LC When You Receive It
Move Documents as Quickly as Possible
Try to Direct LC to Your Bank
Request Freely Negotiable LC
Realize Risk of Consigning Bill of Lading to Buyer
Banks Will Not Look to Your Contract
The LC is Only as Good as the Issuing Bank

THANK YOU

Method For International Financing

by Nirmala last on Oct 15, 2008

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Method For International Financing Presentation Transcript