14.  LETTERS OF CREDIT: PROCEDURES
LETTERS OF CREDIT <ul><li>I. THE NEED FOR LETTERS OF CREDIT </li></ul><ul><li>A.  USES TO THE SELLER </li></ul><ul><ul><ul...
LETTERS OF CREDIT <ul><li>B.  DEFINITION </li></ul><ul><li>1. a letter addressed to the seller, </li></ul><ul><li>2. writt...
LETTERS OF CREDIT <ul><li>C.  USUAL CONDITIONS: </li></ul><ul><li>1.  Seller submits draft with documents. </li></ul><ul><...
LETTERS OF CREDIT Advantages to the  Exporter <ul><li>Credit risk eliminated </li></ul><ul><li>Reduces  exchange rate and ...
L/Cs Facilitate Financing <ul><li>Bankers Acceptances  :  require a time draft from the exporter to the importer’s bank </...
LETTERS OF CREDIT <ul><li>Advantages to the Importer (less than the exporter) </li></ul><ul><li>Expert Examination of Docu...
On-Board Bill of Lading <ul><li>Definition:   shipping waybill certifying presence of goods: a document establishing that ...
LETTERS OF CREDIT <ul><li>II.  PARTIES TO THE TRANSACTION </li></ul><ul><li>A. THE BENEFICIARY </li></ul><ul><li>B. ACCOUN...
LETTERS OF CREDIT <ul><li>E. PAYING BANK </li></ul><ul><li>agent for opening bank </li></ul><ul><li>F. NEGOTIATING BANK </...
<ul><li>G. CONFIRMING BANK </li></ul><ul><li>fee usually paid by opening bank </li></ul><ul><li>bank charges a fee </li></...
LETTERS OF CREDIT: LEGAL CONSIDERATONS <ul><li>III.  LEGAL CONSIDERATIONS </li></ul><ul><li>A.  Case Law </li></ul><ul><li...
OPENING AN L/C <ul><li>The Route of a Letter of Credit </li></ul>
The Path of a Letter of Credit <ul><li>Negotiating  </li></ul><ul><li>  Bank </li></ul><ul><li>Exporter Importer </li></ul...
LETTERS OF CREDIT <ul><li>IMPOR TER </li></ul>ACCOUNT PARTY OPENING or ISSUING BANK
LETTERS OF CREDIT EXPORTER BENEFICIARY ADVISING BANK PAYING BANK
OPENING LETTERS OF CREDIT <ul><li>IV.  OPENING A LETTER OF CREDIT </li></ul><ul><li>should be done as soon as contract sig...
OPENING LETTERS OF CREDIT <ul><li>Unsecured Credit </li></ul><ul><li>requires financial strength and integrity </li></ul><...
<ul><li>2.  Secured Credit </li></ul><ul><li>requires security such as </li></ul><ul><li>cash-commercial credit </li></ul>...
OPENING AN L/C <ul><li>Cash Collateral Credit  in between alternative </li></ul><ul><li>terms depend on the strength of th...
OPENING AN L/C <ul><li>C.  REQUIREMENTS FOR THE  OPENING BANK </li></ul><ul><li>1.  Receipt of Application </li></ul><ul><...
LETTERS OF CREDIT: CONTENTS <ul><li>V.  CONTENTS </li></ul><ul><li>A.  Typical Information </li></ul><ul><li>1.  Place/dat...
LETTERS OF CREDIT: CONTENTS <ul><li>CONTENTS (con’t) </li></ul><ul><li>7.  Ports of origin/destination </li></ul><ul><li>8...
LETTERS OF CREDIT: PAYMENTS <ul><li>VI.  PAYMENTS </li></ul><ul><li>A.  Action by beneficiary </li></ul><ul><li>B.  Checki...
DOCUMENTARY L/CS <ul><li>VII.  DOCUMENTARY L/C  EXAMINATION PROCEDURES </li></ul><ul><li>A.  Schedule </li></ul><ul><li>B....
DOCUMENTARY L/CS <ul><li>D.  Marine bill of lading </li></ul><ul><li>E.  Other documents </li></ul><ul><li>F.  Actions in ...
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14.LetterofCreditPt1

  1. 1. 14. LETTERS OF CREDIT: PROCEDURES
  2. 2. LETTERS OF CREDIT <ul><li>I. THE NEED FOR LETTERS OF CREDIT </li></ul><ul><li>A. USES TO THE SELLER </li></ul><ul><ul><ul><ul><ul><li>WITH A FIRST-TIME CUSTOMER </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>WITH A CREDIT RISKY BUYER </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>WITH A CUSTOMER FROM A COUNTRY WITH EXCHANGE CONTROLS </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>WHO MAY FACE THE RISK BUYER DEFAULTS BECAUSE PRICES HAVE DROPPED </li></ul></ul></ul></ul></ul>
  3. 3. LETTERS OF CREDIT <ul><li>B. DEFINITION </li></ul><ul><li>1. a letter addressed to the seller, </li></ul><ul><li>2. written and signed by a bank, </li></ul><ul><li>3. who acts on the buyer’s behalf. </li></ul><ul><li>-Bank promises to pay drafts, </li></ul><ul><li>provided seller performs </li></ul><ul><li>exactly. </li></ul>
  4. 4. LETTERS OF CREDIT <ul><li>C. USUAL CONDITIONS: </li></ul><ul><li>1. Seller submits draft with documents. </li></ul><ul><li>a. Documents </li></ul><ul><li>1) negotiable bill of lading </li></ul><ul><li>- can be assigned </li></ul><ul><li>2) insurance certificate </li></ul><ul><li>3) commercial invoice </li></ul>
  5. 5. LETTERS OF CREDIT Advantages to the Exporter <ul><li>Credit risk eliminated </li></ul><ul><li>Reduces exchange rate and political risk </li></ul><ul><li>No Need for Credit Check </li></ul><ul><li>Requirements to pay are well-known </li></ul><ul><li>Preshipment risk avoided </li></ul><ul><li>Facilitates financing </li></ul><ul><li>Immediate payment </li></ul>
  6. 6. L/Cs Facilitate Financing <ul><li>Bankers Acceptances : require a time draft from the exporter to the importer’s bank </li></ul><ul><li>Under Letters of credit, B/As are especially easy to create </li></ul><ul><li>With sound credit backing, banks ready to provide needed financing </li></ul><ul><li>an L/C is like a purchase order that allows additional financing </li></ul>
  7. 7. LETTERS OF CREDIT <ul><li>Advantages to the Importer (less than the exporter) </li></ul><ul><li>Expert Examination of Documents </li></ul><ul><li>Sources of Supply expand </li></ul><ul><li>Financing </li></ul><ul><li>No cash tied up </li></ul><ul><li>Payment only after compliance </li></ul><ul><ul><li>To ship by a certain date requires an on-board bill of lading </li></ul></ul>
  8. 8. On-Board Bill of Lading <ul><li>Definition:   shipping waybill certifying presence of goods: a document establishing that goods have been loaded onto a particular vessel and that the carrier is now responsible for their safe passage </li></ul>
  9. 9. LETTERS OF CREDIT <ul><li>II. PARTIES TO THE TRANSACTION </li></ul><ul><li>A. THE BENEFICIARY </li></ul><ul><li>B. ACCOUNT PARTY (usually importer) </li></ul><ul><li>C. OPENING BANK </li></ul><ul><li>D. ADVISING BANK usually a correspondent of opening bank </li></ul>
  10. 10. LETTERS OF CREDIT <ul><li>E. PAYING BANK </li></ul><ul><li>agent for opening bank </li></ul><ul><li>F. NEGOTIATING BANK </li></ul><ul><li>any bank who submits documents to the opening bank </li></ul>
  11. 11. <ul><li>G. CONFIRMING BANK </li></ul><ul><li>fee usually paid by opening bank </li></ul><ul><li>bank charges a fee </li></ul><ul><li>considered very safe from exporter’s viewpoint, i.e. contains obligation to pay on the part of two banks. </li></ul>
  12. 12. LETTERS OF CREDIT: LEGAL CONSIDERATONS <ul><li>III. LEGAL CONSIDERATIONS </li></ul><ul><li>A. Case Law </li></ul><ul><li>B. U.S. Code law </li></ul><ul><li>Article 5 of the UCC </li></ul><ul><li>C. Contractual Law </li></ul><ul><li>Uniform Custom and Practices (UCP) </li></ul><ul><li>D. Banks Deal in Documents only </li></ul>
  13. 13. OPENING AN L/C <ul><li>The Route of a Letter of Credit </li></ul>
  14. 14. The Path of a Letter of Credit <ul><li>Negotiating </li></ul><ul><li> Bank </li></ul><ul><li>Exporter Importer </li></ul><ul><li>Advising Bank Opening Bank </li></ul><ul><li>Paying Bank Confirming Bank </li></ul>
  15. 15. LETTERS OF CREDIT <ul><li>IMPOR TER </li></ul>ACCOUNT PARTY OPENING or ISSUING BANK
  16. 16. LETTERS OF CREDIT EXPORTER BENEFICIARY ADVISING BANK PAYING BANK
  17. 17. OPENING LETTERS OF CREDIT <ul><li>IV. OPENING A LETTER OF CREDIT </li></ul><ul><li>should be done as soon as contract signed </li></ul><ul><li>especially if there is a price decline </li></ul><ul><li>A. Credit Factors – involves: </li></ul><ul><li>1. beneficiary, account party and opening bank </li></ul><ul><li>promise by bank to pay whenever proper documentation is presented </li></ul><ul><li>Requires analysis of creditworthiness </li></ul>
  18. 18. OPENING LETTERS OF CREDIT <ul><li>Unsecured Credit </li></ul><ul><li>requires financial strength and integrity </li></ul><ul><li>bill of lading consigned directly to the importer </li></ul><ul><li>underlying goods not used as collateral </li></ul>
  19. 19. <ul><li>2. Secured Credit </li></ul><ul><li>requires security such as </li></ul><ul><li>cash-commercial credit </li></ul><ul><li>merchandise as collateral </li></ul><ul><li>factors: </li></ul><ul><li>export must be creditworthy </li></ul><ul><li>are goods readily marketable </li></ul><ul><li>adequacy of insurance coverage </li></ul>
  20. 20. OPENING AN L/C <ul><li>Cash Collateral Credit in between alternative </li></ul><ul><li>terms depend on the strength of the importer </li></ul><ul><li>B. REQUIREMENTS FOR THE ACCOUNT PARTY </li></ul><ul><li>1. Application </li></ul><ul><li>importance of documents </li></ul><ul><li>disadvantage of too much detail </li></ul><ul><li>importance of insurance </li></ul>
  21. 21. OPENING AN L/C <ul><li>C. REQUIREMENTS FOR THE OPENING BANK </li></ul><ul><li>1. Receipt of Application </li></ul><ul><li>2. Advice to Beneficiary </li></ul><ul><li>3. Amendments </li></ul>
  22. 22. LETTERS OF CREDIT: CONTENTS <ul><li>V. CONTENTS </li></ul><ul><li>A. Typical Information </li></ul><ul><li>1. Place/date </li></ul><ul><li>2. Names of Account party/beneficiary </li></ul><ul><li>3. General description of merchandise </li></ul><ul><li>4. Tenure of the draft </li></ul><ul><li>5. Paying bank </li></ul><ul><li>6. % amount of draft </li></ul>
  23. 23. LETTERS OF CREDIT: CONTENTS <ul><li>CONTENTS (con’t) </li></ul><ul><li>7. Ports of origin/destination </li></ul><ul><li>8. List of exact documents to </li></ul><ul><li>attach to drafts </li></ul><ul><li>9. Maximum amount of drafts </li></ul><ul><li>10.Expiration date of credit </li></ul><ul><li>11.Irrevocable/revocable? </li></ul>
  24. 24. LETTERS OF CREDIT: PAYMENTS <ul><li>VI. PAYMENTS </li></ul><ul><li>A. Action by beneficiary </li></ul><ul><li>B. Checking of documents </li></ul><ul><li>C. Common discrepancies </li></ul>
  25. 25. DOCUMENTARY L/CS <ul><li>VII. DOCUMENTARY L/C EXAMINATION PROCEDURES </li></ul><ul><li>A. Schedule </li></ul><ul><li>B. L/C and the drawing </li></ul><ul><li>C. Commercial invoice </li></ul>
  26. 26. DOCUMENTARY L/CS <ul><li>D. Marine bill of lading </li></ul><ul><li>E. Other documents </li></ul><ul><li>F. Actions in Cases of Document Discrepancies </li></ul>
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