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14.LetterofCreditPt1
 

14.LetterofCreditPt1

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    14.LetterofCreditPt1 14.LetterofCreditPt1 Presentation Transcript

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