1. INTERNATIONAL PAYMENTS
(BANK COLLECTION &
LETTERS OF CREDIT)
Michelle Rodet, Master of Law, J.D.
French bar, New York bar

2. CREDIT RISK IN INTERNATIONAL SALES
• The risk of Seller not receiving its payment from the
buyer

3. BANK COLLECTION, TRADE FINANCE,
& LETTERS OF CREDIT
REDUCE
CREDIT
RISK

4. BANK COLLECTION, TRADE
FINANCE & LETTERS OF
CREDIT

5. BANK COLLECTION
• The process by which the
international banking
system is used to effect
payment in a
documentary sale
• Documentary draft used
WHAT IS?
The Wall Street Bull

6. TRADE FINANCE &
LETTERS OF CREDIT
• The process by which banks
and financing institutions
guaranty that the seller will be
paid for its goods, and provide
financing to their clients
• Documentary drafts used in
trade finance
WHAT IS?

7. BANK COLLECTION & TRADE
FINANCE
• Bill of Exchange/Draft-definition
• Negotiation
• Documentary Draft & Bank
Collection Process
• Documentary Draft in Trade
Finance
• Credit risk:
• Acceptance
• Financing:
• Factoring Accounts Receivable
ISSUES:

8. THE BILL OF EXCHANGE / DRAFT
DEFINITION:
• An unconditional order in writing
• Addressed by one person to
another one (the seller to the buyer
or buyer’s bank)
• Signed by the person giving it
• With the requirement that the
person to whom it is addressed
pay on demand or at a fixed or
determinable future date
• A sum certain in money, and
• To or to the order of a specified
person , or to the bearer
• Upon delivery of the goods or
presentation of shipping
documents
• Involves three (legal) parties:
• Drawer, party writing the bill of
exchange/ draft and signing it
• Drawee, party who has to pay it
• Payee, beneficiary
• Seller both drawer and payee
• Called Documentary Draft when
used in bank collection
• It is a negotiable instrument

9. THE BILL OF EXCHANGE / DRAFT
NEGOTIATION:
• Negotiability:
• Allows the draft to act as
substitute for money
• Negotiation:
• Transfer of the draft (or other
instrument) from one party to
another so that the transferee
(Holder) takes legal rights to the
instrument
• Bearer draft, transferred
through delivery
• Order draft, transferred through
endorsement and delivery

10. DOCUMENTARY DRAFT
BANK COLLECTION PROCESS:
• Sight Draft:
• To be paid upon presentation or
demand
• Is sent « for collection », i.e.,
documentary collection
• Draft, documents, and collection
letter, sent by the seller to the
buyer
• Documentary collection:
• « Cash against documents »
• « Documents against payment »

11. DOCUMENTARY COLLECTION
Exportfinance navigator.gov.au

12. DOCUMENTARY COLLECTION
HOW RISKY IS IT?

13. DOCUMENTARY DRAFT
IN TRADE FINANCE:
• Documentary draft can serve as an important
financing or credit device for sellers and buyers
• Time Draft:
• To be paid at a future date or after a specified period
• Are sent (with shipping documents) by Seller to Buyer for
Acceptance via banking channels
• Acceptance:
• Stamping « Accepted » on the face of the draft, name and
signature of drawee (buyer)
• Buyer has created a trade acceptance
• After acceptance, draft returned to Seller. Buyer gets the
shipping documents and may collect the goods
• »documents against acceptance »
• Seller may hold it until maturity or sell it to bank
or commercial lending institution for cash (at a
discount)
The « City », London ‘s
financial center

14. DOCUMENTARY DRAFT
BANKER’S ACCEPTANCE & ACCEPTANCE FINANCING:
• A time draft drawn on and accepted by a bank
• Bank stamps « Accepted » on the face of draft, signs it, creating an
acceptance, i.e., an obligation to pay the amount indicated on it to its holder on
the date specified
• Holder can convert it to cask immediately at a discounted rate, or hold it until
maturity
• A short term financing device for both Sellers and Buyers
Shangai financial center

15. CREDIT RISK
IN ACCEPTANCE
FINANCING:
• Rights of the Holder in Due
Course (HDC)
• A rule by which the purchaser
of a negotiable instrument
(draft or acceptance) takes it
free from most disputes
between the drawer and
drawee – the parties to the
underlying transaction
• Ensures free transferability of
commercial paper in
international commerce
HOLDER IN
DUE COURSE STATUS:
• One who purchases the
instrument:
• For value
• In good faith
• Without any notice that it is
overdue or has been
dishonored, and
• Without notice that it contains
an unauthorized signature or
has been altered

16. CREDIT RISK
IN FACTORING
ACCOUNTS RECEIVABLE:
Account receivable:
• A contract right to receive for Seller
to receive future payment
• Can be assigned to another party
Factoring Agreement:
• A contract by which the seller
(assignor) assigns its right to
collect the account receivable to
financial institution (assignee) in
return for cash
• Assignee « steps into the shoes of
assignor » and acquires only
assignor’s rights under the
contract:
• = A payment or a breach of contract
action
Shangai Financial Center

17. LETTERS OF CREDIT

18. LETTERS OF CREDIT
ISSUES
• Definition
• Types of L/Cs
• Documentary L/C defined
• Parties to the transaction
• Legal nature of the L/C
• Law applicable to L/Cs
• The Independence Principle of
L/Cs
• The L/C transaction
• Confirmed L/Cs
• Standby L/Cs
Wall Street, New York

19. LETTERS OF CREDIT
DEFINITION & USAGES:
• An obligation of a bank issued
on behalf of customer
promising to pay a sum of
money upon happening of
certain event(s)
• Can be used:
• In transactions for the sale of
goods (Documentary
credit), or
• To guaranty performance of
contracts or repayment of
loans (Stand-by L/C)
Wall Street, New York

20. DOCUMENTARY LETTER OF CREDIT
(L/C)
DEFINITION OF DOC. L/C
• Definite undertaking of a bank
• Issued in accordance with the
instructions of its customer
(applicant)
• Addressed to, or in favor of, the
beneficiary
• By which the bank promises to pay a
certain sum of money (or to accept
or negotiate the beneficiary’s draft up
to that sum) in a stated currency
• Within the prescribed time limit
• Upon the complying presentation
• Of the required and conforming
documents
Charlie Chaplin during a rally at
Wall Street in 1918
Inside the New York Stock Exchange

21. DOCUMENTARY LETTERS OF CREDIT
Parties to the transaction:
• Applicant= Buyer
• Issuing bank= Buyer’s bank or bank issuing the L/C
• Beneficiary= Seller
Law Applicable to L/Cs:
• UCC Article 5, US, domestic L/Cs US
• Uniform Customs and Practice for Documentary Credits (UCP) 600, international L/Cs
Legal Nature of the L/C:
• Not a contract
• Not a negotiable instrument
• Not a third- party beneficiary contract
• A promise ( « a definite undertaking ») by which an issuing bank promises to pay to a
beneficiary
• Gives the beneficiary a statutory right to enforce the L/C against the issuing bank

22. DOCUMENTARY LETTERS OF CREDIT
The Independence Principle of L/Cs::
• An underlying sales contract between Seller and Buyer
• An agreement between Buyer and Issuing bank
• The Issuing bank’s resulting « undertaking » to pay Beneficiary
provided certain documents required by Buyer are conform with
the terms and conditions of the L/C:
• Except if L/C is fraudulent, forged, or fraud in the transaction
in the underlying sales contract
• Issuing bank not concerned with quality or condition of goods
• Issuing banks have no obligation to inspect goods
• Issuing banks have the obligation to inspect documents

23. DOCUMENTARY LETTERS OF CREDIT (L/C)
THE PROCESS:
• Buyer applies to L/C with issuing bank,
and provides instructions and
conditions for bank to pay
• Once L/C issued, sent to Seller’s bank
(advising bank) who advises Seller of
L/C
• Seller must then comply with Buyer’s
requirements re manufacturing and
producing documents according to L/C
• Presentation of Seller’s documents
within 21 days of date of shipment
• Seller’s documents examined using the
Rule of Strict compliance
• If documents conform to L/C
requirements, issuing bank will pay
• If documents do not comply, issuing
bank will reject them , using the UCP
guidelines for rejecting or dishonoring a
presentation
• Discrepancies may be cured or waived
by Buyer. If not , issuing bank will not
pay
Danske Bank

24. LETTERS OF CREDIT
CONFIRMED LETTERS
OF CREDIT:
• Seller may want L/C to be
confirmed by another bank
• Second bank (in Seller’s
country) will purchase
documents and honor draft
on same terms as original
issuing bank
STANDBY LETTERS
OF CREDIT:
• Issuing bank obligated to pay
beneficiary upon presentation
of documents indicating default
of applicant re payment of a
debt or performance of a
contract
• Used to:
• Guaranty performance of a service
or construction contract
• Guaranty repayment of a loan, or as
• Security for contract or other
obligation