Basics Of Letters Credit

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Basics Of Letters Credit

  1. 1. Basics of Letters of Credit
  2. 2. Agenda <ul><li>Topics to be covered </li></ul><ul><ul><li>Basic terms of Trade </li></ul></ul><ul><ul><li>Letters of Credit </li></ul></ul><ul><ul><li>INCOTERMS </li></ul></ul><ul><ul><li>Applications </li></ul></ul>
  3. 3. Terms of Trade <ul><li>Cash in Advance </li></ul><ul><li>Letter of Credit </li></ul><ul><li>Collection </li></ul><ul><li>Open Account </li></ul>
  4. 4. Who Should Take the Risk? Pre-Pay Letter of Credit Documents Against Payment Documents Against Acceptance Open Account ? ? ? Buyer Takes All the Risk Seller Takes All the Risk
  5. 5. Policy Issues <ul><li>1) Choose Method of Payment </li></ul><ul><ul><li>a. Establish country risk criteria </li></ul></ul><ul><ul><li>b. Standards for particular buyers </li></ul></ul><ul><ul><ul><li>Payment history </li></ul></ul></ul><ul><ul><ul><li>Size of transactions/credit limit </li></ul></ul></ul><ul><ul><ul><li>Credit History </li></ul></ul></ul>
  6. 6. Policy Issues <ul><li>2) Set Policies for Each Method </li></ul><ul><ul><li>a. Cash in advance – wire transfers Vs. check </li></ul></ul><ul><ul><li>b. Open account – discount policy, controls etc. </li></ul></ul><ul><ul><li>c. Documentary Collections – payment at sight </li></ul></ul><ul><ul><li>d. Letters of Credit – “Policy Letter” – L/C Checklist </li></ul></ul><ul><li>3) Enforce the Policies That You Set </li></ul>
  7. 7. A Foreign Check Does Not Represent Immediate Payment <ul><li>Foreign Checks Must Be Sent Back for Collection </li></ul>
  8. 8. Documentary Collections Buyer/Importer Seller/Exporter Seller’s Bank Buyer’s Bank
  9. 9. Buyer/Importer Seller/Exporter Bank Seller/Exporter Buyer/Importer UPS
  10. 10. A Letter of Credit is: <ul><li>A substitution of the bank’s credit for the buyer’s </li></ul><ul><li>A bank’s promise to pay upon the satisfactory compliance with the L/C’s terms and conditions by the L/C’s Beneficiary </li></ul><ul><li>Note – Banks Deal in Documents ONLY </li></ul>
  11. 11. Letters of Credit <ul><li>Parties to a letter of credit </li></ul><ul><li>Letter of Credit Types </li></ul><ul><ul><li>Import </li></ul></ul><ul><ul><li>Export </li></ul></ul><ul><ul><li>Standby </li></ul></ul><ul><li>L/C cycle </li></ul>
  12. 12. Parties to a Letter of Credit PARTY LETTER OF CREDIT TERM
  13. 13. Parties to a Letter of Credit (Cont’d) PARTY LETTER OF CREDIT TERM
  14. 14. Standby Commercial <ul><li>Back up in case of non-payment or non-performance </li></ul><ul><li>Generally not expected to be drawn </li></ul><ul><li>Used for services/goods </li></ul><ul><li>“ After the fact” </li></ul><ul><li>Primary source of payment </li></ul><ul><li>Used for actual goods </li></ul><ul><li>Somewhat simultaneous </li></ul>
  15. 15. Standby L/C <ul><li>Financial </li></ul><ul><li>Performance </li></ul><ul><li>Bid Bond </li></ul><ul><li>Performance Bond </li></ul>
  16. 16. Transaction Cycle L/C L/C L/C Application Buyer/ Importer Applicant - 1 Seller/ Exporter Beneficiary - 4 Advising Bank Confirming Bank Negotiating Bank -3 Issuing Bank 2
  17. 17. $ $ Merchandise Buyer/ Importer - 8,9b Seller/ Exporter - 5,11 Advising Bank Confirming Bank Negotiating Bank - 6,10 Issuing Bank - 7,9a DOCs DOCs DOCs $
  18. 18. Endorse the back! <ul><ul><li>Sight 20 </li></ul></ul><ul><li>Pay to the order of $ </li></ul><ul><li>Dollars </li></ul><ul><li>To </li></ul>At January 5 00 ABC Exporter 8,020.00 Eight Thousand Twenty Dollars and 00/100 Standard Chartered Bank New York, NY ABC Exporter DRAFT Drawn under Documentary Credit No. M0491110NS00616, of the Standard Chartered Bank, Seoul, Korea, dated September 17, 1999
  19. 19. <ul><li>Common Documents </li></ul><ul><li>Draft </li></ul><ul><li>Transport Document (b/l) </li></ul><ul><li>Commercial invoice </li></ul><ul><li>Insurance policy or certificate </li></ul><ul><li>Packing list </li></ul><ul><li>Certificate of origin, weight </li></ul><ul><li>Beneficiary statements </li></ul>
  20. 20. When you receive an L/C <ul><li>CHECK IT CAREFULLY!!! </li></ul><ul><ul><li>Review it ASAP </li></ul></ul><ul><ul><li>L/C mirror sales contract </li></ul></ul><ul><ul><li>Can you perform </li></ul></ul><ul><ul><li>Can you provide ALL the documents </li></ul></ul>
  21. 21. Critical Things to Look For <ul><li>Latest shipment date </li></ul><ul><li>Expiry date </li></ul><ul><li>Partial shipments </li></ul><ul><li>Merchandise description </li></ul><ul><li>Can you provide documents required </li></ul>
  22. 22. Domestic International <ul><li>Known bank </li></ul><ul><li>Known country risk </li></ul><ul><li>Known customs and language </li></ul><ul><li>Unknown bank (??) </li></ul><ul><li>Country stability </li></ul><ul><li>Currency stability </li></ul><ul><li>Foreign laws and usages </li></ul>
  23. 23. Confirmation Confirming Bank Issuing Bank Out of Business
  24. 24. Credit Issues <ul><li>As Applicant </li></ul><ul><ul><li>your Credit Worthiness </li></ul></ul><ul><ul><li>your Collateral </li></ul></ul><ul><li>As Beneficiary </li></ul><ul><ul><li>probably none </li></ul></ul>
  25. 25. Cost Issues <ul><li>As Beneficiary </li></ul><ul><ul><li>minimal cost usually </li></ul></ul><ul><ul><li>if confirmed, expect to pay </li></ul></ul><ul><li>As Applicant </li></ul><ul><ul><li>based on your credit and/or collateral </li></ul></ul><ul><ul><li>use of other bank services </li></ul></ul>
  26. 26. Where to get more information <ul><li>ICC Uniform Customs and Practice for Documentary Credits (UCP 500) </li></ul><ul><li>ICC Guide to Documentary Credit Operations for the UCP 500 </li></ul><ul><li>INCOTERMS 1990 </li></ul><ul><li>International Standby Practices 1998 </li></ul><ul><li> </li></ul><ul><li>(http://www.iccwbo.org) </li></ul>

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