Basics of letters of credit

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Basics of letters of credit

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Basics of letters of credit

  1. 1. Basics of Letters of Credit
  2. 2. Agenda Topics to be covered Basic terms of Trade Letters of Credit INCOTERMS Applications 2
  3. 3. Terms of Trade Cash in Advance Letter of Credit Collection Open Account 3
  4. 4. Buyer Takes All the Risk Pre-Pay Letter of Credit ?? ? Documents Against Payment Seller Takes All the Risk Documents Against Acceptance Open Account Who Should Take the4 Risk?
  5. 5. Policy Issues 1) Choose Method of Payment a. Establish country risk criteria b. Standards for particular buyers • Payment history • Size of transactions/credit limit • Credit History 5
  6. 6. Policy Issues 2) Set Policies for Each Method a. Cash in advance – wire transfers Vs. check b. Open account – discount policy, controls etc. c. Documentary Collections – payment at sight d. Letters of Credit – “Policy Letter” – L/C Checklist 3) Enforce the Policies That You Set 6
  7. 7. A Foreign Check Does Not Represent Immediate Payment Foreign Checks Must Be Sent Back for Collection 7
  8. 8. Documentary Collections Buyer/Importer Seller/Exporter Buyer’s Bank Seller’s Bank 8
  9. 9. Seller/Exporter UPS Buyer/Importer Seller/Exporter Bank Buyer/Importer
  10. 10. A Letter of Credit is: A substitution of the bank’s credit for the buyer’s A bank’s promise to pay upon the satisfactory compliance with the L/C’s terms and conditions by the L/C’s Beneficiary Note – Banks Deal in Documents ONLY 10
  11. 11. Letters of Credit Parties to a letter of credit Letter of Credit Types Import Export Standby L/C cycle 11
  12. 12. Parties to a Letter of Credit PARTY SELLER ( EXPORTER) BUYER ( I MPORTER) LETTER OF CREDIT TERM BENEFI CI ARY ORGI NAL BENEFI CI ARY SECOND BENEFI CI ARY TRANSFEREE ASSI GNEE SHI PPER DRAWER ACCOUNT PARTY APPLI CANT ACCOUNTEE DRAWEE 12
  13. 13. Parties to a Letter of Credit (Cont’d) PARTY BUYER’S BANK I SSUI NG BANK CORRESPONDENT LETTER OF CREDIT TERM I SSUER I SSUI NG BANK OPENI NG BANK PAYI NG BANK ACCEPTI NG BANK DRAWEE ADVI SI NG BANK CONFI RMI NG BANK TRANSFERRI NG BANK NEGOTI ATI NG BANK ACCEPTI NG BANK PAYI NG BANK 13
  14. 14. Standby Back up in case of non-payment or non-performance Generally not expected to be drawn Used for services/goods “After the fact” Commercial Primary source of payment Used for actual goods Somewhat simultaneous 14
  15. 15. Standby L/C Financial Performance Bid Bond Performance Bond 15
  16. 16. Transaction Cycle Buyer/ Importer Applicant - 1 Seller/ Exporter Beneficiary - 4 L/C L/C Application L/C Issuing Bank 2 Advising Bank Confirming Bank Negotiating Bank -3 16
  17. 17. Buyer/ Importer - 8,9b DOCs Merchandise Seller/ Exporter - 5,11 $ $ DOCs Issuing Bank - 7,9a DOCs $ Advising Bank Confirming Bank Negotiating Bank - 6,10 17
  18. 18. DRAFT At Sight ABC Exporter Pay to the order of January 5 $ Eight Thousand Twenty Dollars and 00/100 20 00 8,020.00 Dollars Drawn under Documentary Credit No. M0491110NS00616, of the Standard Chartered Bank, Seoul, Korea, dated September 17, 1999 To Standard Chartered Bank ABC Exporter New York, NY Endorse the back! 18
  19. 19. •Common Documents Draft Transport Document (b/l) Commercial invoice Insurance policy or certificate Packing list Certificate of origin, weight Beneficiary statements 19
  20. 20. When you receive an L/C CHECK IT CAREFULLY!!! Review it ASAP L/C mirror sales contract Can you perform Can you provide ALL the documents 20
  21. 21. Critical Things to Look For Latest shipment date Expiry date Partial shipments Merchandise description Can you provide documents required 21
  22. 22. Domestic Known bank Known country risk Known customs and language International Unknown bank (??) Country stability Currency stability Foreign laws and usages 22
  23. 23. Confirmation Out of Bu siness Issuing Bank Confirming Bank 23
  24. 24. Credit Issues As Applicant your Credit Worthiness your Collateral As Beneficiary probably none 24
  25. 25. Cost Issues As Beneficiary minimal cost usually if confirmed, expect to pay As Applicant based on your credit and/or collateral use of other bank services 25
  26. 26. Where to get more information ICC Uniform Customs and Practice for Documentary Credits (UCP 500) ICC Guide to Documentary Credit Operations for the UCP 500 INCOTERMS 1990 International Standby Practices 1998 ♦♦♦ (http://www.iccwbo.org) 26

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