14. LETTERS OF CREDIT: PROCEDURES 1. LETTERS OF CREDIT I.THE NEED FOR LETTERS OF CREDIT A. USES TO...
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Transcript of 14. LETTERS OF CREDIT: PROCEDURES 1. LETTERS OF CREDIT I.THE NEED FOR LETTERS OF CREDIT A. USES TO...
14. LETTERS OF CREDIT:
PROCEDURES
1
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
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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.
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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
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LETTERS OF CREDITAdvantages 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
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L/Cs Facilitate Financing
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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
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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
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LETTERS OF CREDIT
II. PARTIES TO THE TRANSACTIONA. THE BENEFICIARY
B. ACCOUNT PARTY (usually importer)
C. OPENING BANK
D. ADVISING BANK usually a correspondent of opening bank
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LETTERS OF CREDIT
E. PAYING BANKagent for opening bank
F. NEGOTIATING BANKany bank who submits documents to
the opening bank
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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.
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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
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OPENING AN L/C
The Route of a Letter of Credit
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The Path of a Letter of Credit
Negotiating
Bank
Exporter Importer
Advising Bank Opening Bank
Paying Bank Confirming Bank
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LETTERS OF CREDIT
IMPOR TER
ACCOUNTPARTY
OPENINGor ISSUING
BANK
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LETTERS OF CREDIT
EXPORTER
BENEFICIARY
ADVISINGBANK
PAYINGBANK
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OPENING LETTERS OF CREDIT
IV. OPENING A LETTER OF CREDITshould be done as soon as contract signedespecially if there is a price decline
A. Credit Factors – involves:1. beneficiary, account party and opening bank2. promise by bank to pay whenever proper documentation is presented3. Requires analysis of creditworthiness
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OPENING LETTERS OF CREDIT
1. Unsecured Credit
requires financial strength and integrity
bill of lading consigned directly to the importer
underlying goods not used as collateral
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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
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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
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OPENING AN L/C
C. REQUIREMENTS FOR THE OPENING BANK
1. Receipt of Application2. Advice to Beneficiary3. Amendments
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LETTERS OF CREDIT:CONTENTS
V. CONTENTS
A. Typical Information1. Place/date2. Names of Account
party/beneficiary3. General description of
merchandise4. Tenure of the draft5. Paying bank6. % amount of draft
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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?
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LETTERS OF CREDIT:PAYMENTS
VI. PAYMENTS
A. Action by beneficiary
B. Checking of documents
C. Common discrepancies
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DOCUMENTARY L/CS
VII. DOCUMENTARY L/C EXAMINATION PROCEDURESA. Schedule
B. L/C and the drawing
C. Commercial invoice
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DOCUMENTARY L/CS
D. Marine bill of lading
E. Other documents
F. Actions in Cases of Document Discrepancies
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