B-letter of Credit

8/6/2019 B-letter of Credit

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LETTER OF CREDITLETTER OF CREDIT

(L/C)

Budiman Arif (AK 6D)


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Definition of Letter of CreditDefinition of Letter of Credit(L/C)(L/C)

A written commitment to pay,by a buyer's or importer'sbank (called the issuing bank)to the seller's or exporter'sbank (called the acceptingbank, negotiating bank, orpaying bank).


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Parties involved in L/CParties involved in L/Ctransaction:transaction:

The Applicantis the party that arranges for the letter of creditto be issued.

The Beneficiary is the party named in the letter of credit inwhose favor the letter of credit is issued.

The Issuing or Opening Bankis the applicants bank thatissues or opens the letter of credit in favor of the beneficiary

and substitutes its creditworthiness for that of the applicant. An Advising Bankmay be named in the letter of credit to

advise the beneficiary that the letter of credit was issued. Therole of the Advising Bank is limited to establish apparentauthenticity of the credit, which it advises.

The Paying Bankis the bank nominated in the letter of creditthat makes payment to the beneficiary, after determining

that documents conform, and upon receipt of funds from theissuing bank or another intermediary bank nominated by theissuing bank.

The Confirming Bankis the bank, which, under instruction fromthe issuing bank, substitutes its creditworthiness for that ofthe issuing bank. It ultimately assumes the issuing bankscommitment to pay.


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Typically the documentsTypically the documentsrequested in a Letter of Creditrequested in a Letter of Credit

Financial Documents Bill of Exchange, Co-accepted Draft Commercial Documents

Invoice, Packing list Shipping Documents

Transport Document, Insurance Certificate, Commercial,Official or Legal Documents

Official Documents License, Embassy legalization, Origin Certificate,

Inspection Certificate, Phytosanitary certificate

Transport Documents Bill of Lading (ocean or multi-modal or Charter party),

Airway bill, Lorry/truck receipt, railway receipt, CMC Otherthan Mate Receipt, Forwarder Cargo Receipt, DeliverChallan...etc

Insurance documents Insurance policy, or Certificate but not a cover note.


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Letter of Credit Process:Letter of Credit Process:


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The example: You want to buy $50,000 worth of radios from SeoulManufacturing, which agrees to sell the merchandise and gives you60 days to pay it with the condition that you provide them with a 90days letter of credit for the full amount. The steps to get the LC wouldbe as follows:

1)You go to First American Bank and request a $50,000 letter of creditwith Seoul Manufacturing as a beneficiary.

2)The bank goes through its underwriting process. Although the bank isnot advancing money, they are extending credit on your behalf andare taking on a contingent liability. If your company qualifies from a

credit standpoint the LC is issued. 3)Even if your company does not qualify for credit, you can still get an LC

if you are willing to put cash collateral CD secured letters of creditare very common for small business .

4)The bank sends a copy of the letter of credit to First Seoul Bank, whichlets the vendor knows and the merchandise is shipped.

The letter of credit will indicate that payment shall be made as soon asSeoul Manufacturing can present proof of shipping.

If the letter of credit that your vendor requires is not tied to a particulartransactions, but they are asking for a guarantee that makes surethat you will not default. They are probably asking for a Stand-Byletter of credit or a Revolving letter of credit. These types of LCs

are usually for a longer term. Usually a year and are the vendorsguarantee that they will get paid.


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TYPES OF LETTERS OF CREDITTYPES OF LETTERS OF CREDIT

Irrevocable Unconfirmed Confirmed

Standby Letters of Credit Revolving Letter of Credit Transferable Letter of Credit Back-to-Back Letter of Credit

LC
http://smb//tmp/Desktop/SampleLC.dochttp://smb//tmp/Desktop/SampleLC.doc


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Advantages of Using Letters ofAdvantages of Using Letters ofCreditCredit

For Exporters

Guaranteed payment upon presentation of the documents specifiedin the terms of the letter of credit.

Reducing the production risk, first of all, for the situations when thebuyer cancels or changes his order.

The ability to structure the delivery schedule according to theexporter's interests.

The chance to obtain financing for production or purchase of goods(pre-export finance).

The chance to get financing in the period between the shipment ofthe goods and receipt of payment (especially, in case of delayedpayment).

The buyer cannot refuse to pay due to a complaint about the goods.

The importer must raise any complaints/claims about the delivered

goods separately from the letter of credit, which provides theexporter with a significant advantage in resolving such issues.


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Advantages of Using Letters ofAdvantages of Using Letters ofCreditCredit

For Importers

The possibility to structure the payment plan in thecontract according to the importer's interests.

Certainty that the payment will be made only uponpresentation of the documents confirming shipment ofthe goods.

The use of a letter of credit allows the importer to avoid orreduce pre-payment.

The seller must fulfill all terms of the contract, as indicatedin the letter of credit (shipment of the goods, meetingdelivery terms on stock, amount, and deadlines) inorder to receive the payment.

Having opened a letter of credit, the importer proves hisability to pay and can count on more favourablepayment terms in the future.


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Disadvantages of UsingDisadvantages of UsingLetters of CreditLetters of Credit

For Exporters

Strict compliance is required for payment. Unless allthe documents are 100% compliant with the terms

and conditions of the L/C the bank will not issuepayment. Still subject to political risk of the country the L/C is

issued from Subject to the financial strength and stability of the

Issuing bank More cumbersome - requires a high level of expertise

to successfully navigate the process More expensive than other methods of payment Receiving, negotiating, and other fees associated

with L/C can be expensive.The paperwork can be

very time consuming and cumbersome to produce


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Disadvantages of UsingDisadvantages of UsingLetters of CreditLetters of Credit

For Importers

Tie up the business credit line Unless currency-hedging strategies are utilized,

the actual cost of the goods can increase doto vulnerability to currency fluctuations. Costs involved with issuing, negotiating, and

other fees (like amendments), can make L/Cexpensive.

Sellers bank control the shipping documents The goods shipped may not conform (inferior

quality for example) to the order (rememberL/Cs are strictly about documents and areseparate from the actual goods). Unless the

seller makes good the only recourse isthrough legal proceedings.


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Risk situations in Letter ofRisk situations in Letter ofCredit transactionsCredit transactions

Fraud Risks The payment will be obtained for nonexistent or

worthless merchandise against presentation by thebeneficiary of forged or falsified documents.

Credit itself may be forged.

Sovereign and Regulatory Risks Performance of the Documentary Credit may be

prevented by government action outside the control of theparties.

Legal Risks Possibility that performance of a Documentary Credit

may be disturbed by legal action relating directly to theparties and their rights and obligations under theDocumentary Credit


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Force Majeure and Frustration of Contract Performance of a contract including an obligation

under a Documentary Credit relationship is prevented byexternal factors such as natural disasters or armed conflicts

Risks to the Applicant Non-delivery of Goods, Short Shipment, Inferior Quality,

Early /Late Shipment, Damaged in transit, Foreignexchange, Failure of Bank viz Issuing bank / Collecting Bank

Risks to the Issuing Bank

Insolvency of the Applicant, Fraud Risk, Sovereign andRegulatory Risk and Legal Risks

Risks to the Reimbursing Bank no obligation to reimburse the Claiming Bank unless it

has issued a reimbursement undertaking.


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Risks to the Beneficiary Failure to Comply with Credit Conditions, Failure of, or

Delays in Payment from, the Issuing Bank, Credit Issued byParty other than Bank

Risks to the Advising Bank The Advising Banks only obligation if it accepts the

Issuing Banks instructions is to check the apparentauthenticity of the Credit and advising it to the Beneficiary

Risks to the Nominated Bank

Nominated Bank has made a payment to the Beneficiaryagainst documents that comply with the terms andconditions of the Credit and is unable to obtainreimbursement from the Issuing Bank


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Thank You

B-letter of Credit

Documents

Transcript of B-letter of Credit