Basics of LC
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Transcript of Basics of LC
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Basics of
Letters of Credit
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Agenda
Topics to be covered
Basic terms of Trade
Letters of Credit
INCOTERMS
Applications
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Terms of Trade
Cash in Advance
Letter of Credit
Collection
Open Account
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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
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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
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Policy Issues
2) Set Policies for Each Method
a. Cash in advancewire transfers Vs. check
b. Open accountdiscount policy, controls etc.
c. Documentary Collectionspayment at sight
d. Letters of Credit Policy Letter
L/C Checklist
3) Enforce the Policies That You Set
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A Foreign Check Does
Not Represent ImmediatePayment
Foreign Checks Must Be
Sent Back for Collection
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Documentary Collections
Buyer/Importer Seller/Exporter
Sellers BankBuyers Bank
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Buyer/Importer
Seller/Exporter Bank
Seller/Exporter
Buyer/Importer
UPS
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A Letter of Credit is:
A substitution of the banks credit for the
buyers
A banks promise to pay upon the satisfactory
compliance with the L/Cs terms and
conditions by the L/Cs Beneficiary
Note Banks Deal in Documents ONLY
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Letters of Credit
Parties to a letter of credit
Letter of Credit Types
Import
Export
Standby
L/C cycle
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Parties to a Letter of Credit
SELLER
(EXPORTER)
BENEFICIARY
ORGINAL BENEFICIARY
SECOND BENEFICIARY
TRANSFEREE
ASSIGNEE
SHIPPERDRAWER
BUYER
(IMPORTER)
ACCOUNT PARTY
APPLICANT
ACCOUNTEE
DRAWEE
PARTY LETTER OF CREDIT TERM
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Parties to a Letter of Credit (Contd)
BUYERS BANK ISSUER
ISSUING BANK
OPENING BANKPAYING BANK
ACCEPTING BANKDRAWEE
ISSUING BANK
CORRESPONDENT
ADVISING BANK
CONFIRMING BANK
TRANSFERRING BANKNEGOTIATING BANKACCEPTING BANK
PAYING BANK
PARTY LETTER OF CREDIT TERM
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Standby Commercial
Back up in case ofnon-payment or
non-performance Generally not
expected to bedrawn
Used forservices/goods
After the fact
Primary source ofpayment
Used for actualgoods
Somewhatsimultaneous
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Standby L/C
Financial
Performance
Bid Bond
Performance Bond
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L/C
L/CL/C
Application
Buyer/ ImporterApplicant - 1
Seller/ ExporterBeneficiary - 4
Advising BankConfirming Bank
Negotiating Bank -3
Issuing Bank2
Transaction
Cycle
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DOCs
DOCs
DOCs$
$
$
Merchandiseuyer/ Importer - 8,9b Seller/ Exporter - 5,11
Advising BankConfirming Bank
Negotiating Bank - 6,10
Issuing Bank - 7,9a
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Sight 20
Pay to the order of $
Dollars
To
At January 5 00
ABC Exporter 8,020.00
Eight Thousand Twenty Dollars and 00/100
Standard Chartered Bank
New York, NY
ABCExporter
DRAFT
Drawn under Documentary Credit No. M0491110NS00616, of theStandard Chartered Bank, Seoul, Korea, dated September 17, 1999
Endorse the back!
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Common Documents
Draft
Transport Document (b/l)
Commercial invoice
Insurance policy or certificate
Packing list
Certificate of origin, weight
Beneficiary statements
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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
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Critical Things to Look For
Latest shipment date
Expiry date
Partial shipments
Merchandise description
Can you provide documents required
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Domestic International
Known bank
Known country risk
Known customs andlanguage
Unknown bank (??)
Country stability
Currency stability Foreign laws and
usages
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Confirmation
ConfirmingBank
IssuingBank
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Credit Issues
As Applicant
your Credit Worthiness
your Collateral
As Beneficiary
probably none
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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
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Where to get more information
ICC Uniform Customs and Practice for
Documentary Credits (UCP 500)
ICC Guide to Documentary CreditOperations for the UCP 500
INCOTERMS 1990
International Standby Practices 1998
(http://www.iccwbo.org)