Basics ofLetters 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

4Who Should Take the Risk?Who Should Take the Risk?

Pre-PayPre-PayPre-PayPre-Pay

LetterLetterofof

CreditCredit

LetterLetterofof

CreditCredit

DocumentsDocumentsAgainstAgainstPaymentPayment

DocumentsDocumentsAgainstAgainstPaymentPayment

DocumentsDocumentsAgainstAgainst

AcceptanceAcceptance

DocumentsDocumentsAgainstAgainst

AcceptanceAcceptanceOpenOpen

AccountAccountOpenOpen

AccountAccount

??????Buyer TakesAll the Risk

Seller TakesAll 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 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

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A Foreign Check Does Not Represent Immediate Payment

Foreign Checks Must Be Sent Back for Collection

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Documentary CollectionsDocumentary Collections

Buyer/ImporterBuyer/Importer Seller/ExporterSeller/Exporter

Seller’s BankSeller’s BankBuyer’s BankBuyer’s Bank

Buyer/ImporterBuyer/Importer

Seller/ExporterSeller/Exporter BankBank

Seller/ExporterSeller/Exporter

Buyer/ImporterBuyer/Importer

UPSUPS

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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

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Letters of Credit

Parties to a letter of creditLetter of Credit Types

Import Export Standby

L/C cycle

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Parties to a Letter of Credit

SELLER(EXPORTER)

BENEFICIARYORGINAL BENEFICIARYSECOND BENEFICIARY

TRANSFEREEASSIGNEESHIPPERDRAWER

BUYER(IMPORTER)

ACCOUNT PARTYAPPLICANTACCOUNTEE

DRAWEE

PARTY LETTER OF CREDIT TERM

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Parties to a Letter of Credit (Cont’d)

BUYER’S BANK ISSUERISSUING BANKOPENING BANKPAYING BANK

ACCEPTING BANKDRAWEE

ISSUING BANKCORRESPONDENT

ADVISING BANKCONFIRMING BANK

TRANSFERRING BANKNEGOTIATING BANKACCEPTING BANK

PAYING BANK

PARTY LETTER OF CREDIT TERM

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Standby Commercial

Back up in case of non-payment or non-performance

Generally not expected to be drawn

Used for services/goods

“After the fact”

Primary source of payment

Used for actual goods

Somewhat simultaneous

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Standby L/C

Financial

Performance

Bid Bond

Performance Bond

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L/C

L/CL/CApplicationL/CApplication

Buyer/ ImporterApplicant - 1

Buyer/ ImporterApplicant - 1

Seller/ ExporterBeneficiary - 4

Seller/ ExporterBeneficiary - 4

Advising BankConfirming Bank

Negotiating Bank -3

Advising BankConfirming Bank

Negotiating Bank -3Issuing Bank

2Issuing Bank

2

TransactionCycle

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DOCs

DOCs

DOCs$

$

$

MerchandiseMerchandiseBuyer/ Importer - 8,9bBuyer/ Importer - 8,9b Seller/ Exporter - 5,11Seller/ Exporter - 5,11

Advising BankConfirming Bank

Negotiating Bank - 6,10

Advising BankConfirming Bank

Negotiating Bank - 6,10Issuing Bank - 7,9aIssuing 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

ABC Exporter

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

DraftTransport Document (b/l)Commercial invoiceInsurance policy or certificatePacking listCertificate of origin, weightBeneficiary 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 dateExpiry datePartial shipmentsMerchandise descriptionCan you provide documents required

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Domestic International

Known bankKnown country

riskKnown customs

and language

Unknown bank (??)

Country stabilityCurrency stabilityForeign laws and

usages

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Confirmation

ConfirmingBank

ConfirmingBank

IssuingBank

IssuingBank

Out of Business

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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 Credit Operations for the UCP 500

INCOTERMS 1990International Standby Practices 1998

(http://www.iccwbo.org)