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14. LETTERS OF CREDIT: PROCEDURES 1

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Page 1: 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

14. LETTERS OF CREDIT:

PROCEDURES

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Page 2: 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

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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Page 3: 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

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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Page 4: 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

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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Page 5: 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

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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Page 6: 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

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

Page 7: 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

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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Page 8: 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

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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Page 9: 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

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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Page 10: 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

LETTERS OF CREDIT

E. PAYING BANKagent for opening bank

F. NEGOTIATING BANKany bank who submits documents to

the opening bank

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Page 11: 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

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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Page 12: 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

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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Page 13: 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

OPENING AN L/C

The Route of a Letter of Credit

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Page 14: 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

The Path of a Letter of Credit

Negotiating

Bank

Exporter Importer

Advising Bank Opening Bank

Paying Bank Confirming Bank

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Page 15: 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

LETTERS OF CREDIT

IMPOR TER

ACCOUNTPARTY

OPENINGor ISSUING

BANK

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Page 16: 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

LETTERS OF CREDIT

EXPORTER

BENEFICIARY

ADVISINGBANK

PAYINGBANK

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Page 17: 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

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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Page 18: 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

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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Page 19: 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

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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Page 20: 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

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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Page 21: 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

OPENING AN L/C

C. REQUIREMENTS FOR THE OPENING BANK

1. Receipt of Application2. Advice to Beneficiary3. Amendments

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Page 22: 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

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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Page 23: 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

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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Page 24: 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

LETTERS OF CREDIT:PAYMENTS

VI. PAYMENTS

A. Action by beneficiary

B. Checking of documents

C. Common discrepancies

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Page 25: 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

DOCUMENTARY L/CS

VII. DOCUMENTARY L/C EXAMINATION PROCEDURESA. Schedule

B. L/C and the drawing

C. Commercial invoice

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Page 26: 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

DOCUMENTARY L/CS

D. Marine bill of lading

E. Other documents

F. Actions in Cases of Document Discrepancies

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