payment method tres pratiq

Module2-3:TradePaymentMethodsParticipant

802-80

TradePaymentMethods

Overview

Thispartcoversthefollowingtopics:

Cashinadvance Openaccount Onconsignment Draftordocumentarycollection

LetterofCredit

Objectives

Bytheendofthispart,youwillbeableto:

Identifypaymentoptionsforvarioustradetransactions Recognize the risks and advantages of payment options for both

buyersandsellers

DistinguishbetweenmajorcategoriesofLettersofCredit Analyze the application of different types of Letters of Credit to

internationaltradetransactions


812-81

Introduction

Ininternationalcommercialprocedures,thedealersandbuyersshallwanttomakethesaleunderthebestconditionsforthemselves.Whilethebuyerwillvoteforthecheapestandlongesttermedpaymenttypeinpayingthecostofthegoods,thedealerswillprefercashpayment,whichisthemostadvantageouspaymenttypeandthetypesofcollectionwiththeleastrisks.

Theagreementofbuyersanddealersonhowandinwhichtermthepaymentwillbemadeisaquitecriticalperiodforbothsides.

Inthispart,paymentmethodswillbedealtuponindetails,andtheirrisksandsuperioritiesfordealersandbuyerswillbeevaluated.

Scenario:WilltheExporterbePaid?

Youareintheimportbusiness.Youneedtoplaceanorder,andyousupplierinYugoslaviahasaskedforeithercashinadvanceorpaymentatsightinYugoDinarbyconfirmed,irrevocableletterofcreditwithallchargesforyouraccount.Doesthissoundlikeagooddeal,orwillyounegotiate!

Okay,nowyouareintheexportbusiness.YouhaveanorderfromBulgaria,andthecustomerofferstopayinBulgarianLevaandbilledupon60-dayopenaccountorshippedon60-daysightdraft,documentsagainstacceptance(SD/DA)terms.Isthisacceptable,orwillyounegotiate?

Nowthatyouarebothimportingandexporting,afirminBosniaofferstotrade$10.000worthofbeautifulcottonblousesforindustrialsewingmachinesofthesamevalue.Dontworryaboutdutiesorquotasthemanagersays.Theywontapplybecausethisisabarterdeal.Willyouordertheblousesandsendthesewingmachines?

Thispartwillgiveyouideasabouthowtodealwiththesesortsofissues.Ifyoudontknowhowtodealwiththem,anddonthaveaverygoodbankertoadviseyou,yourbusinesswillbelimitedtothemostroutinetransactions.Getinvolvedinuniqueorcomplexdealswithoutanunderstandingofhowtodealwithmoneymatters,oraverygoodadvisorandyoucouldlooseyourshirt,yourtrousersandmore.


822-82

TradePaymentMethods

Theexporterthatpreparesthegoodsandgetsthemreadyfordispatch,asagreedwiththeimporter,hastothinkofthepaymenttermsandafinancingprogram,ashe/shewillexperienceseriousdifficultiesifhe/sheisnotpaid.Therefore,itisnecessaryfortheexportertohavesufficientinformationaboutthedifferentmethodsofpaymentavailabletohim/her.

Themainpaymentmethodsinforeigntradearecashinadvance,openaccount,onconsignment,draftordocumentarycollectionandletterofcredit.Inthispart,themaincharacteristicsofeachpaymentmethodareexplainedandtheadvantagesandrisksforeachonearegiven.Thusenablingonetochoosethebestmethodforthetransaction.

CashinAdvance

TheCashinAdvanceorAdvancePaymentmethodallowsthebuyertopaycashinadvancetotheseller.Payinginadvancegivesthegreatestprotectionforthesellerandputstheriskonthebuyer.Paymentdoesnotguaranteetheshipmentordeliveryofthegoodsfromtheseller.Therefore,thebuyerwillrarelypaycashupfrontbeforereceivinganassurancethatthegoodswillbeshippedandthatthequalityandquantityofthegoodsorderedwillbedelivered.


832-83

Figure1:ProcessofCashinAdvanceMethod

Althoughthismethodofpaymentisnotuncommon,thesellerrequiringfullpaymentinadvancemaycauselostsalestoaforeignordomesticcompetitorwhoisabletooffermoreattractivepaymentterms.Insomecases,however,wherethemanufacturingprocessisspecialized,lengthyorcapital-intensive,itmaybereasonabletoaskforsomeofthefullpaymentinadvance,orwithprogressivepayments.Thismethodisoftentooexpensiveandriskyforforeignbuyers,butusefulwhenshippingtopoliticallyunstablecountries,whenthebuyer'screditisunsatisfactoryorwhengoodsarecustommadetothecustomersrequirements(LatinTrade,1999).

Insomecircumstancesthispaymentmethodcanbemodifiedtoapartialpaymentinadvancewithagreeduponinstallmentsoradditionaltermsavailable.

Couldyougiveanexampletowhatkindofproblemsthebuyercouldhave?

Shipment

(AfterPayment)

BuyerPayment Payment

CashinAdvanceMethod

Paymentbeforeshipment

Seller


842-84

AdvantagesandRisksofCashinAdvanceMethod

Thecashinadvancemethodisadvantageousforthesellerasthereisnoriskforhim/her.TheadvantagesandrisksforboththebuyerandsellerareillustratedinFigure2.

Thecashinadvancemaybemostpracticalmethodif;

Thebuyerlackscreditworthiness

Thebuyerisnotabletooffersufficientsecurityforpayment

Thebuyerislocatedinaregionofpoliticand/oreconomicinstability

Theproductissospecializedthatitisspecificallymadeforthecustomerandcannotbeeasilysoldtoanothercustomer(http://www.tradeport.org/ts/trade_expert/details/payment/cash.html)

Asabuyerandasellerinwhichpositionsdoyouchoose/acceptcashinadvancemethod?

Advantages Risks

Buyer

None Nocontroloverthegoods Useofthefundsislost Sellermayrefusetoship Politicalriskintheseller

country

Goodsshippedwhen convenient Useofbuyersfunds

None

Sell

Figure2:AdvantagesandRisksfortheBuyerandSellerintheCashinAdvanceMethod


852-85

OpenAccount

Anopenaccounttransactionmeansthatthegoodsaremanufacturedanddeliveredbeforepaymentisnecessary(forexample,paymentcouldbedue14,30,or60followingshipmentordelivery).Themethodprovidesgreatflexibilityandinmanycountriessalesarelikelytobemadeonanopen-accountbasisifthemanufacturerhasbeendealingwiththebuyeroveralongperiodoftimeandhasestablishedasecureworkingrelationship.

TheflowofthegoodsandpaymentintheopenaccountmethodisillustratedinFigure3.

Theopenaccountmethodisapreferredmethodofpaymentfortheimporter,sinceitplacestheriskontheexporterorseller.Thismethodcannotbeusedsafelyunlessthebuyeriscreditworthyandthecountryofdestinationispoliticallyandeconomicallystable.However,incertaininstancesitmightbepossibletodiscountopenaccountsreceivablewithafactoringcompanyorotherfinancialinstitution(LatinTrade,1999).

Payment

(AfterShipment/Delivery)

BuyerShipmentShipment

OpenAccountMethod

Shipmentbeforepayment

Seller

Figure3:TheProcessoftheOpenAccountMethod


862-86

AdvantagesandRisksoftheOpenAccountMethod

TheOpenAccountmethodisadvantageousforthebuyerasthereisnoriskforhim/her.TheadvantagesandrisksareshowninFigure4.

Theopenaccountmethodmaybeusefullif:

Thereislong-termrelationshipandconfidencebetweenthe

buyerandtheseller

Thesellerisunderpressuretosellhisgoods

Thebuyerhasaverygoodreputationandiswell-knowninthemarket

Thebuyerissolvent

Thetwopaymentmethods,cashinadvanceandtheopenaccount,arenotsuitablewhenthebuyerandthesellerdontknoweachotherverywellorthesellerdoesntwanttoassumethecreditriskortheriskofdealingwithaparticularcountrywhenofferingpaymenttermstothebuyer.

What do you think abouthow the seller coulddecrease the risks ofopenaccountmethod?

Advantages Risks

Buyer

Controloverthegoods Payswhenconvenient

None

None Nocontroloverthegoodsorpayment

Buyermayrefusetopay

Seller

Figure4:AdvantagesandRisksofOpenAccountMethodfortheBuyerandSeller


872-87

OnConsignment

Withconsignmentsales,thesellerdoesnotreceivepaymentuntiltheimportersellsorresellsthegoods.Theproductstayswiththeimporteruntilallthetermsofthesalehavebeensatisfied.Intheconsigmentmethod,theimporteriscalledtheconsigneeandhe/sheisresponsibleforpayingforthegoodswhentheyaresold.Consignmentsalesareveryriskyandthereisnocontrolavailabletotheexporter.Obtainingsalesproceedsorreturnofthemerchandiseifitisnotsoldcanbedifficult.(http://www.tradeport.org/ts/trade_expert/details/payment/cash.html)

Payment

(AfterReselling)

BuyerShipmentShipment Reselling

Consignee

OnConsignmentMethod

Sellershipsgoodsbutretainsownership

Seller

Figure5:ProcessoftheOnConsignmentMethod


882-88

AdvantagesandRisksoftheOnConsignmentMethod

Thereareseveraladvantagesandrisksoftheonconsignmentpaymentmethod.TheseadvantagesandrisksareillustratedinFigure6.

Figure6:AdvantagesandRisksoftheOnConsignmentMethod

OnConsignmentpaymentmethodisusefulif;

Theconsigneeisreliable

Theconsigneehasagoodcredithistory

Theconsigneescountryhaseconomicandpoliticalstability

Theconsigneeisthebranchofficeofthemaincompany

Inyourbusinesslife,haveyouusedonconsignmentmethod?Ifyes,couldyou give examples of advantages and risks of that method from yourexperiences?

Advantages Risks

Paysonlywhengoodsaresold

None

Retainsownershipofthegoods

Consigneeistheintermediaryforthesale

ofgoodstothebuyer

Limitedcontrolofgoods Nocontroloverthe

consigneeswillingnesstopayforthegoods

Consignee

Seller


892-89

DraftorDocumentaryCollection

TheDraftorDocumentarycollectionmethodisemployedwheneitherthecashinadvancemethodisnotacceptabletothebuyer,ortheopenaccountmethodisnotacceptabletotheseller.WiththeDraftorDocumentaryCollectionMethod,thesellerorexportershipsthegoodsanddrawsadraftorbillofexchangeonthebuyerorimporterthroughanintermediarybank.Thedraftisanunconditionalordertomakeapaymentinaccordancewithcertainterms.Thedocumentsneededarespecifiedbeforethetitleforthegoodsistransferred(LatinTrade,1999).

Therearefourpartiesinvolvedinthedocumentarycollectionmethod:Thebuyer,collecting/presentingbank(buyersbank),thesellerandtheremittingbank(sellersbank).Also,therearefourmainstepsinthedocumentarycollectionmethod.TheprocessisshownonFigure7.

What do you think about the reason why the seller or the buyer mayacceptdraftordocumentarycollectionmethodinsteadofcashinadvanceoropenaccount?

Figure7:TheProcessoftheDraftorDocumentaryCollectionMethod

Shipment

Buyer

Draft

Payment

RemittingBank

Collecting/Presenting

Bank

1

Draft Draft

Payment Payment

3

2

DraftorDocumentaryCollectionMethod

Banksactasintermediariesbetweenthebuyerandsellerandactuponinstructionsreceived

Seller


902-90

Intheprocessofdocumentarycollectionmethod,

Firstofall,thesellersendsthedrafttotheremittingbank

Theremittingbank,asanintermediary,sendsthedrafttothecollecting/presentingbank

Thecollection/presentingbank,asanintermediary,makesthedocumentsavailabletothebuyer

Thebuyer,afterexaminethedocuments,hasthreeoptions:

topayimmediately

topayatafuturedate torefusetopayforthedraft

Whenthedraftispaid,thetitledocumentsarereleasedtothebuyersohe/shecanobtainpossessionofthegoods.Asthetitletothegoodsisnottransferreduntilthedraftispaidoraccepted,boththebuyerandsellerareprotected.However,nothingpreventsthebuyerfromrefusingadraftforpayment.

Insuchcases,theexporter,whohasalreadyshippedthegoods,facestheproblemofgettinghis/hermerchandiseback,whichmayinvolvewarehousingorinsuringthegoods,orevendisposingofthemerchandiseatthecollectionpoint.Ifthebuyerrefusesordefaultsonpaymentofthedraft,thesellermayalsohavetopursuecollectionthroughthecourts(orpossibly,byarbitration,ifsuchhadbeenagreeduponbetweentheparties).Theuseofdraftsinvolvesacertainlevelofrisk;buttheyarelessexpensiveforthepurchaserthanlettersofcredit.


912-91

SightDrafts:Iftheexporterandimporterhaveagreedthatpaymentshouldbemadeimmediatelyuponreceiptofthedraftand/orshippingdocumentsbythebuyer'sbank,thedraftissaidtobedrawnatsight(LatinTrade,1999).Asightdraftisanordersignedbythesellerinstructingthebuyertopayaspecifiedamounttotheselleruponpresentationofthedraft.

TheflowofthesightdraftisillustratedinFigure8.

Shipment

Buyer

SightDraftSightDraft

Payment

SightDraft

Payment Payment

RemittingBank

Collecting/PresentingBank

1 2 3

7

456

DocumentaryCollectionSightDraftMethod

Agreementforimmediatepayment

Seller

Figure8:TheDocumentaryCollectionProcessforaSightDraft


922-92

TimeDrafts:Ifthesellerhasprovidedcredittermstothebuyer,therebyallowingthemerchandisetobereleasedbeforepaymentisreceived;itiscalledatimedraft.Theexporterwillneedawrittenpromisefromthebuyerthatpaymentwillbemadeataspecifiedfuturedate.Whenabankreceivestimedrafts,thebankisrequestedtodeliverthedocumentsonlywhenthebuyerhasaccepted.Thebuyer'sacceptanceofthedraftishis/heragreementtopayatanagreeduponfuturedate(LatinTrade,1999).

ThetimedraftmethodisillustratedinFigure9.

Figure9:TheDocumentaryCollectionProcessforaTimeDraft

AdvantagesandRisksofDraftorDocumentaryCollectionMethod

Figure10:AdvantagesandRisksoftheDraftorDocumentaryCollectionMethod

Advantages Risks

Buyer

Mayrefusetopayoracceptthedraft Giveshimtimetosellgoods

beforehavingtopayforthem Lowcost

Goodsmaynotbeasrepresentedinthedocumentation

Knowsthattitledocumentsarecontrolledbythebank

Evidenceofindebtedness

Buyermayrefusetopayoracceptthedraft

Foreignexchangerisk CountryspoliticalriskSeller

Shipment

Buyer

TimeDraftTimeDraft TimeDraft

RemittingBank

Collecting/PresentingBank

1 2 3

7

456

AcceptedTimeDraft

AcceptedTimeDraft

AcceptedTimeDraft

DocumentaryCollectionTimeDraftMethod

Agreementforfuturedatepayment

Seller


932-93

Thereareseveraladvantagesandrisksofdocumentarycollectionmethodforthebuyerandseller.TheseadvantagesandrisksareillustratedinFigure10.

LetterofCredit

TheLetterofCredithasbeenakeystoneofinternationaltradeformanyyears.Itcontinuestoplayanimportantroleinworldtradetoday.Withthevariousalternativepaymentmethodsavailabletobuyersandsellersofgoodsorservicestoday,whyistheLetterofCreditthemostcommonpaymentmethod?Asimpleanswermaybethatthesellerwillnotshipwithoutabank'sassuranceofpayment.Whilethisisamajorfactor,theLetterofCreditoffersotheradvantagesforthebuyerandseller.Foranycompanyenteringtheinternationalmarket,theLetterofCreditisanimportantpaymentmechanismthatneedstobeunderstood.

WhatisaLetterofCredit?

ALetterofCreditisadocumentissuedbyabankatthebuyersrequestinfavoroftheseller;itguaranteesthatthebuyerwillpaytheagreedamountofmoneytothesellerwithinaspecifiedperiodoftime,providedthatthesellerconformstotheproductspecificationsanddocumentrequirementsofthebuyer.(http://internet.ggu.edu/~emilian/bankreq.html#LC).

TheLetterofCreditisaspecialized,technicaltoolthatisappliedwhenpayingforashipmentofgoodsorservicesfromonepartytoanother.

Figure11showsthegeneralflowofaLetterofCredit.

What do you know about Letter of Credit and its differences from otherpaymentmethods?


942-94

Figure11:TheProcessoftheLetterofCreditMethod

BothapplicantsandbeneficiariesprofitfromthedistinctuniquenessofaLetterofCredit.However,boththesepartiesmustbeawareofwhataLetterofCreditdoesnotdo:

Itdoesnotprovideatotalassuranceofpaymenttoanyone.ALetterofCreditguaranteespaymentonlyifitstermsandconditionsaresatisfiedbypresentingthenecessarydocuments.Thevalueofsuchaguaranteedependsuponthestabilityofthebankprovidingitsundertakingandthe

Theletterofcreditreferstothedocumentsrepresentingthegoodsnotthegoodsthemselves.

Banksarenotinthebusinessofexamininggoodsonbehalfoftheircustomers.

WhataLetterofCreditisNot?

Buyer

Payment

DocumentsDocuments

Payment

Shipment

IssuingBank

AdvisingBank

Documents

Payment

LetterofCreditMethod

Bankobligationtopay

Seller

1

333

2 2 2


952-95

politicalandforeignexchangestabilityofthecountrywherethebankissituated.

Itdoesnotgiveaguaranteethatthegoodsdepictedinthepresentationdocumentshavebeendelivered.Banksdontdealwithgoodsandservices;theydealwithdocumentsrelatedtotheLetterofCredit.Thequantityandqualityofthegoodsshippeddependsuponthehonestyandintegrityofthesellerthathasmanufacturedorpackagedthegoodsandorganizedthedelivery.

ThebuyermaystipulatethattheLetterofCreditbeaccompaniedbylaboratorytestcertificates,inspectioncertificatesorotherdocumentsthatconfirmthequalityorquantityofthegoods.Generally,thebuyerandselleragreeinadvanceonwhichpartyisresponsibleforthesumoftheseservices.

Thebuyersandsellershonestyareparamountinanyexchangeofgoodsorservicesregardlessofthepaymentmethod.Whenpreparingashipmentcoveredunderaletterofcredit,itisimportanttocloselyfollowtheinstructionsintheletterofcredit.Theletterofcreditwillexplainexactlyhowtopreparethedraft,howthecommercialinvoicemustbeprepared,whatdocumentsmustbepreparedandattachedtothedraftforpayment,andbywhatspecifieddeadlinethesellermustshipthegoodsandpresentthedocumentsforpayment.Accuratenessisextremelyimportant.

Whatdoyouthinkabouttheadvantagesoftheletterofcreditsinstructions?

Tradeinvolvesbuyersandsellersseekingtoexchangegoodsorservicesdespitetheirdifferencesinlanguage,nationalcustom,creditprocedures,andaccountingpractices.Historically,merchantshavelookedforwaysoflesseningthesedifferencesandsmoothingtheprogressoftrade.ThespecialprotectionandopportunitiesofferedbyLettersofCreditrelatetobothdomesticandinternationaltrade.

LetterofCreditsUsefulnessinInternationalTrade


962-96

PartiesandTermsinLettersofCredits

TounderstandLettersofCreditexactly,thepartiesandtermswhichareusedinLettersofCreditshouldbeexamined.

TheParties

ThepartiesconcernedwithaLetterofCreditaredescribedbelow:

Applicant:ThepartythatorganizesfortheLetterofCredittobeissued,usuallythebuyer(importer)inacommercialtransactionortheborrowerinafinancialtransaction.

Beneficiary:ThepartynamedintheLetterofCreditinwhosefavortheLetterofCreditisissued,itisgenerallytheseller(exporter)inacommercialtransactionorthecreditorinafinancialtransaction.

IssuingBank:TheApplicantsbankthatissuesitsundertakingtotheBeneficiaryintheformofaLetterofCredit.

AdvisingBank:Thebank,usuallyintheBeneficiaryscountry,whichinformstheBeneficiarythatanotherbankhasissuedaLetterofCreditintheirfavor.

LetterofCreditTermsandConditions

Thefollowingtermsandconditionsarebasictomostlettersofcredit:

DraftLettersofCreditusuallynecessitatethattheBeneficiarydrawadraftontheIssuingBank.Theperiodoftimefromthedateonwhicheitherthecomplyingdocumentsarepresentedorthedraftisdrawn,tothedateonwhichpaymentispayableisthetenorofthedraft.Ifthedraftispayableuponpresentation,thedraftwillbedrawnpayableatsight.


972-97

Ifthedraftispayable,forexample,30daysafterpresentationofcomplyingdocuments(30dayssight)or30daysafterthedatethedraftisdrawn(30daysdate),thedraftisatimedraft.Timedraftsmaybedrawnforanynumberofdays.Foreaseinfinancing,daysareusuallyexpressedin30dayincrements,i.e.,30,60,90,120,150,180days.TheaccepteddraftistheunconditionalobligationoftheAcceptingBanktopayatmaturity.WhendraftsareacceptedbyanAcceptingBanktheytakeonspecialproperties.

ExpirationDateALetterofCreditshouldcontainastatedexpirydate.TheBeneficiaryisrequiredtopresentthedraft(s)anddocumentstotheIssuingBankoraNominatedBankonorbeforethatdate.UndertheUniformCustomsandPracticeforDocumentaryCreditsAct(UCP),publishedbytheInternationalChamberofCommerce(andincorporatedbyreferenceinmostcommerciallettersofcredit),iftheexpirationdatefallsonadaywhenbanksattheplaceofpresentationareclosed,theexpirationdateisextendedtothenextbusinessday.LettersofCreditexpireatthetimesandlocationsspecifiedintheLetterofCredit.

LatestShippingDateMostCommercialLettersofCreditcontainalatestshippingdate.Thedocumentsconfirmingshipmentmustnotbedatedafterthatdate.Whenonboardtransportationdocumentsarerequired,thedateindicatedintheonboardnotationonthetransportdocumentsisconsideredtobethedateofshipment.

MarineBillsofLadingareissuedineitherShippedonBoardorReceivedforShipmentform.WhenaLetterofCreditspecifiesmarineoroceanonboardbillsoflading,onboardmaybeevidencedby:

Abillofladingbeingissuedusinganonboardform;or

Abillofladingcarriyinganonboardnotation.Thisnotation(oftenasuperimposedstamp)mustbedated.Theonboarddate(the


982-98

shippingdate)cannotbelaterthanthelatestshippingdatespecifiedintheLetterofCredit

UnlesstheLetterofCreditotherwisestates,theUCPrequiresthatmarinebillsofladingshowthatthegoodsareonboard.ThismeansthattheBeneficiarymusteitherprovideanonboardbillofladingorhavethecarriersonboardnotationputonthebilloflading.

LatestDateforPresentationUnlessthecreditstipulatesotherwise,theUCPrequiresthatdocumentsbepresentedwithin21daysofthedateofshipmentoratanothersuchperiodstatedintheLetterofCredit.ForMarineBillsofLading,theonboarddateisseenastheshipmentdate.

CommercialLettersofCreditareoftenissuedwithalatestshippingdatethatismorethan21dayspriortotheLetterofCreditexpirationdate.ThisisduetothefactthatthemostcommonamendmenttoacommercialLetterofCreditistoextendtheshippingdate.Theadditionalperiodpermitstheshippingdatetobeadjustedwithouttheexpirationdatebeingextended.Theadditionaltimeisnotacureperiodfordocumentsunderdiscrepancy.

UCP500:TheletterofcreditprocesshasbeenstandardizedbyasetofrulespublishedbytheInternationalChamberofCommerce(ICC).TheserulesarecalledtheUniformCustomsandPracticeforDocumentaryCredits(UCP)andarecontainedinICCPublicationNo.500.

AnyideaaboutUCP?


992-99

BasicProceduresforEstablishingaLetterofCredit

Thebasicprocedureusedinaletterofcredittransactionisshownbelow.Itshouldbenoted,however,thatforotherSpecificletterofcreditdifferentproceduresareused.

Thebuyerandsellerdecideontheterms,suchasthemeansoftransport,periodofcreditonhand,finaldateofshipmentandtheapplicableincotermtobeused

Thebuyerappliestothebankforaletterofcredittobeissued

Afterassessingthebuyerscreditrating,theissuingbanksendstheletterofcredittotheadvisingbank

Theadvisingbankestablishesthegenuinenessoftheletterofcreditusingsignaturebooksortestcodes,thentheysendtheletterofcredittotheseller

Figure12:FlowoftheIssuanceofaLetterofCredit*ThisfigureisadoptedfromTDBankFinancialGroup

Applicant/Importer Beneficiary/Exporter

IssuingBank Advising/ConfirmingBank

RequesttoAdviseandpossiblyconfirmthe

LetterofCredit

3

Purchase&SalesAgreement

IssuanceofaLetterofCredit

AdvisingBank

IssuingBank

1

RequestforaLetterofCredit

24

AdviceofLetterofCredit


1002-100

ThesellerreviewsalltheconditionsspecifiedintheletterofcreditandIftheycannotfulfillanyoftheterms,theywillaskthebuyertoadjusttheletterofcredit.Whenthefinaltermsaresettled,thesellershipsthegoodstothespecifiedportorlocation

Aftershippingthegoods,thesellerobtainstherequireddocuments.Thedocumentsarepresentedtoabank,inmostcasestheadvisingbank(priortopresentingthedocumentstothebank,thesellershouldensuretherearenoinconsistencieswiththeletterofcredit,andifthereareamendthedocumentswherenecessary)

Theseller'sadvisingbankreviewsthedocuments.Iftheyareinorder,itwillforwardthemtothebuyer'sissuingbank.Iftheletterofcreditisconfirmed,theadvisingbankwillpaytheseller(cashorabankers'acceptancecheck)

Oncethebuyer'sissuingbanktakesdeliveryofandreviewsthe

5 7

Payment

ShipmentofGoods

PaymentunderaLetterofCredit

2

Documents

6Payment

3Documents

Payment

4

Documents

Applicant/Importer

Advising/ConfirmingBank

AdvisingBank

IssuingBank

IssuingBank

Beneficiary/Exporter1

Figure13:PaymentunderaLetterofCredit*ThisfigureisadoptedfromTDBankFinancialGrup


1012-101

documents,iteitherpaysiftherearenoinconsistencies;orsendsthedocumentstothebuyeriftherearediscrepanciesfortheirreviewandapproval

Afterapplicantreviewsandacceptsthedocuments,thebeneficiaryreceivespaymentfromtheadvisingbank

Theissuingbankpaysfortheadvisingbankforthegoodsaccordingtotheletterofcredit

Finally,theapplicantpaystheissuingbankforthegoods

DocumentaryRequirements

ToeasethehandlingofdocumentspresentedunderaCommercialLetterofCreditsubjecttotheUCP,unlessotherwisestipulated:

Draftsshould:

Invoicesshould:

Draftisdrawnonwhom?

BeissuedbytheBeneficiarynamedintheletterofcredit BeissuedtotheApplicant DescribethegoodsandshowthepricesandtermsasdetailedintheLetterofCredit NotexceedtheLetterofCreditamountoritsremainingbalance,exceptinUCP500

BedrawnbytheBeneficiaryonbehalfofthepartiesspecificiedintheLetterofCredit NotexceedtheLetterofCreditamountoritsremainingbalance NotbepayableorendorsedtopartiesotherthantheBeneficiaryortheissuingorthe

nominatedbank

Beinnegotiableform,endorsedbytheBeneficiaryasnecessary RefertotheLetterofCredit


1022-102

Insurancedocumentsshould:

Ifotherdocumentsarerequiredsuchasweightlists,consularinvoices,certificatesofquantityorquality,andthelike,theymustbeissuedandpresentedinaccordancewiththeLetterofCredit.AlldocumentsmustcomplywiththeLetterofCreditandbeconsistentwitheachother.Alldocuments,unlessotherwisestated,mustbeoriginal,anddocumentsrequiredtobecertifiedetc.mustbesignedorproperlyauthenticated.

StrictlycomplyingdraftsandotherdocumentsmustbepresentedundertheLetterofCreditonorbeforetheexpirydateandwithinthepresentationperiodstatedintheLetterofCredit.Ifnoperiodisstated,documentsmustbepresentedwithin21daysofthedateofissuanceofthebillsofladingorothertransportdocuments.

AmendmentofaLetterofCredit

Ifthesellerdoesn'tagreewiththetermsoftheLetterofCredit,thebuyerwillnormallyreceivearequestforanamendment.AnymodificationtoanissuedLetterofCreditisknownasanamendment.

ForthesellertoalterthetermsnotedonanIrrevocableLetterofCredit,itmustaskforanamendmentfromthebuyer.Theamendmentprocedureisasfollows:

CovertherisksstatedintheLetterofCredit Cover,atminimum,110%ofthecost,insuranceandfreight(CIF),orcarriageand

insurancepaid(CIP)valueoftheshipment BecountersignedandiftheassuredisotherthantheConfirming,Issuingbankor

buyer,beappropriatelyendorsed,orendorsedinblank

Bepresentedinfullset(s)(allrelevantdocuments) Beinforceasofadatenotlaterthanthedateappearingonthetransportdocumentor

onboardnotation

Cover110%ofthecost,why?


1032-103

The seller requests a modification or amendment of questionabletermsintheletterofcredit;

Ifthebuyerandissuingbankagreetothechanges,theissuingbankwillchangetheletterofcredit;

The buyer's issuing bank notifies the seller's advising bank of thechange/s;

Theseller'sadvisingbanknotifiesthesellerofthechange/s.

(CreditResearchFoundation)

AdvantagesandRisksoftheLetterofCreditMethod

TheadvantagesandrisksoftheletterofcreditmethodareillustratedinFigure14.

Could you discuss the advantages and risks of amendment in a letter ofcredit?


1042-104

AdvantagesandtheRisksoftheLetterofCreditMethod

Figure14:AdvantagesandRisksoftheLetterofCreditMethod

ACaseaboutLetterofCredit

Theclassicsituationinwhichaletterofcreditisusedisdescribedasfollows.CompanyA,locatedinRomania,wantstopurchaseapieceofminingequipmentfromCompanyB,locatedinCroatia.CompanyBisunwillingtoshiptheequipmentwithoutbeingpaidinadvance.ItisconcernedthatCompanyAmightbeunabletopayfortheequipment,anditisnotwillingtotrustcredit

Advantages Risks

Buyer

Guaranteethatitsbankwillrefusepaymentunlessthesellercomplieswiththetermsandconditionsoftheletterofcredit

Iftheselleriswillingtoallowthebuyerextendedterms,thebuyermayorganizethepaymentforafuturedate

ThroughtheuseofaBankersAcceptance,thebuyermayfinancethegoodsuntiltheyaremarketed

Bythedocumentscalledfor,thebuyercanseektominimizetherisksinnotreceivingthegoodsordered

Banksdealonlywithdocuments.Thegoodsmaynotbethesameasstatedinthedocuments

Thebankscreditworthinessmustbetakenintoaccount

TobeabletoobtainfinancingforthepurchaseormanufactureofgoodsthatwillbeshippedunderLC

Thesellerwillreceivefundsshortlyafterpresentationofshippingdocumentstothebank

Thesellercanreducetheriskthatpaymentforthegoodsmightbedelayed

ThesellersdocumentsmustcomplystrictlywiththetermsandconditionsoftheLCtoentitlethesellertopayment

Thesellerisexposedtothecommercialriskthatthebankprovidingitsundertakingisunwillingandunabletoperform

Thesellerassumeanypoliticalandforeignexchangeriskaffectingtheissuingbanksobligation

Seller


1052-105

reportsfromRomania.ItmightshiponaCODbasis,butthatwouldleavetheminapositionthatiftheequipmentwererejectedondeliveryinRomania,CompanyBwouldhavetotrytore-sellitinRomaniaorshipitbacktotheCroatia.Ineithercase,itwouldlosemoneythatitcouldonlygetbackifitwereabletowinacasesuccessfullyagainstCompanyA(whomaybeinsolvent).However,thecasewouldtakeplaceinaforeigncourtsystemandthiswouldcauseanumberofproblemsforCompanyB.CompanyAisnotwillingtopayinadvancebecauseithassimilarworries.Bmightbecomeinsolvent,oritmightnotship,leavingthebuyertotrytorecouplossesinaforeignlegalsystem.

Aletterofcreditgivesbothpartiessomeguaranteeofafairtradetransaction.Thebuyerwillgetitsbanktoissuealetterofcredit.Thisletterwillstatethatthebankwillhonoradraftdrawnagainstthebanktotheagreedamount,ifthedraftisaccompaniedbycertainspecifieddocuments,oneofwhichwillbeabillofladingshowingthatthegoodshavebeenloadedonashipgoingtoaspecifiedRomaniaportandwhichwillgivethebuyertherightpossessionofthegoodsuponarrival.Withaguaranteefromasound,solventestablishmentthatitwillbepaidassoonasthegoodsareshipped,CompanyBcanshipwithminimalrisk.

CompanyAissimilarlyprotected.Itdoesn'thavetopayuntilthegoodshavebeenshippedandareoutoftheseller'scontrol.Thebankthatissuestheletterofcreditcanprotectitselfinseveralways.ThesimplestistohaveCompanyAputthefaceamountoftheletterofcreditinablockedaccountfromwhichthebankcanwithdrawfundswhentheletterisdrawnupon.Ontheotherhand,itcanissuetheletterofcreditonthesamebasisasifitwasgivingCompanyAaloan,satisfyingitselfastotheapplicant'screditandperhapstakingcollateral.Inthiscase,fundsdisbursedundertheletterofcreditwouldaccumulateinterestatthenormalrateofloansuntilrepaid.

IfCompanyBisunwillingtotrustthebuyer'sbank(ofwhichitmayneverhaveheard)itcanrequirethatabankwhichitdoestrustactasconfirmingbody


1062-106

oftheletterofcredit.Theconfirmingbodywillbeabankthatknowsandtruststheissuerandperhapshasacorrespondentbankingrelationshipwiththem.Theconfirmingbodywillmakeanobligationtohonortheletterofcredit.Itwillcheckthedocumentsthebeneficiary(theselleroftheequipment)presentsandiftheyaresatisfactory,paythefundstothebeneficiary.Itwillthentransmitthedocumentstotheissuerandreceiverepayment.(http://www.law.utk.edu/cle/letcred/1-vb.htm)

ThetransactiondescribedinaboveiscommonlyreferredtoasaLetterofCredit.

TypesofLetterofCredit

AllLettersofCreditareissuedineithera"revocable"oran"irrevocable"formandconfirmed"or"unconfirmed."Theyshouldbereadcarefullyandunderstoodtodeterminetheadvantagesandtodecidewhichoneisfittingforaparticularsituation.

RevocableLetterofCredit

Unlessstatedotherwiseallcreditsarerevocable.Thetermindicatesthatthecreditisnotalegallybindingundertakingandcanbechangedorwithdrawnatanytimewithoutthepermissionorknowledgeofthebeneficiary.However,itgivesnoassuranceofpayment.Whenthesellerdoesntneedsrequireaguaranteeotherthanthebuyer'sreputation,aletterofcreditservesnopurposeunlessitisusedasasuitablemeansofexchangingdocumentsandpayment(TDCommercialBanking)

Assuchwhilstthistypeofinstrumentisextremelyfavorabletotheimporteritishardlyeverusedduetoitscommercialunacceptabilitytotheexporter/beneficiary.

RevocableLetterofCreditforImporterandExporter

Howdoesthesellerpreventnopaymentunderrevocableletterofcredit?


1072-107

IrrevocableLetterofCredit

Withthistypeofcreditthebuyer'sbankhasgivenanirrevocablepromisetopaytheseller,onhis/herproofofcompliancewiththesetconditionsoftheLetterofCredit,andthebankwithouttheauthorizationoftheexportercannotchangethis.ThebuyerhasnoresponsibilitytoagreetochangestotheLetterofCredit.Ifitincludesconditionsthatareinconsistentwiththesales-purchaseagreement,thenthisisasubjecttobesettledbetweenthebuyerandseller;thebankhasnoresponsibilitytoinvolveitselfwiththeparticularsoftheagreement.

Confirmed

Aconfirmedletterofcreditiswhenasecondguaranteeisaddedtothedocumentbyanotherbank.Theadvisingbank,thebranchorthecorrespondentthroughwhichtheissuingbankdirectstheletterofcredit,addsitsundertakingandcommitmenttopaytheletterofcredit.Thisconfirmationmeansthattheseller/beneficiarymayalsolookatthecreditworthinessoftheconfirmingbankforpaymentguarantee(2001,Equipment).

Unconfirmed

Anunconfirmedletterofcreditiswhenthedocumentcarrierstheassuranceofjusttheissuingbank.Theadvisingbanksimplynotifiestheexporterofthetermsandconditionsoftheletterofcredit,withoutaddingitsobligationtopay.Theexportertakesonthepaymentriskoftheissuingbank,whichisnormallysituatedinaforeigncountry(2001,Equipment).

Thisisbyfarthemostcommontypeofletterofcreditacceptabletobothimporterandexporter.

IrrevocableLetterofCreditforImporterandExporter

WhatdoyouthinkinwhichsituationsconfirmedandunconfirmedLetterofCreditisacceptable?

Whoisgoingtopayfortheconfirmationcharges?


1082-108

ConfirmedandUnconfirmedCreditforImporterandExporter

Astheexporterissituatedinadifferentcountryfromtheimporter,twobanksaregererallyconcernedwithadocumentarycredittransaction.Whiletheliabilityoftheissuingbankalwaysexistsinthecaseofanirrevocablecredit,theadvisingbankintheexporterscountryisliableonlytotheextentoftheinstructionsitisgiven.

Theseinstructionscandirectit:

Nottoconfirmthecredit

Whenthisisthecase,theadvisingbankassumesnoresponsibility;itsimplyactsonbehalfoftheissuingbank,inadvisingtheexporteroftheletterofcredit.

Toconfirmthecredit

Whenconfirmingtothecredit,theadvisingbanktakesonasecureandindependentobligationtopay,asdoestheissuingbank.Theconfirmingbankmustmakepaymenteveniftheissuingbankisnotabletosendthenecessarycoverforthepayment.(http://www.chancerygroup.com.au/1to4.htm)

Fromtheimportersviewpointtheconfirmationisdeemedanunnecessaryexpenseandcomplicationwhenthebanktheyuseisofinternationalstanding.Alsowiththeadvisingbankassumingnoresponsibility,anydecisionregardingthevalidityofdocumentsandconsequentpaymentrestswiththeissuingbankwithwhomthereisanestablishedrelationship.Confirmationisnevertotheimportersadvantage.

ConfirmationfromtheImportersViewpoint

Could you compare all types of letter of credits (revocable, irrevocable,confirmed,unconfirmed)advantagesandrisksforthesellerandthebuyer?


1092-109

SpecialLettersofCredit

AshortdescriptionofsomespecialLettersofCreditcanbefoundbelow:

RedClauseLetterofCredit

RedClauseLettersofCreditsupplythesellerwithcashbeforeshipmentsohe/shecanfinancetheproductionofgoods.Thebuyer'sIssuingBankmayforwardsomeorallofthefunds.Inotherwords,thebuyeroffersfinancingtothesellerandthereforesustainstheriskforalladvancedcredits.

DeferredPayment(Usance)LetterofCredit

InDeferredPaymentLettersofCredit,thebuyeracceptsthedocumentsassociatedwiththeletterofcreditandagreestopaytheissuingbankafterafixedperiod.Thiscreditgivesthebuyeragraceperiodforpayment.

RevolvingLetterofCredit

WithaRevolvingLetterofCredit,theissuingbankrestoresthecredittoitsoriginalamountonceithasbeenusedordrawndown.Generally,thesearrangementslimitthenumberoftimesthebuyermaydrawdownitslineoverapredeterminedperiod.

Back-to-BackLetterofCredit

Thisisanewletterofcreditopenedbasedonanalreadyexisting,nontransferablecreditthatisusedascollateral.Tradersoftenuseback-to-backarrangementstopaytheultimatesupplier.Atraderreceivesaletterofcreditfromthebuyerandthenopensanotherletterofcreditinfavorofthesupplier.Thefirstletterofcreditservesascollateralforthesecondcredit.


1102-110

TransferableLetterofCredit

Thistypeofcreditallowsthesellertotransferallorpartoftheproceedsoftheoriginalletterofcredittoasecondbeneficiary,usuallytheultimatesupplierofthegoods.Theletterofcreditmuststatethatitistransferableforittobeconsideredassuch.ThisisawidespreadfinancingmethodusedbymiddlemenandiscommoninEastAsia.

AssignmentofProceeds

ThebeneficiaryofaLetterofCreditmayallocateallorashareoftheproceedsunderacredittoathirdparty(theassignee).However,unlikeatransferredcredit,thebeneficiaryhasexclusiverightstothecreditandisexclusivelyresponsibleforfulfillingitstermsandconditions.Fortheassignee,anassignmentmeansonlythatthepayingbank,onceitobtainsnoticeoftheassignment,acceptstofollowtheassignmentinstructions,ifandwhenpaymentismade.Theassigneeisreliantuponthebeneficiaryforcompliance,andthereforethisarrangementcarriesmoreriskthanatransferredcredit.Beforeagreeingtoanassignment,theassigneeshouldthoroughlyreviewtheoriginalLetterofCredit(CreditResearchFoundation).

ExportLettersofCredit

Forexample,anImporterCompanyinBulgariaarrangestopurchase100televisionsetsfromanExportingCorporationinGreece.Thetransactionbeginswithasalesagreementwhichincludesarequirementthatthe$25,000.00purchasepricebepayableat"sight"underaconfirmedLetterofCredit.TheImporterCompanythenrequeststhatitsbank.Bankoexport,Sofia,Bulgaria,issueanIrrevocableLetterofCredit,tobeadvisedandconfirmedbyabankinGreece.

WhatistheriskofTransferableL/C?


1112-111

ThentheExportingCorporationshipsthegoodsandpresentsa$25,000.00draftalongwiththespecifieddocumentstothebankinGreeceonorbeforetheexpirationdateoftheLetterofCredit.OncethebankinspectsthedocumentsandconcludesthattheymeetthetermsoftheLetterofCredit,paymentismadetotheExportingCorporation.ThebankthensendsthedocumentstotheBulgarianbankthatinspectsthem,reimbursesthebank,andobtainspaymentfrom,anddischargesthedocumentsto,theBulgarianimporter.

There are several mistakes, which exporters can make. A list of thesepossiblemistakesisonthenextpage.

Source(1999-2000,InternationalTradeForum)

Whatdoyouthinkaboutthekindofproblemsexporterscouldmeet?Couldyougiveexamplesfromyourbusinessenvironment?

ExportLetterofCreditTenCommonMistakes

1. Theagreedtimescheduleisnotfollowed,becauseoflateshipmentorlatepresentation.

2. Thespecifieddocumentsarenotpreparedasspecifiedbytheletterofcredit,otherthanthetransportdocument,insurancedocumentandinvoice.

3. Certificates,suchasthecertificateoforiginandcertificateofinspection,arenotsigned.

4. Thegoodsdescriptiononthecommercialinvoicedoesnotmatchthedescriptionontheletterofcredit.

5. Documentsarenotproperlyendorsed.

6. Drafts(billsofexchange)arenotpresentedasstipulatedbytheletterofcreditorarenotpreparedproperly.

7. Theinsurancedocumentisdatedaftertheshipmentdate,ordoesnotcovertherisksasrequiredbytheletterofcredit.Thetypesofrisk,extentofriskcoverageorcurrencydifferfromwhatisstatedintheletterofcredit.

8. ThetransportdocumentisnotproperlysignedasdefinedbytheUCP,oritisnotpreparedincompliancewiththeletterofcredit.

9. Thedocumentsareinconsistentwithoneanother.

10. Thetypeandnumberofstipulateddocumentsandcopiesarenotthesameasthosestipulatedbytheletterofcredit.


1122-112

Toavoidabovemistakes,hereisachecklistyoucanuse:

Source(1996,ExportUSAPublication)

ExportersChecklistforAnalyzingaLetterofCredit

CheckthefollowingitemstoverifythatalltermsandconditionsintheLetterofCreditagreewithyourPriceQuotation/ProformaInvoiceand/orsalesagreementandthatyouwillbeabletocomplywiththeorderasrequestedbytheimporter.

IdentityofPartiesArethenamesandaddressesofyourcompanyandthe importersorganizationcorrectandcomplete?

ConfirmedIstheL/Cconfirmed?Ifnot,arethererestrictionsthatprohibit itfrombeingso?

IrrevocableCantermsandconditionsoftheL/Cbechangedorcancelled withoutyourpriorknowledgeandconsent?

DescriptionofGoodsAregoodsdescribedcorrectlyandcompletelyto includetrademarknamesandmodelnumbers?

PricesDounitpricesandtotalpriceforgoodsagreewiththepricesthat youpreviouslyquoted?

AmountWillthetotalamountcoverallcostsallowedbytheL/C(e.g., documentation,transportation,insurance)?

CurrencyofPaymentIsL/Cthepayableatsightoratalaterdate?Isitdrawn onyourbankorimportersbank?

InsuranceWhoisresponsibleforinsurance?Iftheimporterpays,doyouhave evidenceofadequatecoverage?

ShippingTermsAretermscorrectlystated(e.g.ExWorks,FASPortof Import,FOBPortofExport,CFRPortofImport,CIFPortofImport)?

ShippingDateWillyouhaveadequatetimetoproduceandhavegoods readyforshipmentforthespecifieddate?

TransportationChargesAreinland,oceanorairfreightchargesprepaid orcollect?Whopaysthetransportationcosts?

PartialShipmentsAreyouallowedmorethanoneshipmentormustthe completeorderbecontainedinoneshipment?

TransshipmentCangoodsbeunloadedandtransferredtoanothervessel betweentheportsofexportandimport?

DocumentsCanalldocumentsbeobtainedintheexactrequestedformas andwithinthevalidityperiodoftheL/C?

PresentationofDocumentsIsthereenoughtimeafterdeliverytocollect andpresentdocumentstothebankforpayment?

ExpirationDateCanyoucomplywithallthetermsandconditionsof theL/Cbeforeitautomaticallyexpires?


1132-113

ImportLettersofCredit

Forexample,abankinMacedoniaistheIssuingBank,havingissuedtheLetterofCreditonbehalfoftheMacedonianimporter.ThesamebanksTurkishbranchistheAdvisingBank.TheLetterofCreditisfreelynegotiable.TheTurkishBeneficiary(exporter)oftheLetterofCreditmayhavethedraftnegotiatedbythebanksTurkishbranchoranotherbankinTurkey.Asaresult,theexporterreceivesfinances(typicallyona"withrecourse"basis)afterpresentingcomplyingdocuments.TheTurkishNegotiatingBankwill,then,sendthedraftanddocumentstothebankinMacedonia.Ifthedocumentsmeettheterms,thebankwillchargeitscustomer,theMacedonianimporter(Applicant),forthevalueofthedraftandatthesametimepaytheTurkishNegotiatingBankanddischargethedocumentstotheMacedonianimporter.

Ifthedocumentsdonotcomplythebankmaycontactitscustomerforapprovalofthespecificinconsistencyorinconsistenciesorforageneralauthorizationtopay.Ifcustomerauthorizationisgivenandthebankitselfalsoagreestoignoretheinconsistencies,paymentismade.Iftheimporterorthebankdoesnotagreetoignoretheinconsistencies,theTurkishNegotiatingBankwillbeinformedoftheinconsistenciesandthattheunpaiddocumentswilleitherbereturnedtothemorheldattheirdisposal.

Couldyoucompareanddiscusstheadvantagesandrisksofcomplyinganduncomplyingdocumentsforanimporter?


1142-114

QuestionsImportersCommonlyAskAboutLettersofCredit

ExpiryDate

WhentheLetterofCreditexpirydateisestablished,shouldenoughtimebeallowedforthegoodstogettomeorforpaymenttobemadewhenextendedpaymenttermshavebeennegotiatied(e.g.60daysaftersight)?

No.TheexpirydateshouldsimplyallowtheExporterenoughtime,afterthelatestshippingdate,topresentdocumentstotheavailablewithBank.InaletterofCredit,youarenotallowedtheopportunitytoinspectthegoodspriortopayingforthem.Keepinmindthatbanksdealonlywithdocumentsandnotwithgoods.

QualityofGoods

IsthereanywaythatIcanprotectmyselffromreceivinginferiorqualitygoodsbyusingaLetterofCredit?

Yes.ThiscanbedonebyaskingforappropriatethirdpartydocumentstobepresentedundertheLetterofCreditthatwouldgiveproofoftheshipmentofthepropergoods,e.g.anInspectionCertificate,HealthCertificate,Agent'sCertificate,andsoon.

Cost

WhatarethecoststoissueaLetterofCredit?

ThefeesvarybasedonthedollaramountofyourLetterofCreditandthelengthoftimeitisoutstanding.YoushouldcontactyourTDbranchforaScheduleofFeesandCharges.


1152-115

SWIFTTransmissionoftheLetterofCredit

HowquicklywilltheExportertakedeliverymyLetterofCredit?

OncetheLetterofCreditApplicationformisreceivedbyTD'sInternationalTradeServicesoffice,normallytheLetterofCreditwillbeissuedwithin24hours.IfitissentbyteletransmissionasrequestedintheApplication,theAdvisingBankwillreceivetheadvicethatdayornextbusinessdaydependingontimezones.TheAdvisingBankthencontrolshowquicklytheLetterofCreditissenttotheExporter.IfitisurgentthattheExporter(Beneficiary)receivesadviceoftheLetterofCreditimmediately,werecommendthatyouincludeinstructionsintheApplicationtonotifytheBeneficiarybyphoneorfax.Youshouldincludetherelevantcontactnumbers.

RecourseInCaseofNon-FulfillmentofContract

UnderaLetterofCredit,whatkindofrecourseavailabletomeifthegoodsarriveandtheyarenotthequantityorqualityagreedupon?

Sincebanksdealonlywithdocumentsandnotwithgoods,alldisputescanbereferredtotheInternationalChamberofCommerceArbitrationorhandledthroughlegalproceedings.

GoodsPrecedingDocuments

Whathappensifmyoceanshipmentarrivesbeforemytransportationdocuments?

Youhavetwochoices.YoucaneitherwaitforthetransportationdocumentsandpayforstorageofthegoodsoryoucanrequestTDtoissueonyourbehalfaBondofIndemnityunderyourlineofcreditinfavorofthecarrier.TheBondofIndemnityallowsyoutoobtainthegoodswithoutproducingthetransportationdocuments.Whenthetransportationdocumentsdoarrive,youmustforwardthemtothecarrierinordertohaveyourBondofIndemnityreturnedtoyouandyou,inturn,mustreturnittotheTDbranch.

SourceTDBankFinancialGrup


1162-116

ProblemsthatmaybeEncounteredandTips

Oftenabankrejectsthesellersdocuments

Thebanksuselimiteddiscretioninmatchingthetermsandconditionsoftheletterofcreditagainstthedocumentspresented.Thereisoftenlittleroomforjudgement.

Forexample,imaginethataletterofcreditdescribesgoodsascocoabutterwithamaximumfatcontentof15%.However,theexporterpresentsacommercialinvoicereferringtothegoodsascocoabutterwith12%fatcontent.

Tip:Exportersmustcheckthewordingofalldocumentsbeforesubmission,usingthesamecriteriathatthebanksapply.Ensuringthatallthetermsusedcorrespond.

Often the letter of credit fails to anticipate an aspect of thetransaction

Forexample,acommonrequirementonaLetterofCreditisforaCleanOnboardBillofLadingdocumentssuppliedbytheshippingcompanyconfirmingthatthegoodswerereceivedingoodcondition,andwereloadedintheshipshold.However,ifthegoodsarehazardousorflammable,theywillbeputonthedeckoftheshipinsteadoftheholdmeaningthatthebankcouldrejectthedocuments.

Tip:Toavoidsuchproblems,exportersneedanunderstandingofthedifferenttypesofcommercialdocument(transportdocument,insurancedocumentetc.)andthethingsoneachdocumentthatmaybeimportanttoabankinthecontextofpresentationunderaletterofcredit.


1172-117

Timelimitscanbemissedwhenpresentingrequireddocuments

Tip:Youhavetobeawareofuptothreetimelimitstheexpirydateofcredit,thelatestshippingdateandthemaximumtimeallowedbetweendispatchandpresentation.WhenyougetadviceoftheLetterofCredit,checkthatallitstermsandconditionscanbefulfilled,withinthesettimeframes.IftheLetterofCreditasksfordocumentstobegivenbythirdparties,makereasonableallowanceforthetimethismaytaketoarrange.Afterdispatchofthegoods,checkallthedocumentsbothagainstthetermsoftheLetterofCreditandagainsteachotherforinternalconsistency.(OTAL).

ComparisonofVariousMethodsofPayment

Thefiveexplainedpaymentmethodsareusedfordifferentsituationsandeachhassomeadvantagesandrisks.AcomparisonofthesemethodsisillustratedonTable1.Tobeabletochoosetherightmethod,youshouldcarefullyexaminethetable.

Haveyouhadsuchproblems?Doyouwanttoaddotherproblemsandtipsyouknow?Whatshouldbedonetoavoidthosekindsofproblems?


1182-118

Table1:ComparisonofVariousMethodsofPayment

Method

GoodsAvailabletoBuyer

UsualTimeofPayment

RisktoExporter

RisktoImporter

CashInAdvance

Afterpayment

Beforeshipment Verylow

Maximum-Reliesonexportertoshipgoodsasordered

OpenAccount Beforepayment Asagreed

Reliesonimportertopayaccountasagreed-takescompleterisk

Verylow

Consignment

Beforepayment,exporterretainstitleuntilgoodsaresoldorused

Afteruse;inventoryandwarehousingcoststoexporter

Substantialriskunlessthroughforeignbranchofsubsidiary

Verylow

DocumentaryCollection/SightDraft/DocumentsagainstPayment

Afterpayment

Onpresentationordrafttoimporter

Ifdraftunpaid,goodsmustbereturnedordisposedof,usuallyatloss

Assuredofquantity,alsoquality,ifgoodsareinspectedbeforeshipment

DocumentaryCollection/TimeDraft/DocumentsagainstAcceptance

BeforePayment OnmaturityofdraftReliesasimportertopaydraft

Minimal-Cancheckshipmentforquantityandqualitybeforepayment

LetterofCreditConfirmedUnconfirmed

AfterPayment

Whendocumentsareavailableatshipment

Verylow

Assuredofquantityandalsoqualityatshipmentifinspectionreportisrequired


1192-119

CaseStudy:FruitJuiceForEurope

A South American factory is well known for itsfruitjuices.Theyhavesold2containersofproducttoaFrenchtraderataprice20%offthewholesale.

Now the traderwants exclusive sales rights forthe whole Europe, promising 20 containers the firstyearonopenaccountpaymenttems.

At the same time, extensive research has beenmade for marketing the juice via a stock-keepingimporterinGermany.

Importersselectionisunderwayandthetradefairresultshavebeenpositive.

1. Whatwouldyousuggestforthemanagementtodo?2. Whatkindofriskshasthecompanygot?3. Discussiononthechannels.Whatkindofchannelscantheyuseforenteringthe

Europeanmarket?4. ConditionsforExclusivity.HowshouldtheSouthAmericanfactoryreact?


1202-120

CaseStudy:BeCarefulwiththeContract

AmanufacturerconcludedasizablecontractfortheFASAntwerpsupplyofheavydutymachinery.Paymentwastobebyirrevocableconfirmeddocumentarycredit,stipulatingacommercialinvoiceandthebuyerscertificatethathehadtakendeliveryofthematerialatAntwerp.

Induecourse,thematerialwasreadyforshipmentbutonarrivalatAntwerp,itwasnottakenoverbythebuyerandasthesupplierdidnotreceivethebuyerscertificate,hewasunabletogetpaidunderthecredit.Afterayearoflengthynegotiations,thesupplierreceivedascompensationbutstillsufferedasubstantialloss.

Beforeconcludingthecontract,thesupplierhadconsultedhisbank,whosereplyhadbeen:Thedocumantarycreditisasafeinstrumentofpaymentbothforthebuyerandforthesupplier.Andhehadalsoconsultedauthorsondocumentarycredit,whosewordshequotedas:

Theexporterwillnotbefullyprotectedunlesshehasanirrevocableandconfirmeddocumentarycredit.

Thesupplierwassurethatbyobtaininganirrevocableconfimedcredithehadtakenallthenecessaryprecautionstogetfullpaymentsecurity.

So,whereistheproblem?


1212-121

CaseStudy:RealDocumentaryCredits

TheimporterappliedforacreditforthefullCFRvalueofthegoods.Thiscreditcontainedastermofpayment:

40%ofthevaluepayableatsightagainstpresentationofcompliantdocuments

60%tobesettledbydraftat90dayssightoncreditapplicantwithoutresponsibilityorengagementonourpart(meaningtheissuingbank)

Compliantdocumentswerepreparedbytheexporterandpresentedtothebankandthe40%paymentwaseffected.The90dayssightdraftfortheremaining60%wasdulyacceptedbythecreditapplicant.

Atmaturity,itremainedunpaidandtheissuingbanktookrefugeinthewording.withoutresponsibilityorengagementonourpart.

Thebeneficiaryisintheopinionthatabankissuingacreditforthefullvalueofthegoodsshouldacceptresponsibilityforthebeneficiaryalsotobepaidinfull.

1.Whatdoyouthinkaboutthiskindofcredit?2.Whatiswrongwiththetermsofpaymentinthecredit?3.Doyouthinkthebeneficiaryhasmadehisobjectionontime?


1222-122

Summary

Twoquestionsoftenariseininternationaltrade.Thefirst,forsellers,is:IfIshipthegoods,amIcertaintobepaidforthem?Thesecond,forbuyers,is:IfIsendthemoney,willIbecertaintoreceivethegoods?Notransactionshouldtakeplaceunlesstheanswersaredefinitelyyes.Yetthetwoseemtocontradicteachother.

Thesellercanansweryesifthesellerreceivespaymentinadvance,andthebuyercanansweryesifthebuyermakespaymentafterdelivery,butbothofthesesolutionsfailtoprotecttheotherpartyfromnonperformance.

Therefore,importersandexportersarewelladvisedtoarrangetheircontractualtermstoavoidcourtlitigation.Theyhavetousefullydiscussedpaymenttermsandselecttheonethatsatisfiesbothparties.

Accordingtothetransaction,themostconvenientpaymenttermsshouldbechosenbutingeneralweconcludethatthemostpopularonesarealetterofcreditanddocumentsagainstpayment.


1232-123

KeyTerms

AcceptedTimeDraftAdvancePaymentAdvisingBankAmendmentofaLetterofCreditApplicantAssignmentonProceedsBacktoBackLetterofCreditBeneficiaryCashinAdvanceCollecting/PresentingBankConfirmedLetterofCreditConfirmingBankConsigneeDraftDocumentaryCollection

DeferredPaymentLetterofCreditExpirationDateIrrevocableLetterofCreditIssuingBankLatestDateforPresentationLatestShippingDateLetterofCreditOnConsignmentOpenAccountRedClauseLetterofCreditRemittingBank RevocableLetterofCredit RevolvingLetterofCreditSightDraftTimeDraftTransferableLetterofCredit


1242-124

ProgressCheck

1. Inadocumentarycollection,thebanks;

a. Evaluatethequalityofthegoodsbeforeshipmentb. Actasintermediariesinthecollectionprocessc. Financethebuyerandthesellerd. Dictatethetermse. Onlycheckthedrafts

2. AnexporterreceivesaP/O(purchaseorder)andpaymentfor100kg.ofknittingyarn.Thisisanexampleofwhichtypeofpaymentoption?

a. Cashinadvanceb. Onconsignmentc. Openaccountd. Letterofcredite. Draftordocumentarycollection

3. Ifthebankholdsshippingdocumentsincustodyanddeliversthemtothebuyeruponreceiptofpayment,whattypeofdocumentofpaymenttermisthis?

a. Letterofcreditb. Cashinadvancec. Cashagainstgoodsd. Documentsagainstcollectione. Openaccount


1252-125

4. An exporter receives a P/O (purchase order) for 1000 pullovers andshipsthegoodsandthedocumentsdirectlytothebuyerbeforereceivingpaymentforthegoods.Whichpaymentoptionisthis?

a. Cashagainstdocumentsb. Onconsignmentc. Timedraftd. Cashinadvancee. Openaccount

5. Anopenaccounttransactiongivesalloftheadvantagestothe;

a. Consigneeb. Sellerc. Bankd. Forwardere. Buyer

6. Identify the payment option(s) which place(s) the seller in the riskypositionofnonpaymentbythebuyer(selectallthatapply)?

I.Cashinadvance III.IrrevocableletterofcreditatsightII.Openaccount IV.Onconsignment

a. IandIIb. OnlyIIc. IIandIVd. OnlyIe. OnlyIII


1262-126

7. Whatkindofpaymentoption(s)should thesellerconsiderwhenhis/herproductsareinlowdemand(selectallthatapply)?

I.Cashinadvance III.OpenaccountII.Letterofcredit IV.Documentsagainstpayment

a. OnlyIIb. IIandIIIc. OnlyIIId. IIIandIVe. OnlyIV

8. Identify therisk(s) facedby thesellerwhencollectingpayment fromanoverseasbuyer(selectallthatapply).

I.Country III.IndustrialII.Political IV.Foreignexchange

a. OnlyIb. OnlyIIIc. IIandIIId. IIIandIVe. IandIV

9. Whatpaymentoption(s)shouldthesellerconsiderwhenhe/sheiswillingtoextendcredittothebuyer?

a. Cashinadvanceb. Letterofcreditatsightc. Draftordocumentarycollectiond. Documentsagainstpaymente. Documentsagainstacceptance


1272-127

10.Thesellerisbestprotectedbywhichofthefollowingpaymentterms;

a. Openaccountb. Revolvingletterofcreditc. Confirmed,irrevocableletterofcreditd. Redclauseletterofcredite. Transferableletterofcredit

11.Inaletterofcredittransaction,thebankdeals;

a. Onlywithgoods,notwithdocumentsb. Onlywithdocuments,notwithgoodsc. Withdocumentsandgoodsd. Withquantityandqualityofgoodse. Onlywithpayment

12.Theexporterisabouttocloseadealwiththeimporterbuthe/shedoesnotknowtheissuingbankwell.Sowhatkindofletterofcreditshouldbeopenedtosatisfytheexporterandminimizetherisk?

a. Confirmedb. Avalizedc. Straightd. Redclausee. Backtoback


1282-128

13.Insomecasesthesellermayneedsomeadvancepaymentinordertomakethedealpossible.AL/Cmayassurethatcertainsumsbepaidinadvanceofthepresentationofdocumentsandanyadvancepaidwillbedeductedfromthetotalcreditavailablewhenthecreditispaid.WhatsortofL/Cisthis?

a. Backtobackb. Confirmedc. Redclaused. Straighte. Transferable

14.IfyouareanintermediarypurchasingmaterialsunderL/Cforresaletoafinalpurchaserandyoudonotwanttodiscloseyoursourcetothebuyer,whatkindofL/Cshouldyouuse?

a. Backtobackb. Redclausec. Backto-backd. Revolvinge. Confirmed

payment method tres pratiq

Documents

andyousupplierin okay

advantages of payment