Basics of Letters of Credit

2 Agenda §Topics to be covered l Basic terms of Trade l Letters of Credit l INCOTERMS l Applications

3 Terms of Trade § Cash in Advance § Letter of Credit § Collection § Open Account

4 Who Should Take the Risk? Pre-PayPre-PayLetterofCreditLetterofCreditDocumentsAgainstPaymentDocumentsAgainstPaymentDocumentsAgainstAcceptanceDocumentsAgainstAcceptanceOpenAccountOpenAccount ? ? ? ? ? ? Buyer Takes All the Risk Seller Takes All the Risk

5 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

6 Policy Issues 2)Set Policies for Each Method a.Cash in advance – wire transfersVs. check b.Open account – discount policy,controls etc. c.Documentary Collections – paymentat sight d.Letters of Credit–“Policy Letter” – L/C Checklist 3)Enforce the Policies That You Set

7 A Foreign Check Does Not Represent Immediate Payment §Foreign Checks Must Be Sent Back for Collection

8 Documentary Collections Buyer/Importer Seller/Exporter Seller’s Bank Buyer’s Bank

Buyer/Importer Seller/Exporter Bank Seller/Exporter Buyer/Importer UPS

10 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

11 Letters of Credit §Parties to a letter of credit §Letter of Credit Types l Import l Export l Standby §L/C cycle

12 Parties to a Letter of Credit PARTYLETTER OF CREDIT TERM

13 Parties to a Letter of Credit (Cont’d) PARTY LETTER OF CREDIT TERM

14 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

15 Standby L/C §Financial §Performance §Bid Bond §Performance Bond

16 L/C Application L/C Application Buyer/ Importer Applicant - 1 Buyer/ Importer Applicant - 1 Seller/ Exporter Beneficiary - 4 Seller/ Exporter Beneficiary - 4 Advising Bank Confirming Bank Negotiating Bank -3 Advising Bank Confirming Bank Negotiating Bank -3 Issuing Bank 2 Issuing Bank 2 Transaction Cycle

17 DOCs $ $ $ Merchandise Buyer/ Importer - 8,9b Seller/ Exporter - 5,11 Advising Bank Confirming Bank Negotiating Bank - 6,10 Advising Bank Confirming Bank Negotiating Bank - 6,10 Issuing Bank - 7,9a

18 Sight20 Pay to the order of$ Dollars To At January 5 00 ABC Exporter8, Eight Thousand Twenty Dollars and 00/100 Standard Chartered Bank New York, NY ABC Exporter DRAFT Drawn under Documentary Credit No. M NS00616, of the Standard Chartered Bank, Seoul, Korea, dated September 17, 1999 Endorse the back!

19 Common Documents §Draft §Transport Document (b/l) §Commercial invoice §Insurance policy or certificate §Packing list §Certificate of origin, weight §Beneficiary statements

20 When you receive an L/C §CHECK IT CAREFULLY!!! l Review it ASAP l L/C mirror sales contract l Can you perform l Can you provide ALL the documents

21 Critical Things to Look For §Latest shipment date §Expiry date §Partial shipments §Merchandise description §Can you provide documents required

22 Domestic International §Known bank §Known country risk §Known customs and language §Unknown bank (??) §Country stability §Currency stability §Foreign laws and usages

23 Confirmation Confirming Bank Confirming Bank Issuing Bank Issuing Bank Out of Business

24 Credit Issues §As Applicant l your Credit Worthiness l your Collateral §As Beneficiary l probably none

25 Cost Issues §As Beneficiary l minimal cost usually l if confirmed, expect to pay §As Applicant l based on your credit and/or collateral l use of other bank services

26 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 1990 §International Standby Practices 1998  (