1. 14. LETTERS OF CREDIT: PROCEDURES 1

2. 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 2

3. LETTERS OF CREDIT B. DEFINITION 1. a letter addressed to the seller, 2. written and signed by a bank, 3. who acts on the buyers behalf. -Bank promises to pay drafts, provided seller performs exactly. 3

4. 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 4

5. LETTERS OF CREDIT Advantages 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 5

6. L/Cs Facilitate Financing 6 Bankers Acceptances : require a time draft from the exporter to the importers 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

7. 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 7

8. 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 8

9. LETTERS OF CREDIT II. PARTIES TO THE TRANSACTION A.THE BENEFICIARY B.ACCOUNT PARTY (usually importer) C.OPENING BANK D.ADVISING BANK usually a correspondent of opening bank 9

10. LETTERS OF CREDIT E.PAYING BANK agent for opening bank F.NEGOTIATING BANK any bank who submits documents to the opening bank 10

11. G.CONFIRMING BANK fee usually paid by opening bank bank charges a fee considered very safe from exporters viewpoint, i.e. contains obligation to pay on the part of two banks. 11

12. 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 12

13. OPENING AN L/C The Route of a Letter of Credit 13

14. The Path of a Letter of Credit Negotiating Bank ExporterImporter Advising BankOpening Bank Paying BankConfirming Bank 14

15. LETTERS OF CREDIT IMPOR TER ACCOUNT PARTY OPENING or ISSUING BANK 15

16. LETTERS OF CREDIT EXPORTER BENEFICIARY ADVISING BANK PAYING BANK 16

17. OPENING LETTERS OF CREDIT IV. OPENING A LETTER OF CREDIT should be done as soon as contract signed especially if there is a price decline A. Credit Factors – involves: 1. beneficiary, account party and opening bank 2.promise by bank to pay whenever proper documentation is presented 3.Requires analysis of creditworthiness 17

18. 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 18

19. 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 19

20. 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 20

21. OPENING AN L/C C. REQUIREMENTS FOR THE OPENING BANK 1. Receipt of Application 2. Advice to Beneficiary 3. Amendments 21

22. LETTERS OF CREDIT: CONTENTS V. CONTENTS A. Typical Information 1. Place/date 2. Names of Account party/beneficiary 3. General description of merchandise 4. Tenure of the draft 5. Paying bank 6. % amount of draft 22

23. LETTERS OF CREDIT: CONTENTS CONTENTS (cont) 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? 23

24. LETTERS OF CREDIT: PAYMENTS VI. PAYMENTS A. Action by beneficiary B. Checking of documents C. Common discrepancies 24

25. DOCUMENTARY L/CS VII. DOCUMENTARY L/C EXAMINATION PROCEDURES A. Schedule B. L/C and the drawing C. Commercial invoice 25

26. DOCUMENTARY L/CS D. Marine bill of lading E. Other documents F. Actions in Cases of Document Discrepancies 26