14. LETTERS OF CREDIT: PROCEDURES

14. LETTERS OF CREDIT:PROCEDURES

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

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.

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

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 LETTERS OF CREDITAdvantages to the Exporter

L/Cs Facilitate Financing • 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

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

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

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

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

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.

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

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

The Path of a Letter of Credit Negotiating Bank Exporter Importer Advising Bank Opening Bank Paying Bank Confirming Bank

LETTERS OF CREDIT IMPOR TER OPENING or ISSUING BANK ACCOUNT PARTY

LETTERS OF CREDIT ADVISING BANK EXPORTER PAYING BANK BENEFICIARY

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 • promise by bank to pay whenever proper documentation is presented • Requires analysis of creditworthiness

OPENING LETTERS OF CREDIT • Unsecured Credit requires financial strength and integrity bill of lading consigned directly to the importer underlying goods not used as collateral

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

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

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

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

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?

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

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

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

14. LETTERS OF CREDIT: PROCEDURES