basics of lc

7/30/2019 Basics of LC

1/26

Basics of

Letters of Credit


2/26

2

Agenda

Topics to be covered

Basic terms of Trade

Letters of Credit

INCOTERMS

Applications


3/26

3

Terms of Trade

Cash in Advance

Letter of Credit

Collection

Open Account


4/26

4

Who Should Take the Risk?

Pre-Pay

Letter

of

Credit

Documents

Against

Payment

Documents

Against

Acceptance

Open

Account

?

??Buyer Takes

All the Risk

Seller Takes

All the Risk


5/26

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


6/26

6

Policy Issues

2) Set Policies for Each Method

a. Cash in advancewire transfers Vs. check

b. Open accountdiscount policy, controls etc.

c. Documentary Collectionspayment at sight

d. Letters of Credit Policy Letter

L/C Checklist

3) Enforce the Policies That You Set


7/26

7

A Foreign Check Does

Not Represent ImmediatePayment

Foreign Checks Must Be

Sent Back for Collection


8/26

8

Documentary Collections

Buyer/Importer Seller/Exporter

Sellers BankBuyers Bank


9/26

Buyer/Importer

Seller/Exporter Bank

Seller/Exporter

Buyer/Importer

UPS


10/26

10

A Letter of Credit is:

A substitution of the banks credit for the

buyers

A banks promise to pay upon the satisfactory

compliance with the L/Cs terms and

conditions by the L/Cs Beneficiary

Note Banks Deal in Documents ONLY


11/26

11

Letters of Credit

Parties to a letter of credit

Letter of Credit Types

Import

Export

Standby

L/C cycle


12/26

12

Parties to a Letter of Credit

SELLER

(EXPORTER)

BENEFICIARY

ORGINAL BENEFICIARY

SECOND BENEFICIARY

TRANSFEREE

ASSIGNEE

SHIPPERDRAWER

BUYER

(IMPORTER)

ACCOUNT PARTY

APPLICANT

ACCOUNTEE

DRAWEE

PARTY LETTER OF CREDIT TERM


13/26

13

Parties to a Letter of Credit (Contd)

BUYERS BANK ISSUER

ISSUING BANK

OPENING BANKPAYING BANK

ACCEPTING BANKDRAWEE

ISSUING BANK

CORRESPONDENT

ADVISING BANK

CONFIRMING BANK

TRANSFERRING BANKNEGOTIATING BANKACCEPTING BANK

PAYING BANK

PARTY LETTER OF CREDIT TERM


14/26

14

Standby Commercial

Back up in case ofnon-payment or

non-performance Generally not

expected to bedrawn

Used forservices/goods

After the fact

Primary source ofpayment

Used for actualgoods

Somewhatsimultaneous


15/26

15

Standby L/C

Financial

Performance

Bid Bond

Performance Bond


16/26

16

L/C

L/CL/C

Application

Buyer/ ImporterApplicant - 1

Seller/ ExporterBeneficiary - 4

Advising BankConfirming Bank

Negotiating Bank -3

Issuing Bank2

Transaction

Cycle


17/26

17

DOCs

DOCs

DOCs$

$

$

Merchandiseuyer/ Importer - 8,9b Seller/ Exporter - 5,11

Advising BankConfirming Bank

Negotiating Bank - 6,10

Issuing Bank - 7,9a


18/26

18

Sight 20

Pay to the order of $

Dollars

To

At January 5 00

ABC Exporter 8,020.00

Eight Thousand Twenty Dollars and 00/100

Standard Chartered Bank

New York, NY

ABCExporter

DRAFT

Drawn under Documentary Credit No. M0491110NS00616, of theStandard Chartered Bank, Seoul, Korea, dated September 17, 1999

Endorse the back!


19/26

19

Common Documents

Draft

Transport Document (b/l)

Commercial invoice

Insurance policy or certificate

Packing list

Certificate of origin, weight

Beneficiary statements


20/26

20

When you receive an L/C

CHECK IT CAREFULLY!!!

Review it ASAP

L/C mirror sales contract

Can you perform

Can you provide ALL the documents


21/26

21

Critical Things to Look For

Latest shipment date

Expiry date

Partial shipments

Merchandise description

Can you provide documents required


22/26

22

Domestic International

Known bank

Known country risk

Known customs andlanguage

Unknown bank (??)

Country stability

Currency stability Foreign laws and

usages


23/26

23

Confirmation

ConfirmingBank

IssuingBank


24/26

24

Credit Issues

As Applicant

your Credit Worthiness

your Collateral

As Beneficiary

probably none


25/26

25

Cost Issues

As Beneficiary

minimal cost usually

if confirmed, expect to pay

As Applicant

based on your credit and/or collateral

use of other bank services


26/26

26

Where to get more information

ICC Uniform Customs and Practice for

Documentary Credits (UCP 500)

ICC Guide to Documentary CreditOperations for the UCP 500

INCOTERMS 1990

International Standby Practices 1998

(http://www.iccwbo.org)