export import financing

7/31/2019 Export Import Financing

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LETTER OF CREDITKunal Soni

K3901


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Methods of Payment


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Methods of Payment

Cash in Advance

Letters of Credit

DocumentaryCollection

Sight/Time Drafts aka D/P, D/A

Open Account Risk mitigation:

Export Credit Insurance

Standby L/Cs

L /C


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Cash in AdvanceImporter pays Exporter prior to

shipment

Exporter has no risk of non-paymentor non-acceptance

Importer has risk that exporter willnot ship the goods as ordered

Used occasionally for smallamounts, new customers, one-timesales

ImporteExporter

Goods


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Letters of CreditProtects the interests of both

the Importer and the Exporter

Exporter is assured paymentprovided terms of L/C are met

Importer is assured terms of L/Chave been met before she is

required to pay Used for larger amounts, higher

credit risks, sometimes mandated

L / C


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Documentary Collections

Exporter routes documents throughbanking channels, where they are

held for payment or acceptance

Exporter Exporters Importers Importer

Bank Bank

Less costly than a L/C and avoidstying up Importers line of credit

Average of 2 - 4 weeks forexporter to collect on a sight draft

Consignment Issues

Used for lower risk customers

Goods


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Open AccountExporter ships goods and bills theimporter for payment at sight or at

a future date

Importer has use of funds, noproduct risk

Exporter has risk of non-payment Risk can be shifted through credit

insurance, standby L/Cs Used for well-established customers

with good credit

Goods

Invoice

net 30


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Letters of Credit


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Types of Letters of Credit

TradeImport

Export

Standby


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Definition of a TradeLetter of Credit

A letter addressed to a beneficiary(exporter) by a bank (issuing bank)

wherein the bank undertakes, on

behalf of an applicant (importer)

to effect payment to the beneficiaryfor merchandise shipped or

services performed

provided that the beneficiarypresents the required documents in

compliance with the terms of theletter of credit


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Documents Commonto an Export L/C

Commercial Invoice

Packing List

Bills of Lading Certificate of Origin

Other Certificates: Quality,

Inspection Beneficiary Statements


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1. Importer and Exporterenter into a sales

agreement

AgreementExporter Importe


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2. Importer applies for aletter of credit with the

Issuing Bank

Application

IssuingBank

Importer


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3. Issuing Bank advisesthe letter of credit to

HDFC Bank, usually viaSWIFT

Letter ofCredit

IssuingBankHDFC

Bank

L / C

SWIFT


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and advises L/C toBeneficiary

HDF

Bank

Beneficiary


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5. Exporter preparesthe documents and ships

the goods

Goods

Exporter

Goods

Importer


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6. Exporter sends shippingdocuments to HDFC Bank forexamination

Documents

Exporter

FBM

U.S.Bank


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7. Assuming clean

documents,HDFC Banpays exporter by debitingIssuingBanks account or uponreceipt of funds from a separatreimbursing bank. Documents sento Issuing Bank.

Exporter

HDFCBank

Documents IssuingBank


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8. Issuing Bank examinesdocuments and delivers toimporter against

payment. Importertakes possession ofgoods by presentingdocuments.

Documen

IssuingBank

Importer

Goods


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9. The exporter has beenpaid, the importer has theigoods, the banks havebeen reimbursed, and the cycleis complete!

Agreement

Application

Letter ofCredit

Documents

Letter of

Credit DocumDocuments

Exporter

IssuingBank

HDFCBank

Goods

Importer


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Special Uses of

Letters of Credit


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Bankers Acceptances

On a time draft, the bank onwhom the draft is drawn commitsto pay the face amount atmaturity by stamping Accepted

across the draft .

If the exporter wishes earlypayment, the accepting bank

may discount the draft and paythe exporter at sight.

HDFC Bank can offer you very

competitive rates for BAs if thedraft is drawn on us!


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Standby Letter of Credit

Standby L/Cs are anirrevocable commitment issuedby a bank for a stated time

period

to pay a beneficiary a statedamount of money

upon presentation of specifieddocuments stating that theapplicant did not fulfill their

contractual obligations.


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Transferable Letters of Credi

Often used by an exportintermediary to pay a vendor orproducer

The L/C may be transferred onlyonce, but there may be severalpartial transferees

Vendorcontrols presentation ofdocuments to bank

Intermediary may substitute his

own invoice and draft, but it stilmay be difficult for the vendorand buyer to remain unknown toeach other


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Assignment of Proceeds

Similar to Transferable L/C in thatis commonly used by an exportintermediary to pay a producer orvendor

Intermediary (beneficiary) controlsdocument presentation, not thevendor, allowing him/her to keep

information on the vendor out ofthe paperwork

Vendor relies on intermediary for

proper presentation / performanceunder the terms of the L/C beforefunds will be remitted to them


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Confirmations ofExport Letters of Credit

Confirmed - A second bank,usually in the exporterscountry, guarantees the

obligation of the issuing bank,providing an extra layer ofprotection - especiallyimportant if the country or the

issuing bank is consideredrisky.


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More on Confirmations ..

Gives the greatest degree of paymentprotection and an immediatepayment source, provided thedocuments are clean.

Added cost, normally to the exporter.

Exporter must instruct the importerto have the L/C issued with a requestfor confirmation.

The confirming bank makes a creditdecision based on the credit of theissuing bank and the country risk.Approval will depend also onavailability under an established lineof credit.


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Adding a confirmation orengagement to purchase

documents:

Agreement

Application

Letter ofCredit

Letter ofCredit Docume

Documents

Exporter

Issuing

Bank

Advising

Bank

Documents

Goods

Importer

Confirm.Bank


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Benefits of Letters of CrediTo the Exporter:

Paymentprotection

Reliance onissuing banks

credit rather thanbuyers

Rapid, localsource ofrepayment, ifpayable at a U.S.bank

To the Importer:

Documentaryevidence that theordered goodshave been

shipped on time Assurance that

necessaryclearancedocuments will

be provided

Payment deferreduntil goods areshipped and

documentspresented (use offunds)


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Thank You

Kunal Soni, ABC