letters of credit how to avoid discrepancies and ... of credit how to avoid discrepancies and...

LETTERS OF CREDIT

How to avoid discrepancies and expedite payment

Presented by:

Trade Technologies

Barbara Trupkin – Director Global Sales

©2010 Trade Technologies, Inc. All rights reserved.

1

AGENDA

International Payment Risk

International Payment Mechanisms o Why use LCs?

Letter of Credit Structure o Who Does What – Establish Protocol

o Key LC Terms

Solutions o Process

o People

o Trade Technologies

Q&A as we proceed through process - please mute phones during presentation

©2010 Trade Technologies, Inc. All rights reserved. 2

WHO IS TRADE TECHNOLOGIES

Trade Technologies is world’s largest provider of outsourced letter of credit documentation software and services.

Trade Technologies provides outsourced international trade payment solutions and software as a service to over 1000 global exporters, international freight forwarders and major international trade banks.

Trade Technologies offers a global footprint with 10 operations

offices in the US, Asia and Europe.

Trade Technologies processes over $9 billion of international transactions each year in virtually every industry for some of the world’s largest and most successful companies, including over two dozen Fortune 500 companies.

Patented technology and business process for processing international payments.

First and only company to present original UCP 600 presentations online to major trade banks.

2011 winner of President’s “E Award” for our role in increasing US exports.


INTERNATIONAL PAYMENT RISK

Commercial Risk o Buyer history

o Credit reporting limited

o Financial standards different

o Cultural performance and norms vary

Political Risk o Government stability and consistency

Economic Risk o Currency fluctuations

o Foreign Bank solvency

o Sovereign risk

Legal Risk o Contract enforceability

o Goods recoverable

o Time, language and distance


INTERNATIONAL PAYMENT MECHANISMS

Cash in Advance

Letter of Credit ***

Documentary Collections

Open Account


PAYMENT TERMS RISK CHART

HIGH LOW

LOW HIGH


OPEN ACCOUNT

DOCUMENTARY COLLECTION

LETTER OF CREDIT

CASH IN ADVANCE

LETTERS OF CREDIT

LETTERS OF CREDIT ARE STILL THE NO. 1 MEANS OF FINANCING INT’L TRANSACTIONS.

THEY PROVIDE A FORM OF SECURITY FOR THE PARTIES INVOLVED

THEY ENSURE PAYMENT PROVIDED THAT THE TERMS & CONDITIONS OF THE CREDIT HAVE BEEN FULFILLED

HOWEVER, PAYMENT IS BASED ON DOCUMENTS ONLY & NOT ON MERCHANDISE OR SERVICES


LETTERS OF CREDIT

Provide an accepted middle ground with significant risk reduction for both sides and also mitigate currency regulations.

Governed by internationally agreed upon rules and regulations (UCP 600).

Corruption mitigated by banks involvement.

Can be complex and not for the unprepared.


WHY USE LETTERS OF CREDIT

Letters of Credit

o Letters of Credit assures payment if terms are

complied with.

o In many cases goods cannot be collected until

payment is made.

o Credit Risk is Buyer’s Bank and payment not

contingent on Buyer.

o Rules are well defined and predictable.

o Transport and other risks are governed by INCO

terms.

o Works well for higher risk transactions in difficult

countries and with unknown or untrusted Buyers.


Goods Shipped

EXPORT LETTER OF CREDIT CYCLE


Buyer / Applicant Seller / Beneficiary Freight Forwarder Goods

Transport Documents

L/C & Documents

Documents Issuing Bank Negotiating Bank

Reimbursing Bank

Advising Bank Seller’s Bank

L/C Application

LETTER OF CREDIT ADVANTAGES FOR EXPORTERS

Eliminate buyer risk and assure prompt payment

in difficult markets.

Predictable outcome – If drafted properly can be

totally under Exporter’s control.

Confirmations eliminate bank risk.

Usance LCs and discounting very cost effective

(perhaps profitable) tools to accelerate payment and

provide sales advantage through extended terms.


LETTER OF CREDIT FRICTION

Fewer and fewer trade professionals understand letter of credit requirements.

Letter of credit process is complex and requirements are rigorous.

o Vary by markets and buyers o Time is short and penalties are severe

o Results are binary

Most ERP and sales order systems do not contemplate letter of credit or other trade document requirements – so very little is automated.

Heavy reliance on carrier, forwarder and other third party documents and LC compliance


LETTER OF CREDIT FRICTION

Up to 80% of presentations are discrepant.


LC PRESENTATIONS

DISCREPANT

CLEAN

Discrepancies – Why they occur and how to avoid them

Late Shipment

Definition

Goods shipped after the latest shipment date

Cause

Delayed shipment

Not enough time to manufacture, package and ship goods

Date of the AWB, BL, FCR or other transport document MUST be on or

before the latest ship date

Solution

Develop a standard operating procedure

Be mindful of delayed shipments

Ensure the LC’s latest ship date allows adequate time for manufacturing,

packaging and transport to vessel



Late Presentation

Definition

Documents presented after the period of presentation

Cause

Delayed shipment

Not enough time to manufacture, package and ship goods

Waiting on third party documents: BLs, Insurance, Legalization

Pitfall in the flow process

Solution


Follow up with third parties to ensure documents have quick turn around

Ensure LC period of presentation and other key dates allow adequate

time for manufacturing, packaging, shipping and documentation delivery

Track latest ship, latest presentation & expiry date



Stale LC / Expired LC

Definition

Expired LC: the presentation did not arrive at the expiry location by or

before the expiry date.

Stale LC: the presentation arrived at the expiry location before the expiry

date, but after the period of presentation had passed

Cause

Waiting on third party documents: BLs, Insurance, Legalization

Whole process was delayed, late shipment

Pitfall in the flow process

Solution


Follow up with third parties to ensure documents have quick turn around

Ensure LC period of presentation and other key dates allow adequate

time for manufacturing, packaging, shipping and documentation delivery



Inconsistent Data / Incorrect Details

Definition per our platform

Data shown on one or more documents do not match each other,

amount in words and figures differs

Goods description not per LC, not issued by beneficiary, beneficiary’s

name differs from LC, Cargo Insurance amount incorrect, etc

Cause

Human error, typos

Miscommunication, Document template, letterhead, assorted reasons

Solution

The Letter of credit is the guideline

Check the documents against the LC

Hire personnel with letter of credit and UCP 600 experience to manage

and/or outsource to qualified provider


Solutions -- Process

Establish, document and enforce disciplined process from beginning to end.

o International credit policies and procedures

o LC template and process for approving letters of credit received

o Enforce credit requirements and timing requirements across organization

o Invest in training across organization – especially international sales

©2013 Trade Technologies, Inc. All rights reserved.

Knowledge is Power

18

Solutions -- People

Utilize resources with logistics and UCP 600

experience to manage and/or outsource to

qualified provider

o Specialty providers

o Freight forwarders

o In-house personnel


Solutions -- Tools/Technology

Automate as much of process as possible,

including utilizing bank websites and third party

software.

o Reduces errors, delays and costs

o Distributes information across organization

o Provides visibility and control

o Data for reports provide a source of constant improvement



EXPORTER’S DESIGNATED RECIPIENT

TREASURY, FINANCE, CREDIT

LETTER OF CREDIT DOCUMENT

SALES, MARKETING, CUSTOMER SERVICE

PLANNING & PRODUCTION

PACKING, LOGISTICS

DISTRIBUTE LC AMEND OR RELEASE LC

TRADE TECHNOLOGIES TRADE TECHNOLOGIES

Establish LC recipient protocol

BENEFITS OF OPTIMIZING PROCESS

THROUGH TRADE TECHNOLOGIES.

Sell more internationally with less risk;

Clean documents banked on time;

Accelerated export receivables collection cycle;

Significant reductions in labor costs spent on preparing documents and tracking payments;

Reduced courier expense due to automated document delivery/presentation and third party data exchange;

Reduced discrepancy and other fees;

In-depth reporting for all completed transactions; and

24/7, audit-ready all-inclusive document/data storage


PROFITS RISKS

TRADE TECHNOLOGIES – Services Summary


Letter of Credit Advice

LC Review and Upload

ISSUED

SENT TO BENEFICIARY

COPY TO TRADE TECHNOLOGIES COPY

TRADE TECHNOLOGIES REVIEWS & INFORMS BENEFICIARY OF INCONSISTENCIES

AMENDMENTS IF ANY REQUESTED & RECEIVED

TRADE TECHNOLGOGIES UPLOADS TO BENEFICIARY’S FILES

Advising Bank

Beneficiary


Goods are Shipped

Trade Prepares Documents

TRADE BANKS DOCUMENTS

SAMPLE OUTSOURCED SERVICES SUMMARY

Negotiating Bank

Beneficiary

DSO Report


RESULTS – Fast Growing Solar Manufacturing Company


Fast Growing Start-up Solar Company New to Asia Market – Relied on Letters of Credit for Prompt and

Certain Payment

DSO reduced by over 60%

Discrepancies virtually eliminated

Asia Customers increased by 10X

RESULTS – Fortune 500 Technology Company


.

Fortune 500 Technology Company Experienced Exporter Focused on DSO improvement

DSO reduced by 65% to 7 days

No discrepancies on almost 700 presentations a year

Questions/ Contact Information

Director Global Sales

Barbara Trupkin

516-655-2550 (Mobile)


LETTER OF CREDIT STRUCTURE – KEY TERMS

Standard instructions for banks

Issuing Bank o Buyer Selects – based on buyer being credit-worthy

Advising Bank o Provide bank company wants to use for advising / exam

o If random advising bank used Who holds original LC?

Confirming Bank o Role of Confirming Bank

o How risk is transferred to confirming bank

o Cost of confirmation – is it required?

Reimbursement Bank o Why is reimbursement bank used

o Is reimbursement bank required?


BUYER’S BANK

GOT CREDIT?


Standard requirements of an LC Key LC Parties

51D: APPLICANT BANK

: : CANARA BANK

: : FOREIGN DEPARTMENTNegotiating Bank

: : PLOT NO. 1, SECTOR 34A

: : CHANDIGARH 160022 INDIA

: :

:50 : APPLICANT

: : PREMIER GOODS AND EQUIPMENT

SECTOR 72,CHANDIGARH NARU

160019,INDIA.

:59 : BENEFICIARY

: : THE STANDARDS COMPANY

1212 GATEWAY PARKWAY

: : HACKENSACK, NJ 11223

:41D: AVAILABLE WITH ... BY ...

: : ANY BANK IN USA

: : BY NEGOTIATION

:57A: "ADVISE THROUGH" BANK

BOFAUS3NXXX

Confirming and Reimbursement bank may or may not be involved


Opening Bank

Negotiating Bank

Applicant / Buyer

Beneficiary / Seller


Standard requirements of an LC Key LC Dates START THE CLOCK

:31C: DATE OF ISSUE

: : 111202

:31D: DATE AND PLACE OF EXPIRY

: : 120227USA

:44C: LATEST DATE OF SHIPMENT

: : 120106

:48 : PERIOD FOR PRESENTATION

: : DOCUMENTS ARE TO BE PRESENTED

: : WITHIN 21 DAYS FROM SHIPMENT DATE.

How soon is “soon enough” for LC to be advised?

Make sure LC is received BEFORE order is approved

Missing latest shipping date causes material discrepancy


TIMES UP!

Negotiating Bank


Standard requirements of an LC Key LC Finance Terms

:40E: APPLICABLE RULES

: : UCP LATEST VERSION

: :

:40A: FORM OF DOCUMENTARY CREDIT

: : IRREVOCABLE.

: :

:32B: CURRENCY CODE, AMOUNT

: : USD252550,00

: :

:41D: AVAILABLE WITH ... BY ...

: : ANY BANK IN USA

: : BY NEGOTIATION : :

:42C: DRAFTS AT ...

: : AT SIGHT MARKED WITH OUR LC NUMBER

: : AND DATE.

: :

:49 : CONFIRMATION INSTRUCTIONS

: : WITHOUT

: :

:71B: CHARGES

: : COMM/ALL BANK CHARGES OUTSIDE

: : INDIA ARE FOR THE BENEFICIARY'S ACCOUNT.

Time Drafts – Financing Options


Promise to pay in time OR


Standard requirements of an LC Key LC Shipping Terms

:43P: PARTIAL SHIPMENTS

: : NOT ALLOWED

: :

:43T: TRANSHIPMENT

: : ALLOWED

: :

:44E: PORT OF LOADING/AIRPORT OF DEPARTURE

: : ANY AIRPORT IN USA

: :

:44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION

: : NEW DELHI AIRPORT, INDIA

: : WHICH AIRPORT?

:44C: LATEST DATE OF SHIPMENT

: : 120106



Standard requirements of an LC Key LC Product Description and INCO Terms

:45A: DESCRIPTION OF GOODS AND/OR SERVICES

: : SCIENTIFIC EQUIPMENT AND ACCESSORIES

: : TERMS: FCA BASIS

Key issues with Product Description o No need for line item details

o Simple is best

INCO Terms o Risk elements

o How to decide




46A: DOCUMENTS REQUIRED:

1. Commercial Invoice in duplicate.

Incoterms with itemized relative values

Currency codes

Multiple payments clearly stated




2. Packing List in duplicate.

Packing conditions/Containerized?

Boxes? Crates? Wood ? Marks?

Accurate pieces and weights (lbs./Kgs)

Round up to nearest whole lb. or kg.

Partials to reflect exact items shipped




3. Certificate of Origin in duplicate

Match all PL details + origin of goods




3. Air waybill /Air Consignment Note in duplicate or

F C R – Forwarders Cargo Receipt

or

Received for shipment Receipt

Title per LC to be used

Non-negotiable documents. Consignment based on

opening banks instructions – their risk. Duplicate?

Applicable Incoterms on document and document

determined by Incoterm.




or

Ocean Bill of Lading

Clean

Full set to be stated on BL

Applicable Incoterms on document and

. document determined by incoterm

Date on board ( not date of issue)



Loading on board

“UN”CLEAN ON BOARD



• 47A: Additional Conditions:




• 1. Documents must be signed and dated by issuer

• 2. Invoice to quote Import is Covered under Non-negative

list of Import-Export Policy 2009-2014 and IE Code

no. 2237800629. INVOICE DETAIL AFTER THE FACT

3. Beneficiary’s Certificate certifying that one set of non-

negotiable documents have been sent to the applicant

immediately after shipment. ANOTHER DOCUMENT

PEN AND INK ONLY ALLOWED




• 4. House or Forwarder Air Waybill not acceptable

• 5. Harmonic code number to be stated on invoice and air waybill.

• 6. Description on invoice must be in Spanish and English.

• 7. Documents dated prior to issuance of LC not acceptable.




8. Third Party documents are not acceptable

9. Short form or blank backed transport document

is not acceptable.

10. All documents must state our LC no. and date

11. Discrepancy fee of $75.00 will apply to each

set of documents presented discrepant and

deducted from proceeds.




12. Beneficiary to notify shipment details directly

to applicant immediately upon shipment.

13. Air waybill evidencing goods shipped

14. Freight charges must be shown on air waybill

15. Invoice to show air waybill no.