Scribd
Upload
159 views26 pages

Understanding Letters of Credit Basics

This document provides an overview of letters of credit and related terms. It defines a letter of credit as a bank's promise to pay the seller once the seller has met the terms outlined in the letter. The key parties involved are the buyer, seller, issuing bank and advising/confirming banks. There are two main types - commercial letters of credit used for actual goods, and standby letters used as a backup for non-payment or non-performance. The transaction cycle involves the buyer applying for a letter with their bank, which then advises or confirms it with the seller's bank, allowing the seller to ship goods once certain documents are provided. Critical aspects that must be checked include terms, expiration dates and document requirements.

Uploaded by

Ridhesh Rao
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
159 views26 pages

Understanding Letters of Credit Basics

This document provides an overview of letters of credit and related terms. It defines a letter of credit as a bank's promise to pay the seller once the seller has met the terms outlined in the letter. The key parties involved are the buyer, seller, issuing bank and advising/confirming banks. There are two main types - commercial letters of credit used for actual goods, and standby letters used as a backup for non-payment or non-performance. The transaction cycle involves the buyer applying for a letter with their bank, which then advises or confirms it with the seller's bank, allowing the seller to ship goods once certain documents are provided. Critical aspects that must be checked include terms, expiration dates and document requirements.

Uploaded by

Ridhesh Rao
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Basics of Letters of Credit

Agenda
Topics to be covered

Basic terms of Trade Letters of Credit INCOTERMS Applications

Terms of Trade
Cash in Advance Letter of Credit Collection Open Account

Buyer Takes All the Risk

?? ?

Seller Takes All the Risk

Pre-Pay

Letter of Credit

Documents Against Payment

Documents Against Acceptance

Open Account

Who Should Take the Risk?


4

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

Policy Issues
2) Set Policies for Each Method a. Cash in advance wire transfersVs. check b. Open account discount policy, controls etc. c. Documentary Collections payment at sight d. Letters of Credit Policy Letter L/C Checklist 3) Enforce the Policies That You Set

A Foreign Check Does Not Represent Immediate Payment


Foreign Checks Must Be Sent Back for Collection
7

Documentary Collections

Buyer/Importer

Seller/Exporter

Buyers Bank

Sellers Bank
8

Seller/Exporter

UPS

Buyer/Importer

Seller/Exporter

Bank

Buyer/Importer

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


10

Letters of Credit
Parties to a letter of credit Letter of Credit Types

Import Export Standby

L/C cycle

11

Parties to a Letter of Credit


PARTY
SELLER (EXPORTER)

LETTER OF CREDIT TERM


BENEFICIARY ORGINAL BENEFICIARY SECOND BENEFICIARY TRANSFEREE ASSIGNEE SHIPPER DRAWER ACCOUNT PARTY APPLICANT ACCOUNTEE DRAWEE

BUYER (IMPORTER)

12

Parties to a Letter of Credit (Contd)


PARTY
BUYERS BANK

LETTER OF CREDIT TERM


ISSUER ISSUING BANK OPENING BANK PAYING BANK ACCEPTING BANK DRAWEE ADVISING BANK CONFIRMING BANK TRANSFERRING BANK NEGOTIATING BANK ACCEPTING BANK PAYING BANK
13

ISSUING BANK CORRESPONDENT

Standby
Back up in case of non-payment or non-performance Generally not expected to be drawn Used for services/goods After the fact

Commercial
Primary source of payment Used for actual goods Somewhat simultaneous

14

Standby L/C
Financial
Performance Bid Bond Performance Bond

15

Transaction Cycle
Buyer/ Importer Applicant - 1
L/C Application

Seller/ Exporter Beneficiary - 4


L/C

L/C

Issuing Bank 2

Advising Bank Confirming Bank Negotiating Bank -3


16

Buyer/ Importer - 8,9b


DOCs

Merchandise

Seller/ Exporter - 5,11


$ DOCs

DOCs

Issuing Bank - 7,9a

Advising Bank Confirming Bank Negotiating Bank - 6,10


17

DRAFT
At

Sight
ABC Exporter

January 5

20 00

Pay to the order of

8,020.00

Eight Thousand Twenty Dollars and 00/100

Dollars

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

To Standard Chartered Bank


New York, NY

ABC Exporter

18

Endorse the back!

Common Documents
Draft Transport Document (b/l) Commercial invoice Insurance policy or certificate Packing list Certificate of origin, weight Beneficiary statements
19

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

20

Critical Things to Look For


Latest shipment date Expiry date Partial shipments Merchandise description Can you provide documents required

21

Domestic
Known bank Known country risk Known customs and language

International
Unknown bank (??) Country stability Currency stability Foreign laws and usages

22

Confirmation

Issuing Bank

Confirming Bank
23

Credit Issues
As Applicant

your Credit Worthiness your Collateral probably none

As Beneficiary

24

Cost Issues
As Beneficiary

minimal cost usually if confirmed, expect to pay based on your credit and/or collateral use of other bank services

As Applicant

25

Where to get more information


ICC Uniform Customs and Practice for Documentary Credits (UCP 500) ICC Guide to Documentary Credit Operations for the UCP 500 INCOTERMS 1990 International Standby Practices 1998

(http://www.iccwbo.org)
26

You might also like