Basics ofLetters of Credit

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Information about Basics ofLetters of Credit
Business-Finance

Published on March 23, 2009

Author: aSGuest15274

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Basics ofLetters of CreditBY:Anand Kr. Tiwari & Raushan KumarAmity B. School : Basics ofLetters of CreditBY:Anand Kr. Tiwari & Raushan KumarAmity B. School Agenda : 2 Agenda Topics to be covered Basic terms of Trade Letters of Credit INCOTERMS Applications Terms of Trade : 3 Terms of Trade Cash in Advance Letter of Credit Collection Open Account Slide 4: 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 Policy Issues : 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 Policy Issues : 6 Policy Issues 2) Set Policies for Each Method a. Cash in advance – wire transfers Vs. 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 : 7 A Foreign Check Does Not Represent Immediate Payment Foreign Checks Must Be Sent Back for Collection Documentary Collections : 8 Documentary Collections Buyer/Importer Seller/Exporter Seller’s Bank Buyer’s Bank Slide 9: Buyer/Importer Seller/Exporter Bank Seller/Exporter Buyer/Importer UPS Slide 10: 10 A Letter of Credit is: A substitution of the bank’s credit for the buyer’s A bank’s promise to pay upon the satisfactory compliance with the L/C’s terms and conditions by the L/C’s Beneficiary Note – Banks Deal in Documents ONLY Letters of Credit : 11 Letters of Credit Parties to a letter of credit Letter of Credit Types Import Export Standby L/C cycle Parties to a Letter of Credit : 12 Parties to a Letter of Credit PARTY LETTER OF CREDIT TERM Parties to a Letter of Credit (Cont’d) : 13 Parties to a Letter of Credit (Cont’d) PARTY LETTER OF CREDIT TERM Standby Commercial : 14 Standby Commercial Back up in case of non-payment or non-performance Generally not expected to be drawn Used for services/goods “After the fact” Primary source of payment Used for actual goods Somewhat simultaneous Slide 15: 15 Standby L/C Financial Performance Bid Bond Performance Bond TransactionCycle : 16 L/C L/C L/C Application Buyer/ Importer Applicant - 1 Seller/ Exporter Beneficiary - 4 Advising Bank Confirming Bank Negotiating Bank -3 Issuing Bank 2 TransactionCycle Slide 17: 17 $ $ Merchandise Buyer/ Importer - 8,9b Seller/ Exporter - 5,11 Advising Bank Confirming Bank Negotiating Bank - 6,10 Issuing Bank - 7,9a Endorse the back! : 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 ABC Exporter DRAFT Drawn under Documentary Credit No. M0491110NS00616, of the Standard Chartered Bank, Seoul, Korea, dated September 17, 1999 Endorse the back! Common Documents : 19 Common Documents Draft Transport Document (b/l) Commercial invoice Insurance policy or certificate Packing list Certificate of origin, weight Beneficiary statements When you receive an L/C : 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 Critical Things to Look For : 21 Critical Things to Look For Latest shipment date Expiry date Partial shipments Merchandise description Can you provide documents required Domestic International : 22 Domestic International Known bank Known country risk Known customs and language Unknown bank (??) Country stability Currency stability Foreign laws and usages Slide 23: 23 Confirmation Confirming Bank Issuing Bank Out of Business Credit Issues : 24 Credit Issues As Applicant your Credit Worthiness your Collateral As Beneficiary probably none Cost Issues : 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 Where to get more information : 26 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)

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