LETTER OF CREDIT

Group presentation

PROCESS: HOW IT WORKS? CLASSIFICATION DOCUMENTS & NEGOTIATION FORM

DEFINITION
Letter of credit is a binding agreement by a bank to pay a certain sum of money when the exporter presents necessary documents to the bank

Exporter & buyer sign a contract

Buyer instructs issuing bank to open an L/C Advising bank advises exporter that the L/C has been opened Issuing bank informs advising bank that the L/C has been opened

STAGE 1: ISSUING A LETTER OF CREDIT

Seller ships the goods Carriers issues shipping document Exporter presents the shipping document to the advising bank

Advising bank checks the documents and (if appropriate) pays the exporter

Advising bank notifies issuing bank & forwards shipping documents

Issuing bank transfers necessary funds to advising bank

STAGE 2 PRESENTING A LETTER OF CREDIT

all parties concerned deal in documents, and not in goods, services and/or other performances to which the documents may relate. (UCP)

The buyer also has a safeguard: the bank will pay only if the shipping documents are exactly in line with the buyers instructions

DISCREPANCY
3 solutions for the exporter:
Provide the missing paperwork or correct errors What if thethe bank reject an terms L/C of the LC Ask the buyer to instruct bank to change of discrepancies? Ask the bankbecause to process the LC with the discrepancies but to pay only when (and if) the issuing bank permits payment

Irrevocable vs Revocable
IRREVOCABLE firm commitment to pay provided no discrepancy cannot be canceled or amended without the seller's prior written approval REVOCABLE can be amended or canceled by buyer without approval of the seller provide no protection to seller rarely used

Confirmed vs Unconfirmed
CONFIRMED add endorsement of seller's bank to that of buyer's bank provide the highest level of protection to the seller cannot be canceled unilaterally by buyer banks guaranty payment on its maturity date

UNCONFIRMED
only the issuing bank agrees to guarantee payment increases the risk for the bank that honors the L/C

SETTLEMENT BY SETTLEMENT BY SETTLEMENT BY SETTLEMENT BY SIGHT PAYMENT DEFERRED PAYMENT ACCEPTANCE NEGOTIATION

Seller presents to accepting bank documents a bill L/C Exporter is not presents payable until to bank a number the documents of days after & a& bill delivery of of Exporter presents necessary documents to the paying bank exchange drawn buyer Safe exchange but delayed drawn on on payment buyer After checking documents, bank pays face value of L/C Accepting bank pays when it matures The The exporter negotiating can bank exchange negotiate the L/C thefor billcash at a at discount a discount Exporter can exchange L/C for cash at a discount Least satisfactory to the exporter

OTHER KINDS OF L/C

Standby L/C Transferable L/C Irrevocable L/C without recourse Revolving L/C Back-to-back L/C

STANDBY L/C
Serve as a secondary payment mechanism Bank issues standby L/C to provide assurance of performing the obligations under the contract Both parties dont expect the L/C to be drawn upon A substitute for bond performance Different from a commercial L/C

TRANSFERABLE L/C
The 1st first beneficiary may require issuing bank to transfer all or any part of L/C value to others Can be transfered only once Transfering charges levied in the 1st benificiary

IRREVOCABLE WITHOUT RECOURSE L/C

Issuing bank cannot recourse money after paying the beneficiary under any circumstances

REVOLVING L/C
After being used, L/C automatically comes into force & revolves until the contract is performed

BACK-TO-BACK L/C
L/C established on another L/C (as collateral) Independent of the 1st L/C Require larger number of documents Smaller total value Sooner delivery date

PART 3
Associated Document Negotiating Terms

COMMERCIA L INVOICE

TRANSPORT DOCUMENT

THE INSURANCE DOCUMENT

COMMERCIA L INVOICE

Indicating products, quantities & prices

Invoice information must comply with that in the L/C

TRANSPORT DOCUMENT

THE INSURANCE DOCUMENT

COMMERCIA L INVOICE

TRANSPORT DOCUMENT

Marine bill of lading Air waybill Railway consignment note Road consignment note Combined transport bill of lading

THE INSURANCE DOCUMENT

COMMERCIA L INVOICE

TRANSPORT DOCUMENT

THE INSURANCE DOCUMENT

Insurance included in CIF and CIP contracts.

Insurance information must be identical with that in L/C.

OTHER DOCUMENTS
Financial Documents: Bill of Exchange, Coaccepted Draft Official Documents: License, Embassy legalization, Origin Certificate, Inspection Certificate, Phytosanitary certificate Special Requirements

AGREEMENT

INCORPORATION

SPECIFICATION

VERIFICATION

COMPLIANCE

The list is incorporated into the The exporter The buyer and the buyer contract applies for the discuss and list L/C specifying all required the agreed documentation documentation

The exporter checks the credit to see The exporter that required documentation checks documentation is as agreed & submits it to the bank

PART 4 FORM

1. Applicants information
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2. Beneficiarys information 3. The amount of credit 4. Date & place of expiry

5. The availability
6. Required documents

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7. Term of shipment 8. Transport information 9. Transhipment 10. Partial shipment 11. Description of goods or services

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Thank you for your attention! Any questions?