About Documentary Payments

Documentary payments significantly reduce the risk involved in foreign trade transactions. For exporters, they help ensure payment on time and in full. For importers, they help ensure that the exporter has actually shipped the goods for which they are paying. Documentary payments reduce risk by requiring shipping documents as proof of the transaction. Documentary payments reduce the risk for exporters because importers cannot collect the documents they need to retrieve the goods (documents like bills of lading) until they pay for the goods. They reduce the risk for importers because they do not pay for the goods unless the exporter has provided all of the documents proving that the agreed-upon goods were shipped under the agreed-upon conditions. One of the most common types of documentary payments is the letter of credit.

Letters of Credit
A letter of credit is a legally negotiable document issued by a bank at the request of an importer. The letter of credit ensures the financial ability of the importer to pay for the goods by substituting the credit of a bank for the credit of the importer. There are several types of letters of credit differing according to their use and the number of banks involved. Outlined below are the business flow and the goods and value flow for a common foreign trade procedure using a letter of credit.

Business Flow in a Letter of Credit Transaction

1. The importer sends a purchase order to the exporter. The purchase order is a promise to contract purchase of the specified goods under certain conditions. 2. After receiving the purchase order, the exporter issues an order confirmation. The order confirmation is a promise to sell and deliver the goods according to the agreedupon conditions including payment conditions. 3. The importer, in compliance with the payment conditions the exporter requested, opens a letter of credit at the bank of its choice. This bank is called the opening or issuing bank. The order confirmation and the purchase order are the basis of the letter of credit. The terms and conditions between the bank and the importer are based on the importers credit standing. 4. After approving the request for the letter of credit, the opening bank can contact its branch or affiliate (called the advising bank) in the exporters country t o establish and confirm the letter of credit on behalf of the exporter. The letter of credit itself is usually sent through a telex with a set of identification codes that confirm its authenticity. 5. The advising bank authenticates the letter of credit and sends it to the exporter by registered mail.

The letter of credit has been formally established, confirming the ability of the importer to pay for the goods. The exporter now ships the goods.

Goods and Value Flow in a Letter of Credit Transaction

1. The exporter ships the goods to the importer as the letter of credits terms require. Usually the letter of credit specifies shipping details including the mode of transportation, loading and unloading ports, merchandise packaging, and insurance. 2. After shipping the goods, the exporter gives the negotiating bank the valid letter of credit and the required shipping documents. The exporter can select a negotiating bank or use the advising bank as the negotiating bank. 3. The negotiating bank examines the validity of the shipping documents for any discrepancies. If the documents contain discrepancies, the negotiating bank may refuse to accept the documents for negotiation. The exporter may then either apply for an amendment to the letter of credit to allow the discrepancies or submit a letter of guarantee to the negotiating bank. The letter of guarantee states that the exporter is liable if the importer refuses to accept the documents due to the discrepancies. If documents do not contain discrepancies, the negotiating bank accepts the documents and pays the exporter the contracted amount for the goods. Banking charges may be deducted from this payment depending on the letter of credits terms. 4. The opening bank reimburses the negotiating bank for the amount it paid the exporter. In exchange, it receives the shipping documents from the negotiating bank. The negotiating bank may be entitled to collect bank changes from the opening bank depending on the letter of credits terms. 5. The opening bank negotiates with the importer for payment in exchange for the shipping documents. The payment between the importer and the opening bank depends on the terms of their agreement. Some banks require 75% of the order value in advance and the remaining 25% when the shipping documents arrive. 6. After receiving the valid shipping documents from the opening bank, the importer presents the bill of lading to the shipping company and claims the goods. The importer uses other shipping documents like commercial invoices, packing lists, and certificates of origin during customs clearing.

Activate Letter of Credit in SD documents

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Purpose
The purpose of this wiki page is to clarify how to activate Letter of Credit in the SD documents.

Overview
A letter of credit is required for example if a customer is selling expensive goods to a poor country and needs a guarantee of payment. It works as follows: The customer in the poor country contacts his bank who issues a letter of credit supporting the payment of the goods. They contact the sellers bank and the process is fulfilled through the banks. Local bank = opening bank foreign bank = notifying bank. The material is delivered to the bank in the foreign country. When they receive payment it is passed to the customer. The money is then passed to the local bank and then on to the customer.

Customizing:
Path: sales & dist > Foreign trade > documentary payments > basic settings > risk management for FI

some prerequisites necessary in the customizing of the Credit Management area (SD-BF-CM) -> see note 18613 activate credit check for sales document types -> OVA7 assign document determination schema to order type -> OVFI assign customer determination schema to customer master record (payer) > XD02 -> sales area -> billing document -> field payment guarantee procedure customer determination schema + document determination schema -> payment guarantee procedure ( OVFJ ) payment guarantee procedure defines which forms of payment guarantee can be used ( more than one allowed ) the form of payment guarantee determines financial document category and financial document type ( VI52 ) financial document category and financial document define financial document indicator and bank indicator ( VX53 ) bank indicator defines which bank functions can be used in the FD ( VX54 ) financial document indicator defines: ( VX52 ) which documents must be used for the FD how does the FD look like: attributes, required fields, which fields must be checked when the FD is used in the order

VX52 you set the criteria for the LOC, open/hidden/optional fields etc. If you set a flag by the field it will create an incompletion entry when you create the letter of credit in VX11n

Creating a Financial Document

either transaction VX11N

or during order processing: billing -> extras -> financial document -> create (internal call of VX11N / the financial document category and financial document type defined by the FIRST form of payment guarantee in the payment guarantee procedure will be taken as default proposal for creating the FD)

Assigning an FD number to an sales order

must be done manually in the order on header or item level

if the FD no. is assigned in the header it is valid for all order items (provided that credit check is set to active in the item category customizing) system checks if the assigned FD no. fulfils the necessary requirements (values, dates, payer data etc.) 1. if the check is okay a. b. c. 2. a. b. credit status set to okay, open value is reduced in the FD record (VX13N) table S131 is updated (SE16) credit status is set to not okay order is blocked for delivery

if the check is not okay

In VA01 the log is only visible once, you can make a change to the payment terms and it is available again. Also you must call the customer address manually or you get an incompletion entry

Remarks

if no FD no. is assigned but required the credit status i s set to not okay (header -> status) status of the FD must be set to D so it can be used either the whole value of an order item can be covered by the SD or nothing! FD no. is split criteria for delivery creation! FD. no. is part of the delivery header. FD is also checked during delivery note creation. FD. no. is also part of the invoice header. Used just as a information field. theres no FD check in the invoice

Important transactions:

VKM3 Release of a blocked SD documents VX11N Create a financial document VXA1 Assigned sales documents (display all assigned)

VXA2 Available FDs VXA3 Blocked SD documents VXA7 To simulate the assignment of an FD doc

Relevant coding

Order check: function unit RV_LOC_CHECK_ORDER_LINE_ITEM Delivery check: RV_LOC_CHECK_DELIV_LINE_ITEM Tables: VBKD-LCNUM FD no. order (header and items) LIKP- LCNUM FD no. delivery header VBRK-LCNUM FD no. invoice header

Related Content
Related Notes
SAP Note: 1739363 LIPS-ABGES : Outbound Delivery Guaranteed with Zero % SAP Note: 1744831 Letter of credit for import SAP Note: 409393 Dokumentengeschft: Wertfortschreibung Auftrag, Lieferung