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    Ridhesh Rao
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    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.

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    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.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
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    Download as ppt, pdf, or txt
    91 views26 pages

    Basics of LC

    Uploaded by

    Ridhesh Rao
    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.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
    of 26

    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

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