4. Buyer Takes
All the Risk
Pre-Pay
Letter
of
Credit
??
?
Documents
Against
Payment
Seller Takes
All the Risk
Documents
Against
Acceptance
Open
Account
Who Should Take the4 Risk?
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
5
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
6
7. A Foreign Check Does
Not Represent Immediate
Payment
Foreign Checks Must Be
Sent Back for Collection
7
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
10
11. Letters of Credit
Parties to a letter of credit
Letter of Credit Types
Import
Export
Standby
L/C cycle
11
12. Parties to a Letter of Credit
PARTY
SELLER
( EXPORTER)
BUYER
( I MPORTER)
LETTER OF CREDIT
TERM
BENEFI CI ARY
ORGI NAL BENEFI CI ARY
SECOND BENEFI CI ARY
TRANSFEREE
ASSI GNEE
SHI PPER
DRAWER
ACCOUNT PARTY
APPLI CANT
ACCOUNTEE
DRAWEE
12
13. Parties to a Letter of Credit
(Cont’d)
PARTY
BUYER’S BANK
I SSUI NG BANK
CORRESPONDENT
LETTER OF CREDIT TERM
I SSUER
I SSUI NG BANK
OPENI NG BANK
PAYI NG BANK
ACCEPTI NG BANK
DRAWEE
ADVI SI NG BANK
CONFI RMI NG BANK
TRANSFERRI NG BANK
NEGOTI ATI NG BANK
ACCEPTI NG BANK
PAYI NG BANK
13
14. 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
17. Buyer/ Importer - 8,9b
DOCs
Merchandise
Seller/ Exporter - 5,11
$
$
DOCs
Issuing Bank - 7,9a
DOCs
$
Advising Bank
Confirming Bank
Negotiating Bank - 6,10
17
18. DRAFT
At
Sight
ABC Exporter
Pay to the order of
January 5
$
Eight Thousand Twenty Dollars and 00/100
20 00
8,020.00
Dollars
Drawn under Documentary Credit No. M0491110NS00616, of the
Standard Chartered Bank, Seoul, Korea, dated September 17, 1999
To
Standard Chartered Bank
ABC Exporter
New York, NY
Endorse the back!
18
19. •Common Documents
Draft
Transport Document (b/l)
Commercial invoice
Insurance policy or certificate
Packing list
Certificate of origin, weight
Beneficiary statements
19
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
20
21. Critical Things to Look For
Latest shipment date
Expiry date
Partial shipments
Merchandise description
Can you provide documents required
21
22. Domestic
Known bank
Known country risk
Known customs and
language
International
Unknown bank (??)
Country stability
Currency stability
Foreign laws and
usages
22
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
25
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)
26