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Letter of Credit
Uniform Customary and Practices for Documentary Credits
Standby Letters of Credit Alternative Methods of Guaranteeing Performance Alternative Methods of Financing
Seller Buyer Government Programs
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LETTERS OF CREDIT
Letters of Credit a commercial bank guarantee of either payment by the buyer or performance by the seller.
Purposes
Guarantees payment by the buyer (letter of credit) or to guarantee performance by seller (standby letter of credit. Once letter of credit is issued, the seller can use instrument to finance production of goods.
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LETTERS OF CREDIT
Functions of Letters of Credit
Payment Instrument
In absence of letter of credit, sight or time drafts used. No Guarantee of Payment.
Letters of Credit Involves Bank in Transaction.
Performance Guarantee
In Documentary Transaction no guarantee of performance.
Payment by bank would not be released until goods and document conforms to specifications on letter of credit.
Finance Instrument
Seller can use letter of credit as collateral to finance production and exportation of good.
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LETTERS OF CREDIT
Types of Letters of Credit
Irrevocable Letter of Credit-bank cannot revoke letter of credit. To change letter of credit, must get written agreement.
Most Popular in International Commercial Transaction
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LETTERS OF CREDIT
Letter of Credit Transaction
After formation of contract, buyer arranges for bank to open letter of credit. Buyers bank prepares irrevocable letter of credit. Buyers bank sends irrevocable letter of credit to a US bank for confirmation. US bank prepares a letter of confirmation to exporter along with irrevocable letter of credit Exporter arranges for freight forwarded to deliver goods. Freight Forwarder prepares documents. Exporter presents document to Bank indicating full compliance. Bank bound by rule of strict compliance Bank reviews documents and authorizes payment
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Types-Continued
Retention Fund-in large or government projects, a percentage is deducted from each payment due to the supplier or contractor and is retained in a fund pending completion of project. Demand Guarantee secures performance of a non-monetary obligation.
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