INTERNATIONAL TRADE

FINANCE

INTERNATIONAL TRADE
FINANCE
Topics to be Discussed in Chapter
Letter of Credit
Uniform Customary and Practices for Documentary Credits

Documentary Letter of Credit

Standby Letters of Credit
Alternative Methods of Guaranteeing Performance
Alternative Methods of Financing

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.

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.

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

Revocable Letter of Credit-bank can revoke letter of

credit.
Very Seldom Used.

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

UNIFORM CUSTOMS AND PRACTICES

FOR DOCUMENTARY CREDITS
Uniform Customs and Practices for Documentary
Credits are rules and procedure published by
International Chamber of Commerce
Provisions

Care should be taken in specifying expiration dates

The applicant must specify if the letter of credit is transferable.
The applicant must specify that the letter be confirmed
The currency of the letter of credit should be designated using
ISO currency code.
The applicant should designate the nominating bank

UNIFORM CUSTOMS AND PRACTICES FOR

DOCUMENTARY CREDITS
Uniform Customs and Practices for Documentary
Credits-provisions continued.
Applicant must specify clearly whether the letter of
credit will be available for partial shipment.
The letter of credit should provide transport details
Under rule of strict compliance, banks are authorized
to reject documents if there are any discrepancies.
Facial Compliance Rule-bank only required to review
documents.
Banks are not required to investigate trade customs or usage

UNIFORM CUSTOMS AND PRACTICES

FOR DOCUMENTARY CREDITS
Uniform Customs and Practices for Documentary
Credits-provisions continued
Description of the Goods should be clear and brief as
possible.
In the listing of documents, should list the contents of each
document.
Transportation Documents must be clear.
Insurance Documents must be clear.
Time periods for presentation of documents must be
specified.
Title of Letter of Credit should specify irrevocable.

DOCUMENTARY LC
Being used worldwide
Safer for exporter as it makes sure he will get his
money for the goods sold provided that he
presents the correct documents
Ensure the importer that he will get the goods
bought as long as he pays for them or agreed to
pay in a fixed date in the future.
taking more time than the other methods of
payment

STANBY LETTER OF CREDIT

Standby Letter of Credit is a letter of credit
that represents an obligation to the
beneficiary on the part of the issuer
International Standby Practices
Standby Letters of Credit secures contractual
obligations in construction contracts, service
contracts, warranties, counter-trade trade
obligations, secures international loans and
supplies.

ALTERNATIVE METHODS OF
GUARANTEEING PERFORMANCE

Alternative Methods of Guaranteeing

Performance
Types
Performance Bond-a guarantee from an insurance
company to pay insured in case of default.
Bid Bond-insure against the risk that a bidder may
not honor its bid.
Credit Surety-guarantees the repayment to a bank or
lender who finances an export transaction or
development project. Exim Bank of World Bank

ALTERNATIVE METHODS OF
GUARANTEEING PERFORMANCE

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.

SOURCES OF TRADE
FINANCE
Commercial Banks
Export Financing
Borrowing against trade documents
Factoring-exporter transfers title to its account receivable to a
factoring company at a discount.
Forfaithing-selling at a discount, of longer term receivables or
promissory notes to a foreign buyer.
Transferable Credit-suppliers accept part of the letter of credit
that seller receives from buyer in export transaction.
Back to Back Letter of Credit-buyer makes arrangements with
third bank to make loan.

SOURCES OF TRADE FINANCE

Government Assistance Programs
Eximbank in United States Arranges loans, guarantees, working capital and insurance

Foreign Corporation Insurance Agency

Protects against default on exports sold under open
accounts

Overseas Private Insurance Corporation

Offers performance bonds

Small Business Administration

Revolving line of credit