Basics of

Letters of Credit
 Agenda
❧ Topics to be covered
● Basic terms of Trade
● Letters of Credit
● INCOTERMS
● Applications

2
 Terms of Trade
❧ Cash in Advance
❧ Letter of Credit
❧ Collection
❧ Open Account

3
Buyer Takes ?
? ? Seller Takes
All the Risk All the Risk

Letter DocumentsDocuments
of Against Against Open
Pre-Pay Credit Payment Acceptance
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

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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
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A Foreign Check Does
Not Represent Immediate
Payment

❧ Foreign Checks Must Be

Sent Back for Collection
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Documentary Collections

Buyer/Importer Seller/Exporter

Buyer’s Bank Seller’s Bank

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Seller/Exporter UPS Buyer/Importer

Seller/Exporter Bank Buyer/Importer

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

Letters of Credit

❧ Parties to a letter of credit

❧ Letter of Credit Types
● Import
● Export
● Standby
❧ L/C cycle

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Parties to a Letter of
Credit
PARTY LETTER OF CREDIT
TERM
SELLER BENEFI CI ARY
(EXPORTER) ORGI NAL BENEFI CI ARY
SECOND BENEFI CI ARY
TRANSFEREE
ASSI GNEE
SHI PPER
DRAWER
BUYER ACCOUNT PARTY
(I MPORTER) APPLI CANT
ACCOUNTEE
DRAWEE

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Parties to a Letter of Credit
(Cont’d)
PARTY LETTER OF CREDIT TERM

BUYER’S BANK I SSUER

I SSUI NG BANK
OPENI NG BANK
PAYI NG BANK
ACCEPTI NG BANK
DRAWEE
I SSUI NG BANK ADVI SI NG BANK
CORRESPONDENT CONFI RMI NG BANK
TRANSFERRI NG BANK
NEGOTI ATI NG BANK
ACCEPTI NG BANK
PAYI NG BANK

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 Standby
Commercial
❧ Back up in case of ❧ Primary source of
non-payment or payment
non-performance ❧ Used for actual
❧ Generally not goods
expected to be ❧ Somewhat
drawn simultaneous
❧ Used for
services/goods
❧ “After the fact”
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 Standby L/C

❧Financial

❧Performance

❧Bid Bond

❧Performance Bond

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 Transaction
Cycle
Buyer/ Importer Seller/ Exporter
Applicant - 1 Beneficiary - 4
L/C L/C
Application

L/C
Advising Bank
Issuing Bank Confirming Bank
2 Negotiating Bank -3
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 Merchandise
Buyer/ Importer - 8,9b Seller/ Exporter - 5,11

DOCs $ $ DOCs

$
DOCs
Advising Bank
Issuing Bank - 7,9a Confirming Bank
Negotiating Bank - 6,10
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 DRAFT

At January 5
Sight 20 00
ABC Exporter 8,020.00
Pay to the order of $
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

Standard Chartered Bank ABC Exporter

To
New York, NY

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Endorse the back!
•Common Documents

❧ Draft
❧ Transport Document (b/l)
❧ Commercial invoice
❧ Insurance policy or certificate
❧ Packing list
❧ Certificate of origin, weight
❧ Beneficiary statements
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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

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Critical Things to Look For

❧ Latest shipment date

❧ Expiry date
❧ Partial shipments
❧ Merchandise description
❧ Can you provide documents required

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 Domestic
International
❧ Known bank ❧ Unknown bank
❧ Known country (??)
risk ❧ Country stability
❧ Known customs ❧ Currency stability
and language ❧ Foreign laws and
usages

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Confirmation

Out of Bus
iness

Issuing Confirming
Bank Bank

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Credit Issues
❧ As Applicant
● your Credit Worthiness
● your Collateral
❧ As Beneficiary
● probably none

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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

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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)
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