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LETTERS OF CREDIT

I. THE NEED FOR LETTERS OF CREDIT A. USES TO THE SELLER


WITH A FIRST-TIME CUSTOMER WITH A CREDIT RISKY BUYER WITH A CUSTOMER FROM A COUNTRY WITH EXCHANGE CONTROLS WHO MAY FACE THE RISK BUYER DEFAULTS BECAUSE PRICES HAVE DROPPED

LETTERS OF CREDIT
B. DEFINITION 1. a letter addressed to the seller, 2. written and signed by a bank, 3. who acts on the buyers behalf. -Bank promises to pay drafts, provided seller performs exactly.
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LETTERS OF CREDIT
C. USUAL CONDITIONS: 1. Seller submits draft with documents. a. Documents 1) negotiable bill of lading - can be assigned 2) insurance certificate 3) commercial invoice
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LETTERS OF CREDIT Advantages to the Exporter


Credit risk eliminated
Reduces exchange rate and political risk No Need for Credit Check Requirements to pay are well-known
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Preshipment risk avoided


Facilitates financing Immediate payment

L/Cs Facilitate Financing


Bankers Acceptances : require a time draft from the exporter to the importers bank
Under Letters of credit, B/As are especially easy to create With sound credit backing, banks ready to provide needed financing an L/C is like a purchase order that allows additional financing
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LETTERS OF CREDIT
Advantages to the Importer (less than the exporter) Expert Examination of Documents Sources of Supply expand Financing No cash tied up Payment only after compliance
To ship by a certain date requires an on-board bill of lading
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On-Board Bill of Lading


Definition: shipping waybill certifying presence of goods: a document establishing that goods have been loaded onto a particular vessel and that the carrier is now responsible for their safe passage

LETTERS OF CREDIT
II. PARTIES TO THE TRANSACTION A. THE BENEFICIARY B. ACCOUNT PARTY (usually importer) C. OPENING BANK D. ADVISING BANK usually a correspondent of opening bank
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LETTERS OF CREDIT
E. F. PAYING BANK
agent for opening bank

NEGOTIATING BANK
any bank who submits documents to the opening bank

G.

CONFIRMING BANK
fee usually paid by opening bank

bank charges a fee


considered very safe from exporters viewpoint, i.e. contains obligation to pay on the part of two banks.

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LETTERS OF CREDIT: LEGAL CONSIDERATONS


III. LEGAL CONSIDERATIONS A. Case Law B. U.S. Code law Article 5 of the UCC C. Contractual Law Uniform Custom and Practices (UCP) D. Banks Deal in Documents only
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OPENING AN L/C
The Route of a Letter of Credit

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The Path of a Letter of Credit


Negotiating Bank
Exporter Advising Bank Paying Bank Importer Opening Bank Confirming Bank
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LETTERS OF CREDIT
IMPOR TER

ACCOUNT PARTY

OPENING or ISSUING BANK

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LETTERS OF CREDIT
ADVISING BANK PAYING BANK

EXPORTER

BENEFICIARY

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OPENING LETTERS OF CREDIT


IV. OPENING A LETTER OF CREDIT
should be done as soon as contract signed especially if there is a price decline

A. Credit Factors involves:


1. beneficiary, account party and opening bank 2. promise by bank to pay whenever proper documentation is presented 3. Requires analysis of creditworthiness

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OPENING LETTERS OF CREDIT


1. Unsecured Credit requires financial strength and integrity bill of lading consigned directly to the importer underlying goods not used as collateral
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2. Secured Credit requires security such as cash-commercial credit merchandise as collateral factors: export must be creditworthy are goods readily marketable adequacy of insurance coverage

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OPENING AN L/C
Cash Collateral Credit in between alternative
terms depend on the strength of the importer

B. REQUIREMENTS FOR THE ACCOUNT PARTY 1. Application importance of documents disadvantage of too much detail importance of insurance

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OPENING AN L/C
C. REQUIREMENTS FOR THE OPENING BANK 1. Receipt of Application 2. Advice to Beneficiary 3. Amendments

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LETTERS OF CREDIT: CONTENTS


V. CONTENTS A. Typical Information 1. Place/date 2. Names of Account party/beneficiary 3. General description of merchandise 4. Tenure of the draft 5. Paying bank 6. % amount of draft
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LETTERS OF CREDIT: CONTENTS


CONTENTS (cont) 7. Ports of origin/destination 8. List of exact documents to attach to drafts 9. Maximum amount of drafts 10.Expiration date of credit 11.Irrevocable/revocable?
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LETTERS OF CREDIT: PAYMENTS


VI. PAYMENTS A. Action by beneficiary B. Checking of documents
C. Common discrepancies

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DOCUMENTARY L/CS
VII. DOCUMENTARY L/C EXAMINATION PROCEDURES A. Schedule
B. L/C and the drawing C. Commercial invoice

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DOCUMENTARY L/CS
D. Marine bill of lading
E. Other documents F. Actions in Cases of Document Discrepancies

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