Letter of Credit : A Boon for Cross Border Trade

Group 5
Ashish Reddy
Madhavi Krishna
Nayantara MB
Pratik Singh
 Letter of Credit Simplified

A letter of credit is a negotiable instrument that is

issued by a financial institution (bank) on behalf of
the buyer (of goods) to guarantee the seller (or
beneficiary) that the latter will be in receipt of the
full amount of payment on presenting the advising
bank with the necessary shipping documents that
confirm the shipment of goods within the given time
frame.
 Letter of Credit Simplified

It is generally irrevocable.

The instrument has come to light only to facilitate
international trade.
Due to the nature of international dealings including
factors such as distance, differing laws in each
country and difficulty in knowing each party
personally, the use of letters of credit has become a
very important aspect of international trade.
 Letter of Credit Simplified

The bank also acts on behalf of the buyer (holder of

letter of credit) by ensuring that the supplier will not
be paid until the bank receives a confirmation that
the goods have been shipped.
 Sample Letter of Credit

SAMPLE LETTER OF CREDIT/1

(See Instructions on Page 2)
Name and Address of Bank
Date: __________________
Irrevocable letter of Credit No. ______________
 
Beneficiary:              Commodity Credit Corporation                  Account Party:  Name of Exporter
                                                                                                                           Address of Exporter
Gentlemen:
We hereby open our irrevocable credit in your favour for the sum or sums not to exceed a total of _______________dollars
($__________), to be made available by your request for payment at sight upon the presentation of your draft accompanied by
the following statement:
                                                (Insert applicable statement)/2
This Letter of Credit is valid until _____________________/3, provided, however, that this Letter of Credit will be
automatically extended without amendment for _________________/4 from the present or any future expiration date thereof,
unless at least thirty (30) days prior to any such expiration date the Issuing Bank provides written notice to the Commodity Credit
Corporation at the U.S. Department of Agriculture, 14th and Independence Avenue, S.W., Stop 1025, Washington, D.C. 20250-1025,
of its election not to renew this Letter of Credit for such additional ______________________/5 period.  The notice required
hereunder will be deemed to have been given when received by you.
This letter of Credit is issued subject to the Uniform Customs and Practice for Documentary Credits, 2007 Revision, International
Chamber of Commerce Publication No. 600
(Name of Bank)
By:  _______________________
 Types of Letter of Credit

Revocable versus Irrevocable LOC

It is vital that a letter credit is irrevocable.
 Once an irrevocable letter of credit is open it cannot be changed
without the written consent of all parties including the beneficiary.
 A revocable letter of credit can be changed or withdrawn without
notifying the beneficiary.
 This may raise several problems.
Confirmed versus Advised LOC
 Confirmed is preferred, as the Confirming Bank promises to
pay.
 Advised does not guarantee the creditworthiness of the Opening
Bank.
 Types of Letter of Credit
Straight versus Negotiation
 A negotiation letter of credit can be presented to any bank.
 A straight letter of credit can only be paid in the country of the
Paying Bank.
Sight versus Usance
 At sight means the Beneficiary is paid as soon as the Paying
Bank has determined that all necessary documents are in
order.
 Usance time can be between 30 and 180 days after the bill of
lading date.
 This is a form of delayed payment, and should be avoided.
 Requesting a Letter of Credit

Once you have sent a pro forma invoice or an order acknowledgement to your buyer, you
should request a letter of credit.
Details on what such a request should contain are available from banks that handle
letters of credit.
Here is a list of items that you should ask your buyer to provide when preparing a letter of
credit.
That the letter of credit be confirmed, irrevocable, and at sight.

Suggest a Paying Bank that is convenient to you.

Quantity of items being shipped.

Value of items being shipped.

Specify the currency.

Specify the latest shipping and expiration date.

Specify the appropriate Incoterm.

State whether partial shipments are allowed.

Specify which documents that are required for payment.

It is best to provide the buyer with a sample form for requesting a letter of credit.
 Presenting A Letter Of Credit

Once a letter of credit has been received, it needs to presented

to the bank for payment along with other documents which
may include:
 Commercial invoice
 Consular invoice
 Insurance documents
 Bill of lading
 Certificate of origin
 Packing list
 Inspection certificates
 Import permits
The bank will not pay if there are discrepancies and the
documentation is not in order.
 Common Mistakes made with LOC

Exporters make the following common mistakes, which cause them

to lose the sale or not get paid.
 Presenting documents late, after the letter of credit has expired.
 Shipping their goods after the specified date.
 Making a partial shipment when partial shipment is not allowed.
 Not presenting the proper documents.
 Not legalizing the documents.
 Not obtaining completed bills of lading.
 Not obtaining required insurance.
 Submitting copies instead of originals.
 Spelling mistakes.
 Mathematical mistakes.
In addition to creating payment problems, mistakes can also cause
problems for the importer when clearing customs.
 Payment Terms

Consider
Documentary
Require Consider
Factor Collection
Letter of Credit Open Account
Against
Payment
Type Of Customer Undetermined Acceptable Excellent
Relationship New Established Established
Economic Stability Unstable Stable Very Stable
Regular
Type of Order Custom In Stock
Production
Transaction Size Large Moderate Small
Cash Flow Always Never Never
 Conditions for Issue of LC.

A bank issues an import letter of credit on the behalf of

buyer or importer under the following conditions:
When an importer is importing items within its own
nation.
Any act of merchandise where products from the nation
is sold to another commercially.
When exporter from India who is executing a contract
outside his own nation needs importing items from a
third nation to the nation where he is performing the
deal.
 Contemporary Charges on a LC

Opening Charges : This comprises of promise and

procedure charges for the time of the letter of credit.
Retirement Charges: This is to be remunerated when
the time of letter of credit ends. The bank offering
the letter analyses the bill according to UCPDC
(Uniform Customs and Practice for Documentary
Credits), and tax charges based on cost of items.
 Risks associated with LC and Cross-Border
Trade.
Basic Risks:
1. Financial Standing of the Importer.
2. Sovereign Risk.
3. Foreign Exchange fluctuations.
4. Price Risk.
5. The products involved.
 Alternative Uses of LC

Alternative to bid bonds.

To obtain down-payments or progress payments.
To secure foreign bank credit.
To obtain final payment.
To secure a bank guarantee.
To secure trade credit.
 How does LC propagate foreign trade?

It gives exporters an opportunity to enter to global

trade, without them incurring any undue risk and
without any adverse impact on corporate cash flow
or hitting the balance sheet negatively.
Also, it is traditional means of payment assurance.
It has basis for several products and services.
A LC benefits both parties by helping them trade
what is profitable.
Learn, Advise, Confirm and Negotiate.
Thank You!