3 Methods of Payment Cash in Advance Letters of Credit Documentary CollectionSight/Time Draftsaka D/P, D/AOpen AccountRisk mitigation:Export Credit InsuranceStandby L/C’sL /C
4 Importer pays Exporter prior to shipment Cash in AdvanceImporter pays Exporter prior to shipmentExporter has no risk of non-payment or non-acceptanceImporter has risk that exporter will not ship the goods as orderedUsed occasionally for small amounts, new customers, one-time salesGoodsExporterImporter
5 Protects the interests of both the Importer and the Exporter Letters of CreditProtects the interests of boththe Importer and the ExporterExporter is assured payment provided terms of L/C are metImporter is assured terms of L/C have been met before she is required to payUsed for larger amounts, higher credit risks, sometimes mandatedL / C
6 Documentary Collections Exporter routes documents through banking channels, where they are held for payment or acceptanceExporter Exporter’s Importer’s ImporterBank BankLess costly than a L/C and avoids tying up Importer’s line of creditAverage of weeks for exporter to collect on a sight draftConsignment IssuesUsed for lower risk customersGoods
7 Open Account Exporter ships goods and bills the importer for payment at sight or at a future dateImporter has use of funds, no product riskExporter has risk of non-paymentRisk can be shifted through credit insurance, standby L/C’sUsed for well-established customers with good creditInvoicenet 30Goods
9 Types of Letters of Credit TradeImportExportStandby
10 Definition of a Trade Letter of Credit A letter addressed to a beneficiary (exporter) by a bank (issuing bank)wherein the bank undertakes, on behalf of an applicant (importer)to effect payment to the beneficiary for merchandise shipped or services performedprovided that the beneficiary presents the required documents in compliance with the terms of the letter of credit
11 Documents Common to an Export L/C Commercial InvoicePacking ListBills of LadingCertificate of OriginOther Certificates: Quality, InspectionBeneficiary Statements
12 1. Importer and Exporter enter into a sales agreement
13 2. Importer applies for a letter of credit with the Issuing Bank ApplicationIssuing Bank
14 3. Issuing Bank advises. the letter of credit to. U. S 3. Issuing Bank advises the letter of credit to U.S. Bank, usually via SWIFTL / CSWIFTLetter ofCreditIssuing BankU.S. Bank
15 4. U.S. Bank authenticates the L/C and advises L/C to Beneficiary Letter of CreditU.S. Bank
16 5. Exporter prepares the documents and ships the goods ImporterGoods
17 6. Exporter sends shipping documents to U.S. Bank for examination FBM
18 7. Assuming clean. documents, U. S. Bank pays. exporter by debiting 7. Assuming clean documents, U.S. Bank pays exporter by debiting Issuing Bank’s account or upon receipt of funds from a separate reimbursing bank. Documents sent to Issuing Bank.ExporterIssuing BankU.S. BankDocuments
19 8. Issuing Bank examines. documents and delivers. to. importer against 8. Issuing Bank examines documents and delivers to importer against payment. Importer takes possession of goods by presenting documents.ImporterDocumentsDocsGoodsIssuing Bank
20 9. The exporter has been. paid, the importer has 9. The exporter has been paid, the importer has their goods, the banks have been reimbursed, and the cycle is complete!GoodsAgreementExporterImporterLetter ofCreditDocumentsApplicationDocumentsLetter ofCreditU.S. BankIssuing BankDocuments
22 Bankers’ AcceptancesOn a time draft, the bank on whom the draft is drawn commits to pay the face amount at maturity by stamping “Accepted” across the draft .If the exporter wishes early payment, the accepting bank may discount the draft and pay the exporter at sight.U.S. Bank can offer you very competitive rates for BA’s if the draft is drawn on us!
23 Standby Letter of Credit Standby L/C’s are an irrevocable commitment issued by a bank for a stated time periodto pay a beneficiary a stated amount of moneyupon presentation of specified documents stating that the applicant did not fulfill their contractual obligations.
24 Transferable Letters of Credit Often used by an export intermediary to pay a vendor or producerThe L/C may be transferred only once, but there may be several partial ‘transferees’Vendor controls presentation of documents to bankIntermediary may substitute his own invoice and draft, but it still may be difficult for the vendor and buyer to remain unknown to each other
25 Assignment of Proceeds Similar to Transferable L/C in that it is commonly used by an export intermediary to pay a producer or vendorIntermediary (beneficiary) controls document presentation, not the vendor, allowing him/her to keep information on the vendor out of the paperworkVendor relies on intermediary for proper presentation / performance under the terms of the L/C before funds will be remitted to them
26 Confirmations of Export Letters of Credit Confirmed - A second bank, usually in the exporter’s country, guarantees the obligation of the issuing bank, providing an extra layer of protection - especially important if the country or the issuing bank is considered risky.
27 More on Confirmations ...Gives the greatest degree of payment protection and an immediate payment source, provided the documents are clean.Added cost, normally to the exporter.Exporter must instruct the importer to have the L/C issued with a request for confirmation.The confirming bank makes a credit decision based on the credit of the issuing bank and the country risk. Approval will depend also on availability under an established line of credit.
28 Adding a confirmation or engagement to purchase documents: GoodsExporterAgreementImporterLetter ofCreditApplicationDocumentsDocumentsFaxportLetter ofCreditAdvisingBankIssuing BankConfirm BankDocuments
29 Benefits of Letters of Credit To the Exporter:Payment protectionReliance on issuing bank’s credit rather than buyer’sRapid, local source of repayment, if payable at a U.S. bankTo the Importer:Documentary evidence that the ordered goods have been shipped on timeAssurance that necessary clearance documents will be providedPayment deferred until goods are shipped and documents presented (use of funds)