l Cash in Advance l Letters of Credit l Documentary Collection – Sight/Time Drafts – aka D/P, D/A l Open Account – Risk mitigation: » Export Credit Insurance » Standby L/Cs L /C
Cash in Advance Importer pays Exporter prior to shipment Importer pays Exporter prior to shipment l Exporter has no risk of non-payment or non-acceptance l Importer has risk that exporter will not ship the goods as ordered l Used occasionally for small amounts, new customers, one-time sales ImporterExporter Goods
Letters of Credit Protects the interests of both the Importer and the Exporter l Exporter is assured payment provided terms of L/C are met l Importer is assured terms of L/C have been met before she is required to pay l Used for larger amounts, higher credit risks, sometimes mandated L / C
Documentary Collections Exporter routes documents through banking channels, where they are held for payment or acceptance Exporter Exporters Importers Importer Bank Bank Bank Bank l Less costly than a L/C and avoids tying up Importers line of credit l Average of 2 - 4 weeks for exporter to collect on a sight draft l Consignment Issues l Used for lower risk customers Goods
Open Account Exporter ships goods and bills the importer for payment at sight or at a future date l Importer has use of funds, no product risk l Exporter has risk of non-payment l Risk can be shifted through credit insurance, standby L/Cs l Used for well-established customers with good credit Goods Invoice net 30
Types of Letters of Credit l Trade – Import – Export l Standby
Definition of a Trade Letter of Credit t A letter addressed to a beneficiary (exporter) by a bank (issuing bank) t wherein the bank undertakes, on behalf of an applicant (importer) t to effect payment to the beneficiary for merchandise shipped or services performed t provided that the beneficiary presents the required documents in compliance with the terms of the letter of credit
Documents Common to an Export L/C l Commercial Invoice l Packing List l Bills of Lading l Certificate of Origin l Other Certificates: Quality, Inspection l Beneficiary Statements
1.Importer and Exporter enter into a sales agreement Agreement ExporterImporter
2.Importer applies for a letter of credit with the Issuing Bank Application Issuing Bank Importer
3.Issuing Bank advises the letter of credit to U.S. Bank, usually via SWIFT Letter of Credit Issuing Bank U.S. Bank L / C SWIFT
4.U.S. Bank authenticates the L/C and advises L/C to Beneficiary U.S. Bank Letter of Credit Beneficiary
5.Exporter prepares the documents and ships the goods Goods Exporter Goods Importer
6. Exporter sends shipping documents to U.S. Bank for examination Documents Exporter FBM U.S. Bank
7.Assuming clean documents, U.S. Bank pays exporter by debiting Issuing Banks account or upon receipt of funds from a separate reimbursing bank. Documents sent to Issuing Bank. Exporter U.S. Bank Documents Issuing Bank
8. Issuing Bank examines documents and delivers to importer against payment. Importer takes possession of goods by presenting documents. Documents Issuing Bank Importer Goods Docs
9.The exporter has been paid, the importer has their goods, the banks have been reimbursed, and the cycle is complete! Agreement Application Letter of Credit Documents Letter of Credit Documents Exporter Issuing Bank U.S. Bank Goods Importer
Bankers Acceptances l On 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. l If the exporter wishes early payment, the accepting bank may discount the draft and pay the exporter at sight. l U.S. Bank can offer you very competitive rates for BAs if the draft is drawn on us!
Standby Letter of Credit t Standby L/Cs are an irrevocable commitment issued by a bank for a stated time period t to pay a beneficiary a stated amount of money t upon presentation of specified documents stating that the applicant did not fulfill their contractual obligations.
l Transferable Letters of Credit – Often used by an export intermediary to pay a vendor or producer – The L/C may be transferred only once, but there may be several partial transferees – Vendor controls presentation of documents to bank – Intermediary may substitute his own invoice and draft, but it still may be difficult for the vendor and buyer to remain unknown to each other
l Assignment of Proceeds – Similar to Transferable L/C in that it is commonly used by an export intermediary to pay a producer or vendor – Intermediary (beneficiary) controls document presentation, not the vendor, allowing him/her to keep information on the vendor out of the paperwork – Vendor relies on intermediary for proper presentation / performance under the terms of the L/C before funds will be remitted to them
Confirmations of Export Letters of Credit l Confirmed - A second bank, usually in the exporters 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.
More on Confirmations... Gives the greatest degree of payment protection and an immediate payment source, provided the documents are clean. Gives the greatest degree of payment protection and an immediate payment source, provided the documents are clean. Added cost, normally to the exporter. Added cost, normally to the exporter. Exporter must instruct the importer to have the L/C issued with a request for confirmation. 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. 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.
Adding a confirmation or engagement to purchase documents: Agreement Application Letter of Credit Letter of Credit Documents Exporter Issuing Bank Advising Bank Documents Goods Importer Faxport Confirm. Bank
Benefits of Letters of Credit To the Exporter: l Payment protection l Reliance on issuing banks credit rather than buyers l Rapid, local source of repayment, if payable at a U.S. bank To the Importer: l Documentary evidence that the ordered goods have been shipped on time l Assurance that necessary clearance documents will be provided l Payment deferred until goods are shipped and documents presented (use of funds)