15 LETTERS OF CREDIT: TYPES AND USES

CHAPTER 14 LETTERS OF CREDIT: TYPES AND USES I. COMMERCIAL CREDITS A. Certainty of Commitment 1. Irrevocable amendment needs approval byall 2. Revocable altered at will by account party

LETTERS OF CREDIT: TYPES AND USES a. Uses of Revocable L/C: -shows bank’s confidence -for highly saleable goods -exporter calls just before shipment -used between subsidiaries -never sent directly to beneficiary but intermediary bank

LETTERS OF CREDIT: TYPES AND USES II. NEGOTIABILITY OF CREDITS A. STRAIGHT 1. Obligations of opening bank extend only to the named beneficiary 2. Other intermediaries a.) negotiate drafts b.) risk to negotiating bank

LETTERS OF CREDIT: TYPES AND USES B. NEGOTIATED CREDITS 1. Opening bank honors all drafts 2. Bank buys drafts from exporter in local currency 3. Negotiating bank : if draft be dishonored, recourse to beneficiary

LETTERS OF CREDIT: TYPES AND USES C. COMMITMENT BY SECOND BANK Confirmation: usually in exporter’s locality Exporter requests confirmation in the sales contract 1. Irrevocable, confirmed 2. Revocable, confirmed

COMMITMENT BY SECOND BANK 3. When to request confirmed credit? reputation and financial standing of the foreign opening bank country in which opening bank is located

LETTERS OF CREDIT: TYPES AND USES D. REVOLVING L/Cs 1. When to Use? when purchasing continually from a foreign supplier when intra company, credits may be revocable 2. Cumulative or Non-cumulative unused credit usable in subsequent time period

LETTERS OF CREDIT: TYPES AND USES II. FINANCING UNDER COMMERCIAL CREDITS A. Who Should Finance the Transaction? 1. Availability of Funds 2. Cost 3. Relative Bargaining Strength 4. Need a. Importer needs the credit b. Exporter weak c. Solutions

LETTERS OF CREDIT: TYPES AND USES B. TRANSFERS AND ASSIGNMENTS Primary problem: exporter needs credit to pay supplier Solution: beneficiary assigns L/C to the supplier SIGNIFICANCE: major problem solved for new or thinly capitalized exporter

LETTERS OF CREDIT: TYPES AND USES 1. TRANSFERABLE L/C a. PURPOSE: 1. proceeds assigned to supplier 2. who is assured payment 3. induced to ship the goods

LETTERS OF CREDIT: TYPES AND USES b. Rights/Responsibilities: 1. beneficiary instructs paying or opening bank 2. transfer must be authorized in the L/C 3. second beneficiary must be domiciled in same country as the original beneficiary.

LETTERS OF CREDIT: TYPES AND USES c. When transfer occurs 1. Trf. amount may be less than L/C amount (seller’s profit) 2. Unit price may be lower 3. Primary beneficiary substitutes his own invoice for those of supplier

LETTERS OF CREDIT: TYPES AND USES d. Procedure: 1. Documents received notify primary benef. 2. Primary substitutes his invoice/sent to open. bank for payment. 3. Secondary benef. presents draft + docs

LETTERS OF CREDIT: TIME L/Cs 2. TIME LETTER OF CREDIT calls for usance drafts to be drawn on and accepted by the opening or paying bank. a. Creation of the Acceptance b. Discounting the Acceptance when exporter is not willing to wait

LETTERS OF CREDIT: Refinancing Sight Drafts 3. REFINANCING SIGHT DRAFTS a. Importer Wishes More Time a. Direct Loan usually for 90 to 180 days b. Banker’s Acceptance