Export Import Financing Letter of Credit

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LETTER OF CREDIT CITD SEMINAR Tuesday, June
22nd, 2004
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Methods of Payment

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Methods of Payment

• Cash in Advance
• Letters of Credit
• Documentary Collection
• Sight/Time Drafts
• aka D/P, D/A
• Open Account
• Risk mitigation
• Export Credit Insurance
• Standby L/Cs

L /C
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Cash in Advance

• Importer pays Exporter prior to shipment
• Exporter has no risk of non-payment or
  non-acceptance
• Importer has risk that exporter will not ship the
  goods as ordered
• Used occasionally for small amounts, new
  customers, one-time sales

Importer
Exporter
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Letters of Credit

• Protects the interests of both
• the Importer and the Exporter
• Exporter is assured payment provided terms of L/C
  are met
• Importer is assured terms of L/C have been met
  before she is required to pay
• Used for larger amounts, higher credit risks,
  sometimes mandated

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Documentary Collections

• Exporter routes documents through banking
  channels, where they are held for payment or
  acceptance
• Exporter Exporters Importers
  Importer
• Bank Bank
• Less costly than a L/C and avoids tying up
  Importers line of credit
• Average of 2 - 4 weeks for exporter to collect on
  a sight draft
• Consignment Issues
• Used for lower risk customers

Goods
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Open Account

• Exporter ships goods and bills the
• importer for payment at sight or at a future date
• Importer has use of funds, no product risk
• Exporter has risk of non-payment
• Risk can be shifted through credit insurance,
  standby L/Cs
• Used for well-established customers with good
  credit

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Letters of Credit
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Types of Letters of Credit

• Trade
• Import
• Export
• Standby

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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 performed
• provided that the beneficiary presents the
  required documents in compliance with the terms
  of the letter of credit

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Documents Common to an Export L/C

• Commercial Invoice
• Packing List
• Bills of Lading
• Certificate of Origin
• Other Certificates Quality, Inspection
• Beneficiary Statements

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1. Importer and Exporter enter into a sales
agreement

Agreement
Exporter
Importer
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2. Importer applies for a letter of credit with
the Issuing Bank

Importer
Application
Issuing Bank
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3. Issuing Bank advises the letter of credit to
U.S. Bank, usually via SWIFT

L / C
SWIFT
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4. U.S. Bank authenticates the L/C and advises
L/C to Beneficiary
Beneficiary
Letter of Credit
U.S. Bank
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5. Exporter prepares the documents and ships the
goods
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6. Exporter sends shipping documents to U.S.
Bank for examination
Documents
U.S. Bank
FBM
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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
Issuing Bank
Documents
U.S. Bank
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8. Issuing Bank examines documents and delivers
to importer against payment. Importer
takes possession of goods by presenting
documents.
Importer

Documents
Docs
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9. The exporter has been paid, the importer has
their goods, the banks have been reimbursed,
and the cycle is complete!
Goods
Agreement
Exporter
Importer
Letter of Credit
Application
Documents
Documents
Letter of Credit
Issuing Bank
U.S. Bank
Documents
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Special Uses ofLetters of Credit
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Bankers Acceptances

• 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 .
• 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 BAs if the draft is drawn on us!

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Standby Letter of Credit

• Standby L/Cs are an irrevocable commitment
  issued by a bank for a stated time period
• to pay a beneficiary a stated amount of money
• upon presentation of specified documents stating
  that the applicant did not fulfill their
  contractual obligations.

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• 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

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• 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

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Confirmations ofExport Letters of Credit

• 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.

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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.

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Adding a confirmation or engagement to purchase
documents
Goods
Exporter
Agreement
Importer
Letter of Credit
Application
Documents
Documents
Faxport
Letter of Credit
Issuing Bank
Advising Bank
Confirm. Bank
Documents
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Benefits of Letters of Credit

• To the Exporter
• Payment protection
• Reliance on issuing banks credit rather than
  buyers
• Rapid, local source of repayment, if payable at a
  U.S. bank

• To the Importer
• Documentary evidence that the ordered goods have
  been shipped on time
• Assurance that necessary clearance documents will
  be provided
• Payment deferred until goods are shipped and
  documents presented (use of funds)