Letters Of Credit - NACM
Commercial Letters ofCreditNACM Learning CenterNancy WatsonWatson-Pistole CCECICPDefinitionA letter of credit is a writtenundertaking by a bank (issuingbank), acting at the request and onthe instructions of its customer(applicant for the credit)Risk SpectrumSpectrum of payments1
Documentary Letters of CreditCommercial (documentary) letters of credit (LC) are a writtenundertaking by a bank (issuing bank) acting at the requestand on the instructions of its customer (applicant for thecredit) to: Make payment to (the order of) a third party (beneficiary) Accept and pay bills of exchange (drafts) drawn by thebeneficiary Authorize another bank to effect such payment or to pay,accept or negotiate such bills of exchange (drafts)Credit terms and conditions must be met before payment,negotiation or acceptance can be madeMay include a variety of documents Draft, bill of lading, commercial invoices, certificate oforigin and insurance policies or certificatesGenerally governed by the Uniform Customs and Practice forDocumentary Credits (UCP)Participants Under a Letter of Credit Applicant or account party(buyer/importer)Beneficiary (seller/exporter)Issuing Bank (the importer’importer’s bank)Advising Bank (usually a banklocated in the exporter’exporter’s locale andthrough which the credit has beenadvised)Issuing BankThe issuing bank, upon instruction ofthe applicant, opens or “issues”issues” theletter of credit.2
Advising BankThe advising bank is usually a branchor correspondent of the issuing bank,located in the beneficiary’beneficiary’s locale.Additional BanksOther banks may become involved aswell, in order to facilitate a letter ofcredit transaction.Paying Bank/Accepting BankThis is the bank on which the draft isdrawn. It can be the issuing bank,the advising bank, or yet anothernominated bank.3
Negotiating BankThe term “negotiating bank”bank” applies toa bank, usually in the locale of thebeneficiary, that gives value fordrafts and/or documents under thecredit.Confirming BankThe term “confirming bank”bank” applies tothe bank, usually in the locale of thebeneficiary, who, at the request ofthe issuing bank, may “confirm”confirm” orobligate itself to the beneficiary toinsure payment/acceptance of a draftunder the letter of credit.Steps in Letter of Credit Cycle STEP 1 - The buyer agrees to purchase goods from the seller using a letterletter of credit as themechanism of payment.STEP 2 - The buyer applies to his bank for a letter of credit, signing thethe bank's letter of creditapplication/agreement form.STEP 3 - After approving the application, the issuing bank issues the actualactual letter of creditinstrument and forwards it to the advising bank via a SWIFT message.message.STEP 4 - The advising bank authenticates the letter of credit and deliversdelivers it to the beneficiary (theseller).STEP 5 - Having received the issuing bank's assurance of payment, the beneficiarybeneficiary (seller) shipsthe merchandise to the applicant (buyer).STEP 6 - The beneficiary (seller) prepares the documents called for in thethe letter of credit andpresents them to the negotiating bank. The letter of credit may specify a negotiating bank or itmay say it is "available with any bank," giving the beneficiary the freedom to choose.STEP 7 - The negotiating bank examines the documents and, if they comply,comply, obtains funds forpayment to the beneficiary in accordance with the terms of the letterletter of credit.STEP 8 - The negotiating bank transfers payment to the beneficiary (seller)(seller) and forwards thedocuments to the issuing bank.STEP 9 - The issuing bank examines the documents. If it agrees with the negotiating bank that thedocuments comply with the letter of credit, the issuing bank obtainsobtains payment from the applicant(buyer) in accordance with the terms of the applicant's letter ofof credit agreement and forwards thedocuments to the applicant.STEP 10 - The applicant (buyer) uses the documents to pick up the merchandisemerchandise from the carrier,completing the letter of credit cycle.4
Letter of Credit CycleTypes of Letter of CreditRevocable vs. Irrevocable RevocableRevocable-under this type of credit, theissuing bank is allowed the right to cancel(revoke) or modify the terms of the creditwithout the consent of the beneficiary. IrrevocableIrrevocable-this type constitutes a definiteundertaking by the issuing bank to pay oraccept drafts drawn under the letter ofcredit provided that the terms andconditions of the credit are complied with.Types of Letter of CreditUnconfirmed vs. Confirmed An unconfirmed letter of credit is onewhich has solely been advised to thebeneficiary by the advising bank withoutadding its confirmation. A letter of credit is “confirmed”confirmed” when thesecond bank, usually in the locale of theexporter, has added its confirmation(obligation of assurance of payment) tothat of the issuing bank.5
Types of Letter of CreditStraight vs. Negotiation The term ‘straight’straight’ is used when theobligation of the issuing bank topay/accept drafts, or to incur a deferredpayment obligation extends only to thebeneficiary of the credit. Negotiation is used when the obligation ofthe issuing bank to pay/accept drafts orincur a deferred payment obligationextends not only to the beneficiary, butalso to the nominating bank in the credit.Types of Drafts Sight Draft: if a letter of creditrequires the beneficiary to draw adraft “at sight”sight”, it is expected thatthe beneficiary will receive paymentas soon as the documents arepresented and the negotiating(paying) bank has had a reasonabletime to examine the documents todetermine if they are in compliancewith the credit terms.Types of Drafts Time draft (also referred to as acceptancedraft or usance draft) – if a letter of creditrequires the beneficiary to draw a timedraft for acceptance with payment atsome determinable future date, it isexpected that the bank on which the draftis drawn (drawee) will accept the draft assoon as the documents complying with thecredit terms are at the nominating bankand such nominated bank has had areasonable time to examine thosedocuments.6
Special Letter of CreditArrangementsTransferable Credits Exporter may wish to transfer rights under a credit to another partypartyOften used when the exporter is not the supplier of merchandise but is anintermediary between a supplier and an importerAllows the beneficiary (the exporter) to transfer all or part of the rightsunder the credit to a third party (transferee)The respective rights are passed to the transferee who must complycomply withthe terms and conditions of the transferred credit in order to receivereceivepaymentExporter must arrange for the importer to have a credit opened expresslyexpresslystipulating that it is ‘transferable’transferable’Before transfer can be made, exporter must send a written requestrequest to thetransferring bankTransferring bank, whether it has confirmed the credit or not, isis under noobligation to effect the transfer except to the extent and in thethe manner towhich it has expressly consented and until bank charges for such transferare paidUCP sets forth the conditions under which credits may be transferredtransferred andspecifies the rights and obligations of the various partiesUCP provides that a credit may be transferred only onceSpecial Letter of CreditArrangementsAssignment of Proceeds Assignment of proceeds should not be confused with ‘transferable’transferable’ creditThe terms are entirely differentFor a letter of credit to be transferable, it must clearly state that it is‘transferable’transferable’; no other terminology is acceptableHowever according to the UCP, ‘the fact that a credit is not stated to betransferable does not affect the beneficiary’beneficiary’s rights to assign any proceedswhich he may become entitled to under such credit, in accordance withthe provisions of the applicable law’law’With an assignment of proceeds, the beneficiary of a letter or creditcreditassigns all or part of the proceeds under a credit to a third partyparty (theassignee)Unlike a transferred credit, the beneficiary maintains sole rightsrights to thecredit and is solely responsible for complying with its terms andand conditionsFor the assignee, assignment means only that the paying bank, onceonce itreceives notice of the assignment, undertakes to follow the assignmentassignmentinstructions, if and when payment is madeAn assignment of proceeds does not provide the assignee with any rightsunder the credit.The assignee is dependent upon the beneficiary for complianceArrangement is more risky for the assignee than a transferred creditcreditSpecial Letter of CreditArrangementsBackBack-toto-Back An exporter may, as in the situation described under transferabletransferablecredits, be an intermediary between a supplier and an importer Exporter might ask the advising bank or a third bank to issue asecond letter of credit in favor of the supplier, using as collateralcollateral aletter of credit issued in the exporter’exporter’s favor Banks are reluctant to enter into backback-toto-back arrangementsbecause of the associated risks Anticipated compliance and eventual payment under the firstcredit should provide some assurance of payment under thesecond, but performance under the first credit may becomeimpossible, either through acts of the parties involved,government edict, or other causes Most banks will generally prefer their customers to utilize transfertransferor assignment of proceeds arrangements rather than backback-to backletters of credit7
Special Letter of CreditArrangementsRed Clause A beneficiary may require financing in order to complete themanufacturing of merchandise or to purchase items to fill a particularparticularorderA Red clause credit helps achieve thisName is derived from the historical practice of placing a notationnotation in thecredit in red ink to identify this optionIssuing bank authorizes the advising or confirming bank to make a cashadvance to the beneficiary against the beneficiary’beneficiary’s written undertaking topresent documents evidencing shipment in compliance with the creditcredittermRed clause permits the exporter to obtain an advance on part or all of theamount of the credit, as specified in the creditWhen the letter of credit is drawn under, the paying or negotiatingnegotiating bankdeducts the amount of the advance and any interest dueShould the beneficiary fail to ship or meet the credit requirements,requirements, thepaying or negotiating bank looks to the issuing bank to obtainreimbursement for the amount of the advance plus interestIssuing bank then charges the account of the importerSpecial Letter of CreditArrangementsInstallment Credit Installment credit – applicant for a letter of credit may need to be assured ofreceiving the merchandise over a period of time in certain given installmentsWhen a bank issues an installment credit or a credit stipulating shipments byinstallment within given periods, that credit should clearly statestate ‘shipments must beeffected in the following installments’installments’Failure to meet the conditions of any installment causes the creditcredit to be null and voidfor future drawingsRevolving credit There are similarities and major differences between installment and revolvingcredits with differences representing major risks for all partiesparties involvedRevolving letters of credit contain instructions which allow the beneficiary to draw forspecified amounts over specified periodsIt uses the same letter of credit to cover numerous shipments overover a long periodwithout the necessity of issuing new credits or amending the existingexisting creditsIt restricts the amount available for each shipmentIt controls the frequency of shipments and amounts availableRevolving credits are either ‘cumulative’cumulative’ or ‘nonnon-cumulative’cumulative’ – controlling the amountavailable for drawingSpecial Letter of CreditArrangementsDeferred Payment Exporter may be asked by the buyer to provide financing under a letter of credit for aterm beyond six monthsA letter of credit providing for the drawing of a time draft for acceptance by the bank(i.e. banker’banker’s acceptance) might not be appropriate because the acceptance wouldwould beineligible for discountUnder a deferred payment credit, after shipment the exporter presentspresents complyingdocuments to the negotiating/paying bankInstead of drawing a draft on the bank or applicant when the documentsdocuments arepresented, the exporter authorizes the bank to release documents against the bank’bank’sobligation to pay on a future date as specified in the creditThe issuing/confirming bank therefore makes a promise of future sight payment(s)payment(s)For incurring the liability, the bank assesses a deferred paymentpayment commission, usuallya fee proportionate to its regular acceptance commission, adjustedadjusted for the longerperiodIf the beneficiary requires interim financing, it may be able to use theissuing/confirming bank’bank’s promise of future payment to obtain credit from it’it’s bankBeneficiary cannot discount any paper for this financing, becausebecause a deferred paymentcredit does not provide for the creation of a negotiable instrumentinstrument which may be soldin the secondary market8
Important Points to be Checked byBeneficiaryUpon Receipt of an Export Letter of Credit Whether the credit is irrevocable or revocable Whether the credit is confirmed or unconfirmed When the credit expires (expiration datedate-be aware of the date format) Where the credit expires (at the seller's bank counters or offshoreoffshore counters) Correctness of beneficiary's (seller's) title and address [check L/C] Correctness of applicant's (buyer's) title and address [check L/C]L/C] Amount (consider terms of salessales- possible additional charges) Does it say "about" so much, "up to" so much - if so, an amount may vary apercentage more or less Tenor of draft(s) [at sight, 30, 60 days] Location of paying bank (where credit is available; i.e., London,London, New York) Is the credit negotiable? Documents required to be presented by the beneficiary Description and unit price of merchandise Point of shipment and destination Stipulations on partial shipments and transshipments Special instructions Shipping terms/terms of sale Whether subject to uniform customs and practice for documentary credits (U.C.P.600)Effective Use of Letters of CreditTo facilitate the speed, accuracy and ease ofhandling, letters of credit documents mustconform in all aspects to the terms andconditions of the credit.This review is not meant to cover allsituations; each credit has its ownpeculiarities. It is important to rememberin all cases, however, that problems canbe avoided by meeting the terms of thecredit exactly.All Documents Properly signedSufficient number of originals and copiesprovided (one extra for bank)Marks, numbers, and other information are inaccordance with all other documentsCorrections are properly authenticatedPresentation must be on or before expiration dateof the credit at the given location and within thepresentment period specified within the credit9
Commercial Invoice Issued by beneficiary, unless otherwise stated in creditMade out to the account party, unless otherwise stated in creditAmount not in excess of the credit amount or available balance ofofthe credit (i.e. 10% /10% /-)Covers full shipment, if partial shipments not permittedQuantity shipped, weight and measures agree with bills of ladingand other documentsDescription of goods is identical to that shown in creditUnit price agrees with creditMarks, numbers and other information are in accordance withrelated documentsShipping terms agree with creditCalculations, extensions and additions are correctDoes not contain charges or other merchandise not specified inthe creditDoes not state "used," "rebuilt," or "secondhand" unless soauthorized in creditSigned, certifiedCommercial Invoice Insurance documents as required in the credit have to bepresented. An insurance certificate is not acceptable when thecredit requires an insurance policy. Brokers' cover notes are notnotacceptable, unless so specified in the creditAmount is sufficient; at least equal CIF value of shipment orgreater than the draft amount of the invoice valueProperly signed and countersigned if requiredEndorsed by party to whom loss is payable (sign co. name onback of policy or certificate)Date not later than that of bill of lading or other shippingdocumentsIssued in the same currency as credit, unless otherwise specifiedspecifiedCorrectly shows scope of entire voyage in compliance with termsof creditPacking, shipping marks, etc. agree with information shown inother documentsCovers specific risks as required by credit (institute clause A, warrisks and strike risks)Common DocumentationDiscrepancies Drafts are presented after Letter of Credit has expired or aftertime for shipment has expired Invoice value or draft exceeds amount available under Letterof Credit Charges included in invoice are not authorized in Letter ofCredit Amount of insurance coverage is inadequate or coverage doesnot include risks required by Letter of Credit Insurance document is not endorsed and/or countersigned Date of insurance policy or certificate is later than date on billsbillsof lading Bills of lading are not cleanclean-that is, they bear notations thatqualify good order and condition of merchandise or its packing Bills of lading are not marked "on board" when so required byLetter of Credit "On board" endorsement or changes on bills of lading are notsigned by carrier or its agent or initiated by party who signedbills of lading "On board" endorsement is not dated10
Common DocumentationDiscrepancies Bills of lading are not endorsed Bills of lading are made out "to order" (shipper's order, blankendorsed) where Letter of Credit stipulates "straight" (direct totoconsignee) bills of lading or vice versa. [In some countries, "to"toorder" bills of lading are prohibited and heavy penalties oradditional duties are assessed for failure to ship on a "straight""straight"bill of lading.] Bills of lading do not indicate "freight prepaid" or "freight collect"collect"as stipulated in the Letter of Credit Bills of lading are marked "freight prepaid" and freight chargesare not included in invoice Descriptions, marks and numbers of merchandise are not thesame on all documents presented or are not as required by Letterof Credit Not all documents required by Letter of Credit are presented Documents are "stale dated" that is, not presented within areasonable time after issuance (i.e. within the presentmentperiod) Invoice does not specify shipment terms (C&F, CIF, FOB, etc.) asstated in Letter of Credit Invoice is not signed as Letter of Credit requiresConsequencesDocuments with DiscrepanciesThe negotiating bank will notify the beneficiary that the documentsdocuments presentedcontain discrepancies. If the beneficiary cannot correct such documents,documents,within the limits of the Letter of Credit, the beneficiary will instruct thenegotiating bank to either:1.Telex the issuing bank to request approval from the applicant (customer)(customer)to pay with the mentioned discrepancies.2.Send the documents to the issuing bank on a collection basis3.Post a guarantee in favor of the paying bank to secure release ofof fundsEven if the beneficiary can correct the documents, payment will definitely bedelayed and additional charges will be incurred.When documents cannot be corrected the resulting consequences are:are:1.Confirmation, if any, is voided.2.Issuing bank is under no obligation to pay.RESULT: YOU HAVE LOST THE ASSURANCE OFPAYMENT UNDER THE LETTER OF CREDITLetters of Credit and the ExporterAdvantages: Affords greatest protection against nonpayment (except forcash in advance) Minimal risk of nonpay
under the letter of credit. Steps in Letter of Credit Cycle STEP 1 - The buyer agrees to purchase goods from the seller using a lett er of credit as the mechanism of payment. STEP 2 - The buyer applies to his bank for a letter of credit, signing t he bank's letter of credit application/agreement form.
Credit Boot Camp, Chairleaders Membership Contest Winners additional person same company 55 PAGE SEVEN April Calendar & NACM Board of Directors PAGE EIGHT ICEL April Meeting NACM Products Credit Line For information or to sign up contact Georgette Bevan, CCE, at 801-487-8781, ext 116. email GBevan@nacmint.com 2006 NACM Mechanic Lien Update Seminar
to NACM Connect at registration@nacmconnect.org. Credit card payments can be made upon receipt of . invoice. MAIL You may send your completed Registration Form with payment to: NACM Connect. Attn: Credit Conference. Registration. 3005 Tollview Drive. Rolling Meadows, IL 60008-3708. TEAM DISCOUNTS 5 - 9 attendees receive a 10% . registration .
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1. Credit as a Business Function 2-2 2. The Strategic Role of Credit 2-2 3. Credit within the Business 2-3 Organization 4. The Role of Credit in Financial 2-4 Management 5. Credit and the Operating Cycle 2-5 6. The Core Activities of the 2-6 Credit Department 7. The Credit Department's Goals 2-7 8. The Credit/Sales Relationship 2-8 9.
d. Dido and Aeneas fell in (4 letters) g. African princess (4 letters) h. Romans built a huge (6 letters) DOWN 1. Where Aeneas was born (4 letters) 2. Enemy town of Rome (8 letters) 6. They destroyed Troy (6 letters) 7. The land (in Italian) Aeneas finally arrived to (5 letters) 8. Capital of the world (4 letters) Activity 3 Read one of .
required to have the Credit Card Credit permission to access the Apply Credit Card Credit. The patient transactions that appear in the Credit Card Credit page are limited to charges with a credit card payment. This can be any credit card payment type, not just Auto CC. To apply a credit card credit: 1.
Many consider trade credit to be an offspring of the factoring movement. American Credit Indemnity (which, over 100 years later, was acquired by Euler) began as a credit insurer in the 1890s. London Guaranty (later bought by Coface) starts as a credit insurer in 1895. The primary industries served by the insurers initially are FUR, LUMBER,
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