Comparison methods of payment
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Express Capital Group provided Letter of Credit valued USD 550,000 to our client toward purchase of Steel Bars.
Express Capital Group provided Letter of Credit valued USD 780,000 to our client toward purchase and import of Rice.
Express Capital Group provided Letter of Credit valued USD 450,000 to our client toward purchase and import of Building Materials.
Express Capital Group provided Letter of Credit valued USD 55,000 to our client toward purchase of Sporting Goods.
Express Capital Group provided Letter of Credit valued USD 148,000 to our client toward purchase and import of Home Furniture from manufacturer.
Express Capital Group provided Letter of Credit valued USD 240,000 to our client toward purchase and import of Kitchenware from manufacturer.
Express Capital Group provided Letter of Credit valued USD 350,000 to our client toward purchase and import of Clothing from manufacturer.
Letters of Credit: The Basics
An importer/buyer (Applicant) may open a letter of credit if they wish to ensure that the exporter/seller (Beneficiary) has performed those requirements as per the underlying sales contract, by making the documentation requested conditions of the credit. (N.B. The sales contract is not an inherent part of the letter of credit, although the letter of credit may contain a reference to such contract).
Because the documentary credit is a conditional undertaking, payment is made on behalf
of the buyer against documents, which may represent the goods and give the buyer rights to
Seller or Beneficiary:
A "beneficiary" in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor.
Exporters will need to be certain that it is necessary to use a letter of credit which includes a few typical considerations like:
. Is it a legal requirement in the importing country?
. What is the country risk of the importing country?
. Would a confirmed letter of credit be more suitable?
. What is the usual practice in trading with that country and in that particular commodity?
. What is the value of the order?
. Will the bank charges be out of proportion to the value?
. What is the importer's credit rating? Are they a new customer or has a trading relationship already been established?
. What is the standing of the Issuing bank?
. Would a confirmed letter of credit be more suitable?
. Recommendation by banks who may advise that the best method of payment is a "confirmed irrevocable letter of credit" irrespective of the country, strength of issuing bank and without much regard to the value of the consignment.
. Insistence by a Credit Insurer to trade on letter of credit terms with buyers in certain markets.
. Are there any other measures that could be taken to protect the exporter - e.g. credit insurance?
. Strategic decision made by the exporter - this strategy should be flexible to adapt to the changing risk profile of both the country and the buyer.
. "Always traded this way"
. The reasons for requesting this method of payment should be periodically re-assessed.
Documentary credits therefore:
- Are arrangements that are made by banks for settling international commercial transactions.
- Provide a form of security to the parties who are involved.
- Ensure payment, provided that the terms and conditions of the Letter of Credit have been fulfilled.
- Mean that payment by such means is based on documents only, and not on merchandise or services involved.
Types of Letters of Credit
- It can be neither amended nor cancelled without the agreement of all the parties to the credit
- The Issuing bank gives a binding undertaking to the Beneficiary provided all the credit terms and conditions are fulfilled.
- Under UCP 600 all letters of credit are irrevocable.
A letter of credit forwarded by the Advising bank directly to the exporter without adding its own undertaking to make payment or accept responsibility for payment at a future date, but confirming its authenticity.
- Where a bank usually in the Beneficiary's country, adds its own undertaking confirming that payment will be made as long as compliant documents are presented.
- This commitment holds even if the Issuing bank or the Applicant fails to make payment.
- Confirmation gives the exporter added security, particularly if the standing of the Issuing bank is unknown or the current political and economic state of the importer's country is uncertain.
. Note: Banks may not wish to confirm letters of credit issued in certain countries - A bank will make an additional charge for confirming a letter of credit.
. Confirmation costs will vary according to the country involved, but for many countries considered a high risk it will be between 2%-8%.
Standby letter of credit:
- A secondary payment mechanism used as support where an alternative, less secure, method of payment has been agreed.
. The parties involved with the transaction do not expect that the letter of credit will ever be drawn upon.
. They are also used in the United States of America in place of bank guarantees.
- Often used to guarantee performance or to strengthen the credit-worthiness of a customer.
- Should the exporter fail to receive payment from the importer he may claim under the standby letter of credit.
- Certain documents are likely to be required to obtain payment including:
. The standby letter of credit itself;
. Sight draft for the amount due;
. Copy of the unpaid invoice;
. Proof of dispatch; and
. A signed declaration from the Beneficiary stating that payment has not been received by the due date and therefore reimbursement is claimed by letter of credit.
- The International Chamber of Commerce rules for operating standby letters of credit are UCP600 and ISP98 International Standby Practices.
Revolving letter of credit:
- Used for regular shipments of the same commodity between the same exporter and importer.
- The credit must state that it is a revolving letter of credit.
. It may revolve either automatically or subject to certain provisions.
- Avoids the need for repetitious arrangements for opening or amending letters of credit.
- Can revolve in relation to time or value.
. If the credit is time revolving once utilized it is re-instated for further regular shipments until the credit is fully drawn.
. If the credit revolves in relation to value once utilized and paid the value can be reinstated for further drawings.
Transferable letter of credit:
- The exporter has the right to request the paying or negotiating bank to make part (or all) of the credit value available to third parties.
. Useful for those acting as middlemen, especially where there is a need to finance purchases from third party suppliers.
- At the request of the (first) Beneficiary, it may be made available in whole or in part to another (second) Beneficiary.
. A credit may be transferred in part to more than one second Beneficiary.
Back to back letter of credit:
- Can be used as an alternative to the transferable letter of credit.
- A letter of credit is used as security to establish a second letter of credit issued by the Advising Bank in favor of the exporter's merchandise supplier - rather than transferring the original letter of credit to the supplier.
- Many banks are reluctant to issue back to back letters of credit due to the level of risk to which they are exposed, whereas a transferable credit will not expose them to risk higher than that under the original credit.