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INTERNATIONAL TRADE

FINANCE

Letter of Credit

Uniform Customary and Practices for Documentary Credits Standby Letters of Credit

Alternative Methods of Guaranteeing Performance

Alternative Methods of Financing

Seller Buyer

Government Programs

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LETTERS OF CREDIT

Letters of Credit a commercial bank

guarantee of either payment by the buyer or

performance by the seller.Purposes

Guarantees payment by the buyer (letter of credit) or

to guarantee performance by seller (standby letter of

credit.

Once letter of credit is issued, the seller can use

instrument to finance production of goods.

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LETTERS OF CREDIT

Functions of Letters of Credit

Payment Instrument

In absence of letter of credit, sight or time drafts used. No

Guarantee of Payment. Letters of Credit Involves Bank in Transaction.

Performance Guarantee

In Documentary Transaction no guarantee of performance.

Payment by bank would not be released until goods and

document conforms to specifications on letter of credit.

Finance Instrument Seller can use letter of credit as collateral to finance production

and exportation of good.

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LETTERS OF CREDIT

Types of Letters of Credit

Irrevocable Letter of Credit-bank cannot revoke letter

of credit. To change letter of credit, must get writtenagreement.

Most Popular in International Commercial Transaction

Revocable Letter of Credit-bank can revoke letter of

credit.

Very Seldom Used.

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LETTERS OF CREDIT

Letter of Credit Transaction After formation of contract, buyer arranges for bank to open

letter of credit.

Buyers bank prepares irrevocable letter of credit. Buyers bank sends irrevocable letter of credit to a US bank for

confirmation.

US bank prepares a letter of confirmation to exporter alongwith irrevocable letter of credit

Exporter arranges for freight forwarded to deliver goods.Freight Forwarder prepares documents.

Exporter presents document to Bank indicating fullcompliance. Bank bound by rule of strict compliance

Bank reviews documents and authorizes payment

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UNIFORM CUSTOMS AND PRACTICES

FOR DOCUMENTARY CREDITS

Uniform Customs and Practices for Documentary

Credits are rules and procedure published by

International Chamber of Commerce Provisions

Care should be taken in specifying expiration dates

The applicant must specify if the letter of credit is transferable.

The applicant must specify that the letter be confirmed The currency of the letter of credit should be designated using

ISO currency code.

The applicant should designate the nominating bank

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UNIFORM CUSTOMS AND PRACTICES FOR

DOCUMENTARY CREDITS

Uniform Customs and Practices for Documentary

Credits-provisions continued.

Applicant must specify clearly whether the letter ofcredit will be available for partial shipment.

The letter of credit should provide transport details

Under rule of strict compliance, banks are authorized

to reject documents if there are any discrepancies. Facial Compliance Rule-bank only required to review

documents.

Banks are not required to investigate trade customs or usage

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UNIFORM CUSTOMS AND PRACTICES

FOR DOCUMENTARY CREDITS Uniform Customs and Practices for Documentary

Credits-provisions continued

Description of the Goods should be clear and brief aspossible.

In the listing of documents, should list the contents ofeach document.

Transportation Documents must be clear.

Insurance Documents must be clear.

Time periods for presentation of documents must bespecified.

Title of Letter of Credit should specify irrevocable.

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STANBY LETTER OF CREDIT

Standby Letter of Credit is a letter of creditthat represents an obligation to the

beneficiary on the part of the issuerInternational Standby Practices

Standby Letters of Credit secures contractualobligations in construction contracts, service

contracts, warranties, counter-trade tradeobligations, secures international loans andsupplies.

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ALTERNATIVE METHODS OF

GUARANTEEING PERFORMANCE

Types-Continued

Retention Fund-in large or government

projects, a percentage is deducted from eachpayment due to the supplier or contractor and is

retained in a fund pending completion of

project.

Demand Guarantee secures performance of a

non-monetary obligation.

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SOURCES OF TRADE

FINANCE Commercial Banks

Export Financing

Borrowing against trade documents Factoring-exporter transfers title to its account receivable to a

factoring company at a discount.

Forfaithing-selling at a discount, of longer term receivables or

promissory notes to a foreign buyer.

Transferable Credit-suppliers accept part of the letter of creditthat seller receives from buyer in export transaction.

Back to Back Letter of Credit-buyer makes arrangements with

third bank to make loan.

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SOURCES OF TRADE FINANCE

Government Assistance Programs

Eximbank in United States-

Arranges loans, guarantees, working capital and insuranceForeign Corporation Insurance Agency

Protects against default on exports sold under openaccounts

Overseas Private Insurance Corporation Offers performance bonds

Small Business Administration Revolving line of credit

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