export import financing
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LETTER OF CREDITKunal Soni
K3901
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Methods of Payment
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Methods of Payment
Cash in Advance
Letters of Credit
DocumentaryCollection
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 AdvanceImporter pays Exporter prior to
shipment
Exporter has no risk of non-paymentor non-acceptance
Importer has risk that exporter willnot ship the goods as ordered
Used occasionally for smallamounts, new customers, one-timesales
ImporteExporter
Goods
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Letters of CreditProtects the interests of both
the Importer and the Exporter
Exporter is assured paymentprovided terms of L/C are met
Importer is assured terms of L/Chave been met before she is
required to pay Used for larger amounts, higher
credit risks, sometimes mandated
L / C
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Documentary Collections
Exporter routes documents throughbanking channels, where they are
held for payment or acceptance
Exporter Exporters Importers Importer
Bank Bank
Less costly than a L/C and avoidstying up Importers line of credit
Average of 2 - 4 weeks forexporter to collect on a sight draft
Consignment Issues
Used for lower risk customers
Goods
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Open AccountExporter ships goods and bills theimporter for payment at sight or at
a future date
Importer has use of funds, noproduct 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
Goods
Invoice
net 30
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Letters of Credit
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Types of Letters of Credit
TradeImport
Export
Standby
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Definition of a TradeLetter 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 beneficiaryfor merchandise shipped or
services performed
provided that the beneficiarypresents the required documents in
compliance with the terms of theletter of credit
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Documents Commonto 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 Exporterenter into a sales
agreement
AgreementExporter Importe
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2. Importer applies for aletter of credit with the
Issuing Bank
Application
IssuingBank
Importer
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3. Issuing Bank advisesthe letter of credit to
HDFC Bank, usually viaSWIFT
Letter ofCredit
IssuingBankHDFC
Bank
L / C
SWIFT
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and advises L/C toBeneficiary
HDF
Bank
Beneficiary
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5. Exporter preparesthe documents and ships
the goods
Goods
Exporter
Goods
Importer
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6. Exporter sends shippingdocuments to HDFC Bank forexamination
Documents
Exporter
FBM
U.S.Bank
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7. Assuming clean
documents,HDFC Banpays exporter by debitingIssuingBanks account or uponreceipt of funds from a separatreimbursing bank. Documents sento Issuing Bank.
Exporter
HDFCBank
Documents IssuingBank
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8. Issuing Bank examinesdocuments and delivers toimporter against
payment. Importertakes possession ofgoods by presentingdocuments.
Documen
IssuingBank
Importer
Goods
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9. The exporter has beenpaid, the importer has theigoods, the banks havebeen reimbursed, and the cycleis complete!
Agreement
Application
Letter ofCredit
Documents
Letter of
Credit DocumDocuments
Exporter
IssuingBank
HDFCBank
Goods
Importer
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Special Uses of
Letters of Credit
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Bankers Acceptances
On a time draft, the bank onwhom the draft is drawn commitsto pay the face amount atmaturity by stamping Accepted
across the draft .
If the exporter wishes earlypayment, the accepting bank
may discount the draft and paythe exporter at sight.
HDFC Bank can offer you very
competitive rates for BAs if thedraft is drawn on us!
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Standby Letter of Credit
Standby L/Cs are anirrevocable commitment issuedby a bank for a stated time
period
to pay a beneficiary a statedamount of money
upon presentation of specifieddocuments stating that theapplicant did not fulfill their
contractual obligations.
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Transferable Letters of Credi
Often used by an exportintermediary to pay a vendor orproducer
The L/C may be transferred onlyonce, but there may be severalpartial transferees
Vendorcontrols presentation ofdocuments to bank
Intermediary may substitute his
own invoice and draft, but it stilmay be difficult for the vendorand buyer to remain unknown toeach other
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Assignment of Proceeds
Similar to Transferable L/C in thatis commonly used by an exportintermediary to pay a producer orvendor
Intermediary (beneficiary) controlsdocument presentation, not thevendor, allowing him/her to keep
information on the vendor out ofthe paperwork
Vendor relies on intermediary for
proper presentation / performanceunder the terms of the L/C beforefunds will be remitted to them
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Confirmations ofExport Letters of Credit
Confirmed - A second bank,usually in the exporterscountry, guarantees the
obligation of the issuing bank,providing an extra layer ofprotection - especiallyimportant if the country or the
issuing bank is consideredrisky.
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More on Confirmations ..
Gives the greatest degree of paymentprotection and an immediatepayment source, provided thedocuments are clean.
Added cost, normally to the exporter.
Exporter must instruct the importerto have the L/C issued with a requestfor confirmation.
The confirming bank makes a creditdecision based on the credit of theissuing bank and the country risk.Approval will depend also onavailability under an established lineof credit.
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Adding a confirmation orengagement to purchase
documents:
Agreement
Application
Letter ofCredit
Letter ofCredit Docume
Documents
Exporter
Issuing
Bank
Advising
Bank
Documents
Goods
Importer
Confirm.Bank
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Benefits of Letters of CrediTo the Exporter:
Paymentprotection
Reliance onissuing banks
credit rather thanbuyers
Rapid, localsource ofrepayment, ifpayable at a U.S.bank
To the Importer:
Documentaryevidence that theordered goodshave been
shipped on time Assurance that
necessaryclearancedocuments will
be provided
Payment deferreduntil goods areshipped and
documentspresented (use offunds)
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Thank You
Kunal Soni, ABC