internationaltradefinance-131009100419-phpapp02
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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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