Chapter 7

sight draft 183

A sight draft is a type of bill of exchange, in which the exporter holds the title to the transported goods until the importer receives and pays for them. Sight drafts are used with both air shipments and ocean shipments for financing transactions of goods in international trade.

standby letter of credit 204

A standby letter of credit (also called a standby credit, or simply a standby) is one in which the issuer is obligated to pay a beneficiary upon the presentation of documents indicating a default by the account party in the payment of a debt or the performance of an obligation.

revolving letter of credit 205

When a buyer is planning on purchasing from a foreign seller on a regular basis, the buyer may use a revolving letter of credit.

fraud in the transaction 200

fraud in the transaction—the presentation of documents covering goods and the shipment of bales of worthless rubbish.

evergreen clause 205

An evergreen clause provides for automatic renewal of the letter of credit until the bank gives "clear and unequivocal" notice of its intent not to renew.

drawee 183

Drawee is a legal and banking term used to describe the party that has been directed by the depositor to pay a certain sum of money to the person presenting the check or draft. A typical example is if you are cashing a paycheck.

letter of credit 187

In broad terms, we can say that a letter of credit is an obligation of a bank, usually irrevocable, issued on behalf of one of its customers and promising to pay a sum of money to a beneficiary upon the happening of a certain event or events.

drawer 183

Maker or writer of a bill of exchange (check, draft, letter of credit, etc.) who directs the drawee (such as a bank) to pay the stated amount to a third party (the payee). In documentary credit, the drawer is the beneficiary of a letter of credit. Also called writer.

negotiation 183

Negotiation is the transfer of an instrument from one party to another so that the transferee (called a holder) takes legal rights in the instrument.

Uniform Customs and Practice for Documentary Credits 188

Perhaps the most important rules affecting letters of credit are not laws at all, but a privately developed set of guidelines based on the customs and commonly accepted practices of merchants and bankers, known as the Uniform Customs and Practice for Documentary Credits.

bill of exchange 182

The bill of exchange is a specialized type of international draft commonly used to expedite foreign money payments in many types of international transactions.

nominated bank 194

The nominated bank, usually in the seller's country has been appointed or "nominated" by the issuing bank to honor the documents. The nominated bank is often the advising bank that originally transmits the documents to the seller.

confirmed letter of credit 204

confirmed letter of credit is one in which a second bank, usually in the seller's country, agrees to purchase documents and honor drafts on the same terms as the original issuing bank.

banker's acceptance 185

A banker's acceptance is a negotiable instrument and short-term financing device in wide use to finance international (as well as domestic) sales.

payee 183

A payee is the party in an exchange who receives payment. A payee is paid in cash, check or other transfer medium by a payer, with the payer receiving goods or services in return.

independence principle 190

The independence principle is a general rule of law stating that the letter of credit is independent of the sales contract between buyer and seller.

back-to-back letter of credit 205

A backto-back letter of credit is a special type of financing arrangement in which the proceeds of one credit serve as security to obtain a second credit. It might be used where a manufacturer or other exporter has a contract to sell finished goods to a buyer but needs financing to purchase needed component parts or raw materials from a supplier

account party 188

A buyer that has committed in the sales contract to obtain a letter of credit begins by applying to its bank for a letter of credit issued "in favor of" or "for the benefit of" the seller. In this arrangement, the buyer is known as the account party

documentary letter of credit 188

A commercial letter of credit is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

complying presentation 194

A complying presentation is one in which 1. the seller delivers all of the required documents, 2. within the time allowed for presentation and prior to the expiry date of the credit, 3. containing no discrepancies, and 4. which complies with all other terms of the letter of credit, the provisions of the UCP, and standard banking practices.

discrepancy 194

A discrepancy is any difference, no matter how minor, between the terms of a required document and the terms required by the letter of credit. The discrepancy may be caused by some wording or data in a document that is not exactly what was required in the credit.

documentary collection 183

A documentary collection is a process, in which the seller instructs his bank to forward documents related to the export of goods to the buyer's bank with a request to present these documents to the buyer for payment, indicating when and on what conditions these documents can be released to the buyer.

documentary draft 182

A documentary draft is used to expedite payment in a documentary sale. The word draft is more frequently in use in U.S. law and banking practice, while the term bill of exchange is more frequently in use outside the United States, particularly in England.

draft 182

A draft is the signed order of the drawer, given to a drawee who is in possession of money to which the drawer is entitled, to pay a sum of money to a third party, the payee, on demand or at a definite time.

holder in due course 186

A holder in due course is a holder in possession of a negotiable instrument (such as a draft or acceptance) that has been taken: (1) for value, (2) in good faith, (3) without notice that it is overdue or has been dishonored, and (4) without notice that the instrument contains an unauthorized signature or has been altered

negotiable instrument 182

A negotiable instrument is a signed writing, containing an unconditional promise or order to pay a fixed sum of money, to order or to bearer, on demand or at a definite time.

transferable credits 205

A transferable letter of credit is a letter of credit that permits the beneficiary of the letter to make some or all of the credit available to another party, thereby creating a secondary beneficiary. The party that initially accepts the transferable letter of credit from the bank is referred to as the first beneficiary. The bank issuing the letter of credit must approve the transfer.

time draft 184

A type of foreign check that is guaranteed by the issuing bank, but that is not payable in full until a specified amount of time after it is received and accepted. Time drafts are a type of short-term credit used for financing transactions of goods in international trade. They allow the buyer a delay in payment after accepting a shipment of exported goods.

issuer or issuing bank 188

An issuer is a legal entity that develops, registers and sells securities to finance its operations. Issuers may be corporations, investment trusts, or domestic or foreign governments. Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their jurisdictions.

beneficiary 188

In life insurance, the beneficiary is the person or entity entitled to receive the claim amount and other benefits upon the death of the benefactor or on the maturity of the policy. Description: Generally, a beneficiary is a person who receives benefit from a particular entity (say trust) or a person.

rule of strict compliance 196

The prevailing standard established by the courts for examining documents is found in the rule of strict compliance

red clause 205

The red clause is a financing tool for smaller sellers who need capital to produce the products to be shipped under a letter of credit. A red clause in a letter of credit is a promise (usually written or underlined in red ink) by the issuing bank to reimburse the seller's bank for loans made to the seller.

indorsement and delivery 183

To negotiate an order instrument, indorsement (by signature) and delivery of the instrument to the holder must take place.

trade finance 184

Trade finance relates to the process of financing certain activities related to commerce and international trade. Trade finance includes such activities as lending, issuing letters of credit, factoring, export credit and insurance. Companies involved with trade finance include importers and exporters, banks and financiers, insurers and export credit agencies, and other service providers.