Chapter 7: Bank Collections, Trade Finance, and Letters of Credit

Documents usually include

--Draft --Commercial Invoice is required by buyers, banks, and customs authorities -- Ocean Bill of Lading: must be "on board" and "clean" -- Certificates of Analysis or Inspection -- Insurance Policy --Certificate of Origin --Possibly others if contract between buyer and seller requires

Bills of Exchange and Documentary Drafts are negotiable instruments that can serve two purposes:

Act as substitute for money act as a financing or credit device. They are specialized type of int'l drafts used to expedite foreign money payments.

Modified strict compliance rule

All of the data doesn't have to be identical but can't conflict. However, the description of goods in commercial invoice must correspond with LOC. (so strict compliance for that). A document (other than then the invoice) may describe the goods "in general terms not conflicting with their description in the credit."

law applicable to letters of credit

Article 5 UCC defers to UCP for international transactions ▪ Uniform Customs & Practice (UCP) for Documentary Credits - standardized rules (not a law or treaty) issued by ICC; incorporated into LOC so that UCP applies. ▪ Presumed Irrevocable. ▪ The LOC is independent of the sales contract between buyer and seller

Confirmed Letters of Credit

Bank in Seller's country 'confirms' and agrees to purchase docs and honor drafts on LOC on same terms as issuing bank. Much more expensive, but gives S funds much quicker. If Bank won't do, then S might need to reconsider underlying transaction.

After the buyers bank gets the documents, the UCP allows up to ____ banking days to inspect paperwork

FIVE

Letters of credit are _____ of the sales transaction

INDEPENDENT bank does not have right to do inspection at the dock, they can only inspect documents and pay for it if it matches

Use of time drafts and acceptances

If per contract Buyer agrees to pay Seller at a future date, maybe 60 days after shipment, the buyer or his bank can obtain the documents to get the goods immediately by 'accepting' the documents. The bank will be bound by this 'trade acceptance' and will be obligated to pay the funds at the future date. Upon Banker's Acceptance by stamping its name, date and signature on the face of the draft, the bank's credit is subbed for the buyer's. Whoever holds the trade acceptance draft at maturity gets paid the amount due. (short- term: 6-month max) Buyer is charged a fee (basically like a loan) by the bank. Major financial institutions facilitate international trade by doing this.

Standby Letters of Credit

Issuer is obligated to pay beneficiary upon presentation of documents indicating a default by the account party in payment of debt or performance of the obligation.

Why would you want to use a LOC instead of a documentary sale with banker's acceptance?

It is a strong assurance to the seller that theyll get paid

letter of credit

Obligation of a bank usually IRREVOCABLE, issued on behalf of their customer, promising to pay a sum of money to a beneficiary upon occurrence of a certain event(s).

How does cash against documents work?

Seller sends all the docs (BOL, insurance, inspections, etc.) along with a sight draft (or demand) draft to his bank who sends them to buyer's bank (like in Ch. 6) with collection letter/instructions. Once funds taken from buyer's account, the buyer gets the documents so can get goods.

What is the SWIFT System

Society for Worldwide Interbank Financial Transfer, facilitates funds transfers between 9000+ banks. Working cooperatively with transport & logistics industry, have created the Bolero Project which moves most documents electronically.

When would you not want to use a LOC instead of a documentary sale with banker's acceptance?

The buyer would not, interest, fees, and a lower profit margin the seller will get off the goods

Description of goods in letter of credit

VERY important, if not identical or included, they wont be covered

Documentary Draft and Bank Collection Process

a) Drafts can be accepted by buyer creating a "trade acceptance" (see below) b) Buyer agrees to pay unconditionally at the time stated on the draft. c) Banker's acceptance= bank agrees to pay= negotiable instrument. d) Documentary collection is similar to a C.O.D. transaction. e) Called "Cash Against Documents" or CAD

Requirements for bill of exchange and draft

a) unconditional order in writing b) from one person to another c) signed by the person giving it d) to pay on demand or at a certain time e) a fixed sum of money f) to the ORDER or BEARER.

Following a letter of credit transaction

a. Buyer's Advising bank sends the LOC to the Beneficiary (Seller) via a Bank in Seller's country ('correspondent bank') b. Seller's Compliance with the LOC -- Seller must read the terms and conditions of the LOC very carefully before manufacture or ship goods.

What is a holder in due course?

a. Has a negotiable instrument. b. Takes for value, c. In good faith, d. Without notice of dishonor or overdue, and e. Without notice of alteration or unauthorized signature.

Documentary letter of credit

a. The definite undertaking of a bank (not exactly a contract), b. issued in accordance with the instructions of their customer, c. in favor to the beneficiary, d. wherein bank promises to pay a certain sum of money in the stated currency, e. within the prescribed time limits, f. upon the complying presentation, g. of the required and conforming documents.

negotiable instrument

an unconditional written promise to pay a specified sum of money upon demand of the holder

Functional standard of compliance

banks dont have to reject docs due to obviously minor typos

If there is a discrepancy between BOL, invoice, insurance, ect. then

buyers bank can refuse to pay

You dont get perfection in delivery, you get perfection in _______

documentation

Banks deal with...

documents and not with goods

bill of exchange

international draft used to expedite foreign money payments

Description of goods in commercial invoice must correspond exactly to the ____

letter of credit

Negotiable goods are used to...

move goods, transfer ownership and possession

Draft (think check)

signed order or drawer, given to drawee, to pay sum of money to third party on demand Drawer (Buyer of goods) orders his Bank (drawee) to pay the Payee (Seller)

rule of strict compliance

the terms of the documents presented to the issuing bank must strictly conform to the requirements of the letter of credit and the UCP

Documentary draft

used to expedite payment in a documentary sale

Complying presentation of LOC

• Seller's documents and draft are delivered to the nominated bank (Seller's) or directly to the (Buyer's) issuing bank. • Per UCP must present documents within 21 days of shipment. • Must contain ALL the required documents, within the time frame allowed and prior to expiry of the credit, with no discrepancies, and which complies with all terms of the LOC.