LGST4120 Ch. 11
back to back letter of credit
(at request of beneficiary) third bank agrees to issue a second letter of credit, using the first letter as collateral. -second letter is often used to pay the beneficiary's suppliers
Export-Imort Bank (Eximbank)
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Foreign Corporation Insurance Agency (FCIA)
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Overseas Private Insurance Corporation (OPIC)
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Small Business Administration (SBA)
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bill of exchange
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without recourse
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international standby practices (ISP98)
10 seperate rules governing standby letters of credit
foraiting
Long term financing - draft given to exporter to obtain nonrecourse financing - terms are negotiated in advance so the exporter is assured of payment before shipping the goods
irrevocable letter of credit
Most commonly type (letter of credit) used in export transactions. Provides more security, given the bank cannot revoke it at any time
factoring
Short term financing - exporter sells a _______ company the right to cecieve payment. That company then discounts the amount of payment owed to the exporter in order to produce the desired rate of return
documentary credit transaction
The removal of the risk of nonpayment. - the buyer obtains a letter of credit from bank that guarantees payment to seller ****substituting the credit or guarantee of a bank (for that of a buyer) eliminates risk of nonpayment
standby letter of credit
Type of credit issues as a guarantee against default by any parties to the contract. ****used to gaurantee performance rather than payment**** -only paid on default (party doesn't perform) **same purpose as bank guarantee/performance bond
Convention on Independent Letters of Guarantee and Standby Credits
UNCITRAL's rules governing guarantee/standby **ineffective (only 6 states joined)
red clause financing
Unsecured Financing seller recieves an advance (monetary) on the letter of credit prior to presenting documents ****purchaser trusting the exporter
open account transaction
Unsecured type of financing -seller does not require payment until after purchaser recieves goods/documents ****exporter trusting the buyer
power of attorney
_______ allows the freight forwarder to complete documents in the name of the exporter
amendment
a change to a letter of credit (issued by bank and signed by all parties)
World Bank
a development
sight draft
a draft that does not specify time of payment
retention fund
a surety in the form of a corporate guarantee from the parent company. Not a third party guarantee but an arrangement between the principal parties.
banker's acceptance
bank accepts a draft int becomes a negotiable instrument known as a ___________. *** this can be sold to another bank at a discount for immediate payment
Nominating bank
bank designated by the issuing bank, where the beneficiary party can give documents/get paid (does not have to be advising or confirming bank)
confirming bank
bank in beneficiary's country that further guarantees the issuing banks commitment to pay the letter of credit
Unifrom Commercial Code - Article 5
basic rules for letter of credit transactions within the US
draft
collections instrument that acts like a check. Seller presents documents for payment on a LoC (which is a draft drawn on the LoC). The draft is an order to the bank/account party to pay. **documentary draft - seller acts as botht the drawer and the payee
letter of credit
commercial bank guarantee of either payment by the buyer (______) or performance by one of the parties (stanby ______) ***bank guarantee
freight forwarder
coordinates the movement of goods, secures the bill of lading, and copletes other documentation as requireded in the letter of credit
acceptance
creates independant obligation drawee/payer - _____ converts a draft into a negotiable instrument
transferable credit
credit can be transferred by beneficiary party in whole or part to secondary beneficiaries UCP requires the original credit exprssly provide for transferablity
Bill of Lading
document of title. Negotiable bill allows the transfer of good while in transit. - negotiable = collateral to secure loan
performance bond
guarantee from an insurance company to pay the insured in case of default. (same purpose as standby) *minimizes buyer's risk of nonperformance by the seller
credit surety
guarantees repayment to a bank or lender who finances an export transaction or development project
customs broker
importer/buy may seek advice regarding import regulations (required documentation) from this party prior to signing a contract.
advising bank
intermediary bank that chooses not confirm/guarantee LoC from issuing bank. No contractual relationships are formed between issuer or beneficiary ** no liability - meaning choice of law will generally go to issuing bank's state
UCP 500
international rules for letters of credit pyblished by ICC in paris **current version known as _______
time draft
like a postdated check - can only be cashed sometime after the presentation of the document (draft may be sued on - independanct of underlying export contract)
documentary letter of credit
payment under a ______ is based on documents , not on terms of sale or the condition of goods sold
demand guarantee
popular means of guaranteing performance. "any guarantee, bond or other payment undertaken by a bank, insurance company or other body or person given in writing for the payment of money on presentation in conformity with the terms of the undertaking of a writen demand for payment and such other documents as may be specified in the Guarantee *secures performance on a nonmonetary obligation -default device when performance is unsatisfactory ****banks pay a documentary LoC when things go right, called upon to pay a ________ or standby letter only if things go wrong
facial compliance rule
refers to the principle that a bank's ONLY obligation in a LoC transaction is to review document *not to be confused w/ strict compliance(the standard by which banks review)
bid bond
required to bid on government procurement contracts - inusres against the risk of a bidder not honoring its bid
documentary collections transaction
seller does not give up control of goods until the buyer purchases the document, minimizing seller's risk of not being payed - simultaneously minimizes buyer's non-delivery risk b/c it ooobtains legal control over the goods in transit (only risk is fraud) - bank does not act as a guarantor of payment
Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes
states that "a bill of exchange or draft contains: (1) an unconditional order to pay a determinate sum of money; (2) the name of the drawee/payer; (3) statement of the time of payment; (4) place where payment is made; (5) name of person payee/who is getting paid; (6) date/place the bill is isssued; and (7) the signature of the person who issues the bill (drawer)
21 Day Rule
states that the bill of lading, and accompanying documents, must be presented tot he bank within twenty-one days from their prcurement ***parties can avoid this through express terms in the letter of credit (can be implied from parties' actions/interpretation/requirements
Uniform Rules for Demand Guarantees
the ICC's rules to govern Demand Guarantees. 28 articles. discourages unfair calls (banks) by requiring a statement from the beneficiary describning the way in which the principal is in breach
issuing bank
the bank that accepts the application for LoC and forms contract between the account party (buyer) and itself. This bank then issues LoC, forming contract w/ beneficiary party to pay the contract price upon the presentation of documents *** Contractual relationships are independent of on another (seller v. buyer is not related to seller v. bank)
beneficiary party
the party for which the letter of credit is ISSUED ***receiving payment (ie. exporter/seller of goods)
account party
the party requesting or applying for the letter of credit from a bank
rule of strict compliance
the strandard by which banks review documents presented for payment under a LoC. Banks ensure that documents submitted by beneficiary are exactly corresponding to the letter of credit
pro forma invoice
used in export import financing - know financing factors beforehand
trade acceptance
when buyer signs the draft, and is formally obligated to pay within the stated time
approximate
word usage in UCP500 that fixes variants in amount of goods as ranging 5% (<,>)
