Term of payment 3
How many persons are involved in the process of the documentary credit?
- 4 parties - The buyer and his bank known as the "issuing bank" - the seller and the bank situated in the seller's country known as the "advising bank".
What is the undertaking part in confirmed credit?
- Advantages of the confirm credit to the seller are obvious and instead of having to rely exclusively on a foreign bank (the issuing bank is a foreign bank for the seller) who is standing (financial standing) is probably unknown to him and, if there's a problem, he would have to be sued in a foreign country, he has the benefit of a separate commitment (undertaking) by a bank in his own country, which can be relied on to pay or to procure payment (obtain) and is subject to (être assujeti) legal action in his own country (at home). - When the advising bank doesn't add its separate confirmation, the credit is called an unconfirmed credit. Confirmed or unconfirmed credit, both are possible.
What should both parties be aware of?
- Finally, both parties should be aware, restrict government exchange controls that are in place (the government limit the transfer money in and out of the country. Ex: Greece because anyone wants its money to leave the country). When exchange controls are in place, documentary credit tends to be used because it makes it easier for the control authorities to check that the payments due on export of goods are in fact paid.
What are the steps when all is in oder?
- If all the documents are in order and the advising bank as a confirmed credit, meaning that the advising bank is obligated on the credit and has liability, it pays the seller the amount specified. - The advising bank then transmits the documents to the buyer's bank to the issuing bank and the issuing bank then pays the advising bank the amount the advising bank has paid the seller. - In the final step then, the issuing bank debits the sum to the buyer's account and hands over the relevant document to the buyer so that the latter can take possession of the goods i.e. the property in the goods passed to the buyer.
What does the seller do when he has a letter of credit?
- Now that the seller has got the letter of credit, he carefully refuses the terms and conditions laid down in the letter of credit. - He may contact its freight forwarder to make sure that the shipping date can be met since goods must be shipped by the date (on or before the date) specified in the letter of credit. - The seller will also check to see that the letter's terms correspond to the terms of his pro forma invoice. - If the seller cannot comply meet any of the conditions, or if any information is incorrect/misspelled, the buyer is immediately alerted/contacted. -The seller may want the letter of credit to specify that partial shipments and transhipment just means that the cargo change its vessel during the transport operation. He may want these to be permitted and at this stage, he must check that these have been foreseen in the letter of credit.
What is a sight draft?
- The first of these is the sight draft which provides for payment against documents whereby the seller draws a sight bill of exchange on the advising bank and presents the documents with the draft for immediate payment. This is known as sight payment credit, the details of which are laid down in the letter of credit.
How is made the notification of irrevocable credit?
- The notification is made via the advising bank. -The advising bank informs the seller of the opening of the credit in his favour and the issuing bank becomes immediately bound (vis-à-vis) the seller when the latter receive the letter of credit. - The meaning of bound: in the sense that the issuing bank has an obligation to honour the credit on presentation of the required documents.
What is the responsibilities of the exporter?
- The onus (la charge de la preuve) is on the exporter to make sure that they can meet delivery obligations before relying on letters of credit to ensure payment since their failure to perform could cancel the importer's obligations. - it is up to the exporter to determine in advance whether external factors such as currency fluctuation changes in import restriction (increase tariff) in the exporter's country could threaten the viability of the export deal (could make it too expensive basically).
What is the documentary credit?
- This is the most secure method of payment. - It involves the letter of credit; it is part of documentary credit. It's a complex document. - The documentary credit is a method of payment used when the seller needs a further insurance before arranging for the actual physical shipment of the goods that he will be paid after the shipment. - As we have seen, they are other less secure methods of payment and the use of documentary credit may depend of a number of factors. - the security aspect, the degree of confidence felt by the seller in the credit worthiness of the buyer (also the use of documentary credit depends on the type of market: if it's a seller market he can impose its terms and demand the documentary credit). - It is subject to The Uniform Customs and Practice for Documentary Credits (UCP): ICC in Paris.
What is the particularity of Irrevocable credit?
- constitutes a binding undertaking which the issuing bank is not entitled to cancel/nullify with or without notice. - The issuing bank may issue the letter of credit directly to the seller but almost invariably (every single time) it will arrange for notification by another bank known as the "advising bank", which is situated in the seller's country. Notification is the act of giving notice.
What is the ultimate aim of the documentary credit?
- guaranty security on the payment of the buyer. The exporter still has to way up the pros and cons to at the better way to use it.
What document requires an acceptance credit?
- requires the presentation by the seller of a term bill to the advising bank for acceptance against documents, involving payment by the accepting/advising bank at the due date, e.g. 90 days assuming it has receive all the relevant documents.
What about the verification process?
- the advising bank verifies if the documents comply with the conditions on the letter of credit and at this point, the advising bank will probably getting contact with the issuing bank (origin of the letter of credit). - If the documents do not conform with the letter of credit, the issuing bank may have many options opened to it. - It may consult the buyer to see if he is willing to wave the discrepancy or the issuing bank may reject the documents. It is does this, it must inform the seller or his bank, which ever handed the documents within a reasonable time not exceeding seven banking days, following receipt of the document.
What happends of the details are not consistent?
- the credit may be nullify (cancel) due to missed deadlines or null and void.
What does the seller do once he has recieved the letter of credit and all is well?
- the seller can then proceed to fulfil the order and ship the goods. Then the seller is going to dispatch the goods. Early in this process, the freight forwarder completes the necessary documentation when the goods are loaded into the boat at the beginning of the shipment process. - Once all the documents relating to the shipment and export transaction as a whole they are handed over to the advising bank by the seller or by its bank. The conditions of the letter of credit normally stipulate that the seller must also send a bill of exchange (or a draft) to the advising bank.
What about deffred payment credit
- there is no payment or acceptance to pay on presentation of the documents since it is pre-established in the letter of credit that payment shall be made (obligation dans les contrats) after the expiration of a stated period of time. -> For example: 30 days after presentation of the documents.
What does the buyer has to pay attention to?
-The buyer must ensure that the letter of credit (abbreviation: L/C or LC) issued to the seller correspond to what have been said or stipulated in the contract. - Fulfilment of this obligation is a condition precedent to the seller's duty to perform his delivery obligation. Condition precedent for example: if you want to sell me a car and I say I will only buy it with the MOT test. This is translated as "condition suspensive". For example, if the contract provides for a confirm credit the seller is entitled to reject and unconfirm the credit. If the letter of credit stipulated that a bill of lading should be one of the shipping documents whereas the contract of sales permits the seller to tender a delivery order, the letter of credit will likewise the defective and can be rejected by the seller.
The documentary credit requires strict compliance with ...
... - the terms and conditions - use entails proper documentation - Close attention must be paid to the fine print (bottom of the contract) on such matters as description of goods and deadlines for delivery of goods
What are the steps?
1- The first major step then is taken by the buyer who has an obligation then; he must apply to the issuing bank to open a credit in favour of the seller (for the seller basically). 2- the seller is going to be paid. This means that the issuing bank issues a letter of credit, undertaking to pay him a sum equal to the contract price of payment. Payment to the seller is actually made much more later. The buyer will be required to complete the bank's standard form of application to open a credit, giving full details of its requirements. The credit to be issued may be either revocable or irrevocable. The former (revocable) can be withdrawn by the issuing bank without notice and thus gives the seller little security.
Who can demand this method of payment?
The seller's right to demand a documentary credit and the exact nature of the credit to which he is entitled depend on the terms of the contract of sales.
Would the banking charges, other charges, insurance and courier be out of proportion to the value of the order?
When the buyer sets the ball rolling by buying then the documentary credit from its bank (the issuing bank) the fee he pays to the bank depends partly on its creditworthiness but varies from 2% to 8% of the value of the goods in the export transaction.