FINANCING FOREIGN SALES
The Export Usance Letter of Credit
An exporter in the United States can offer terms to an overseas buyer through
the usance (time) letter of credit mechanism. An export letter of credit may call
for the beneficiary’s drafts to be drawn at a certain number of days after sight
or after the bill of lading date. Typically, the drafts are drawn on the exporter’s
bank. Once the buyer’s bank has accepted the documents under the letter of
credit as a conforming drawing, the “accepted” draft becomes a banker’s
acceptance.
The advantages of the usance (time) letter of credit are:
· The exporter can give the foreign buyer the option of financing its trade
cycle at the banker’s acceptance rate in the United States.
· For buyers in developing countries, the banker’s acceptance rate is usually
a much better rate than they can access in their own country.
· The exporter’s credit risk is the U.S. bank or foreign bank on which the draft
is drawn as an irrevocable undertaking to pay the exporter at maturity.
· In many cases, the exporter can finance the foreign sale at a better rate
under the usance letter of credit than under its own bank line of credit based
on Prime.
· The exporter can extend financing terms without using its own line of credit.
For example, a Mexican company, Alfa Industries, opens a $500,000 time
letter of credit with its bank, MexiBank, in favor of the beneficiary in the United
States, Beta Corp.. The time letter of credit calls for the draft to be drawn on
Bank of America at 90 days after the bill of lading date. Since the draft is
drawn on Bank of America, they are taking the credit risk of MexiBank. Thus, it
is important for the exporter to check with Bank of America before the letter of
credit is issued to determine if Bank of America has sufficient availability
under its credit limit to MexiBank to accept this transaction. (An alternative to
having the draft drawn on Bank of America is to have the draft drawn on
Mexibank. The exporter thus upgrades the credit risk from that of his buyer to
that of the buyer’s bank. But, Bank of America no longer has credit exposure
to MexiBank under this alternative and payment will not be coming from Bank
of America.)
The goods are shipped on April 14. Alfa Industries presents the documents
required by the letter of credit to Bank of America on April 20, accompanied
by a 90-day draft maturing on July 13. Bank of America examines the
documents; finds two discrepancies, and sends the documents to
MexiBank in Mexico by courier. On April 24 MexiBank notifies Bank of America
by an authenticated SWIFT transmission that the buyer has waived the
discrepancies, enabling MexiBank to give Alfa Industries the title documents
and obligating MexiBank to pay Bank of America on July 13. This discrepancy
waiver in turn enables Bank of America to stamp the draft drawn on it as
“accepted”, thereby creating a banker’s acceptance.
Once the banker’s acceptance has been created, the exporter has two
choices:
1) Wait until July 13 to get the $500,000, knowing that its credit risk is now
that of Bank of America. If this option is picked, Beta Corp. will be charged a
per annum commission of 1.5% ($833.33) representing Bank of America's
price for accepting the Mexican bank's risk for 80 days.
2) On April 24, discount the draft with Bank of America at the banker’s
acceptance discount rate of 6.4% plus the commission of 1.5%. In this
example, Beta Corp. would be discounting the banker’s acceptance for the
time period of 80 days left until maturity at a rate of 7.9% based on a year of
360 days, giving a total discount of $8,777.76. Beta Corp. will receive the net
proceeds of $491,222.24.
A significant advantage to Beta Corp. is that it can finance this foreign
receivable at a cheaper rate than under its bank line of credit, priced at one
percent over Prime (9.5%). In this example, Beta Corp. is saving 2% and does
not have to utilize its own bank line to finance the export sale.
The Mexican buyer could not receive such advantageous pricing from
MexiBank based on its credit rating. If it were financing this transaction with
MexiBank under its Peso denominated line of credit, it would be paying 16% to
18%. However, Alfa Corp. does have the commission costs of opening the
letter of credit as well as the 25% cash margin requirement required by
MexiBank for credit and foreign exchange reasons.
Banker’s Acceptance Discount Rates
These rates vary with the amount and tenor; the larger the amount and the
smaller the number of days, the less the rate will be. Banker’s acceptance
rates are quoted in the third section of the Wall Street Journal under “Money
Rates” for periods of 30, 60, 90 and 180 days. These quoted rates are for
million dollar transactions and represent the “best” rates. Since the banker’s
acceptance discount rate is approximately equal to the bank’s “cost of funds”;
the all-in discount rate includes the commission, which covers the credit risk
and operational overhead assumed by the U.S. bank. The U.S. bank can, in
turn, re-discount or sell these bankers' acceptances to investors in the money
markets, thereby providing a liquid source of funding for the bank.
Banker’s Acceptance Rules
The rules for banker’s acceptances are established by the Federal Reserve
Bank. Although banker’s acceptances can be created for the domestic
storage of commodities, they are most commonly created to finance current
(within 30 days of the bill of lading date) import and export transactions.
Banker’s acceptances can be automatically created within the structure of a
time letter of credit or they can be requested by an importer or exporter from
its bank to finance its trade cycle for up to six months. The tenor (number of
days) of the acceptance should match the cash conversion cycle from
inventory, to accounts receivable, to cash.
CreditManagementWorld.com
Tuesday, September 29, 2009
BUYING AND SELLING GOODS INTERNATIONALLY
International sales transactions between sellers and buyers
require an agreement as to the form of payment for the goods.
Various methods of payment settlement include but are not
limited to open account, foreign collection, cash in advance and
documentary credit. One of the most common forms of payment
is documentary credit, which is also known as a Letter of Credit.
What is a Letter of Credit?
A Letter of Credit is literally a "letter" pertaining to a sales
transaction between a buyer and seller. The "letter" is initiated
by the buyer and is directed to the seller or beneficiary, in most
cases. In some cases, the beneficiary may not necessarily be
the Seller but would be the party possessing the right to receive
payment for the goods or services. (Please refer to the
webpage dealing with transferable letters of credit for additional
information.)
A Letter of Credit is the traditional worldwide risk management
tool for international transactions. Issued by a foreign bank
(representing the buyer) and confirmed by a corresponding
bank usually in the country of the seller, a Letter of Credit is the
overseas bank's commitment to pay the seller's drafts. A Letter
of Credit is opened by an issuing or opening bank. The buyer
chooses the opening bank.
Revocable vs. Irrevocable Letters of Credit
A Letter of Credit may be revocable or irrevocable. In a
revocable Letter of Credit, the issuing bank (representing the
buyer) has the right to cancel or alter its obligation at any time
before payment of a sight draft or acceptance of a time draft.
That situation exists even if goods were shipped in reliance on
the expectation of payment.
An irrevocable Letter of Credit that is accepted by the seller,
however, cannot be altered or canceled without the consent of
the seller. Any change to an irrevocable Letter of Credit requires
the consent of all parties. Consent would include any parties
beyond the buyer and seller. For example the confirming banks
would be affected parties.
Confirmed vs. Unconfirmed
An irrevocable Letter of Credit can be either confirmed or
unconfirmed.
In a confirmed Letter of Credit, the issuing bank (representing
the buyer) agrees independently to the buyer's commitments to
pay the seller the agreed-up amount of money, as long as all the
requirements of the Letter of Credit are fulfilled.
A confirmed irrevocable Letter of Credit can become very
elaborate. A second bank (often specified as a prime bank) may
confirm or otherwise guarantee payment of the foreign bank that
initially opened the Letter of Credit. This requirement originates
from the seller and usually takes places only if the bank of the
buyer is not internationally established.
Other types of Letters of Credit
Other types of Letters of Credit may include straight or
negotiation credits. These types of Letters of Credit inform the
seller whether any bank, or only certain banks, can process the
documents of the seller to receive payment. All of the various
types of Letters of Credit can be combined in various ways with
extended rights and/or obligations, depending upon the exact
type of Letter of Credit issued. A Seller should be aware of
rights under a Letter of Credit before proceeding with a sale.
Letter of Credit rules- International Chamber of Commerse
A Standard Documentary Credit Application Form has been
developed by the International Chamber of Commerce (ICC), in
Paris, France. The ICC has also published a guide to
Documentary Credit Operations. Banks throughout the world
adhere to the rules developed by the ICC.
The rights and obligations of buyers, sellers and participating
banks in international Letters of Credit transactions are
presented in careful detail in publications made available by the
ICC. Under the Uniform Customs and Practices for Document
Credits (UCP), the International Chamber of Commerce has
made available in a publication called the UCP 600. The
publication is almost always referred to in international Letter of
Credit forms and is a part of the Letter of Credit contract. The
ICC also has available ICC Publication No. 511, which takes the
reader through UCP 600 on an article-by-article and
clause-by-clause basis. The ICC Publication No. 511 also
explains the reasoning that led the ICC Working Group to
develop a thoroughly revised sets of Rules for Documentary
Credits under UCP 600.
Benefits of using a Letter of Credit
By conducting export sales transactions under an irrevocable
Letters of Credit, the seller does not have to determine the
credit standing of the foreign buyer. Letters of Credit are issued
in many different forms from foreign banks and financial
institutions. The variations are due to differences in customs
and regulations of trade and finance in the country of origin of
the issuing bank or financial institution. If, for any reason, a
seller cannot comply with one or more conditions of a Letter of
Credit, it is absolutely imperative for the seller to contact the
buyer to arrange for one or more amendments to the original
agreement.
Letter of Credit Discrepancies
If there is a disagreement between a sale contract's shipping
and documentation requirements and those in a Letter of Credit,
the seller must take immediate action before shipping to arrange
for an amendment to the Letter of Credit. If the seller does not
arrange for such an amendment, the seller may experience
payment problems. Full compliance with all conditions for
payment are interpreted by banks rigidly. Any disagreement,
however small, represents grounds to reject the payment of the
draft.
On a worldwide basis, approximately 60% of document
presentations on Letters of Credit are presented with
discrepancies. Banks charge for EACH discrepancy. Therefore,
it is extremely important to ensure document presentations are
accurate and complete to avoid additional costs and delays in
payment processing.
Payment on a Letter of Credit
The documents listed in a Letter of Credit are presented to the
negotiating/paying Bank with a draft, which is sometimes
referred to as a "bill of exchange". A draft resembles a check. In
a Letter of Credit sale, the drawee on the draft is the bank that
issued the Letter of Credit. The seller is the drawer of the draft.
Drafts are classified as either sight or time. A sight draft requires
a drawee to pay the amount shown in full upon proper
presentation of documentation. On a time draft, a payment date
later than the date of presentation would be stipulated (such as
60 days after sight or 90 days after sight).
When properly presented, a time draft is accepted by the
drawee. This means the drawee indicates an acknowledgement
that the necessary conditions to its payment were met and the
drawee is obligated to pay on the appointed date.
Paying a sight draft or accepting a time draft when documents or
goods have been presented is known as honoring the draft.
If the Letter of Credit states "payment at sight", the seller should
receive payment within a reasonable time (usually not exceeding
seven days) after documents are presented within the validity
period of the Letter of Credit and accepted by the negotiating
(paying) bank.
Usual Letter of Credit conditions
The usual conditions included in a Letter of Credit include
delivery dates, product specifications and receipt by the bank of
specific documents (such as negotiable bills of lading, inspection
certificates, commercial invoices and packing lists). Any required
documents must be presented to the bank within a specific
period of time. There may also be other terms and conditions as
negotiated between the buyer and seller.
Letter of Credit terms and conditions (and all required
documents) should be agreed upon between the buyer and
seller, in advance of opening of a Letter of Credit. Letter of
Credit issuance instructions should then conform to the terms of
such an agreement.
Exporters in the United States should request the overseas
buyer to open an Irrevocable Commercial Letter of Credit,
payable 100% at sight, freely negotiable or confirmed by a bank.
If the Letter of Credit is to be confirmed, the seller should also
request the buyer to instruct the issuing bank to obtain the
Letter of Credit confirmed by a bank in the United States.
International Letter of Credit
CreditManagementWorld.com
require an agreement as to the form of payment for the goods.
Various methods of payment settlement include but are not
limited to open account, foreign collection, cash in advance and
documentary credit. One of the most common forms of payment
is documentary credit, which is also known as a Letter of Credit.
What is a Letter of Credit?
A Letter of Credit is literally a "letter" pertaining to a sales
transaction between a buyer and seller. The "letter" is initiated
by the buyer and is directed to the seller or beneficiary, in most
cases. In some cases, the beneficiary may not necessarily be
the Seller but would be the party possessing the right to receive
payment for the goods or services. (Please refer to the
webpage dealing with transferable letters of credit for additional
information.)
A Letter of Credit is the traditional worldwide risk management
tool for international transactions. Issued by a foreign bank
(representing the buyer) and confirmed by a corresponding
bank usually in the country of the seller, a Letter of Credit is the
overseas bank's commitment to pay the seller's drafts. A Letter
of Credit is opened by an issuing or opening bank. The buyer
chooses the opening bank.
Revocable vs. Irrevocable Letters of Credit
A Letter of Credit may be revocable or irrevocable. In a
revocable Letter of Credit, the issuing bank (representing the
buyer) has the right to cancel or alter its obligation at any time
before payment of a sight draft or acceptance of a time draft.
That situation exists even if goods were shipped in reliance on
the expectation of payment.
An irrevocable Letter of Credit that is accepted by the seller,
however, cannot be altered or canceled without the consent of
the seller. Any change to an irrevocable Letter of Credit requires
the consent of all parties. Consent would include any parties
beyond the buyer and seller. For example the confirming banks
would be affected parties.
Confirmed vs. Unconfirmed
An irrevocable Letter of Credit can be either confirmed or
unconfirmed.
In a confirmed Letter of Credit, the issuing bank (representing
the buyer) agrees independently to the buyer's commitments to
pay the seller the agreed-up amount of money, as long as all the
requirements of the Letter of Credit are fulfilled.
A confirmed irrevocable Letter of Credit can become very
elaborate. A second bank (often specified as a prime bank) may
confirm or otherwise guarantee payment of the foreign bank that
initially opened the Letter of Credit. This requirement originates
from the seller and usually takes places only if the bank of the
buyer is not internationally established.
Other types of Letters of Credit
Other types of Letters of Credit may include straight or
negotiation credits. These types of Letters of Credit inform the
seller whether any bank, or only certain banks, can process the
documents of the seller to receive payment. All of the various
types of Letters of Credit can be combined in various ways with
extended rights and/or obligations, depending upon the exact
type of Letter of Credit issued. A Seller should be aware of
rights under a Letter of Credit before proceeding with a sale.
Letter of Credit rules- International Chamber of Commerse
A Standard Documentary Credit Application Form has been
developed by the International Chamber of Commerce (ICC), in
Paris, France. The ICC has also published a guide to
Documentary Credit Operations. Banks throughout the world
adhere to the rules developed by the ICC.
The rights and obligations of buyers, sellers and participating
banks in international Letters of Credit transactions are
presented in careful detail in publications made available by the
ICC. Under the Uniform Customs and Practices for Document
Credits (UCP), the International Chamber of Commerce has
made available in a publication called the UCP 600. The
publication is almost always referred to in international Letter of
Credit forms and is a part of the Letter of Credit contract. The
ICC also has available ICC Publication No. 511, which takes the
reader through UCP 600 on an article-by-article and
clause-by-clause basis. The ICC Publication No. 511 also
explains the reasoning that led the ICC Working Group to
develop a thoroughly revised sets of Rules for Documentary
Credits under UCP 600.
Benefits of using a Letter of Credit
By conducting export sales transactions under an irrevocable
Letters of Credit, the seller does not have to determine the
credit standing of the foreign buyer. Letters of Credit are issued
in many different forms from foreign banks and financial
institutions. The variations are due to differences in customs
and regulations of trade and finance in the country of origin of
the issuing bank or financial institution. If, for any reason, a
seller cannot comply with one or more conditions of a Letter of
Credit, it is absolutely imperative for the seller to contact the
buyer to arrange for one or more amendments to the original
agreement.
Letter of Credit Discrepancies
If there is a disagreement between a sale contract's shipping
and documentation requirements and those in a Letter of Credit,
the seller must take immediate action before shipping to arrange
for an amendment to the Letter of Credit. If the seller does not
arrange for such an amendment, the seller may experience
payment problems. Full compliance with all conditions for
payment are interpreted by banks rigidly. Any disagreement,
however small, represents grounds to reject the payment of the
draft.
On a worldwide basis, approximately 60% of document
presentations on Letters of Credit are presented with
discrepancies. Banks charge for EACH discrepancy. Therefore,
it is extremely important to ensure document presentations are
accurate and complete to avoid additional costs and delays in
payment processing.
Payment on a Letter of Credit
The documents listed in a Letter of Credit are presented to the
negotiating/paying Bank with a draft, which is sometimes
referred to as a "bill of exchange". A draft resembles a check. In
a Letter of Credit sale, the drawee on the draft is the bank that
issued the Letter of Credit. The seller is the drawer of the draft.
Drafts are classified as either sight or time. A sight draft requires
a drawee to pay the amount shown in full upon proper
presentation of documentation. On a time draft, a payment date
later than the date of presentation would be stipulated (such as
60 days after sight or 90 days after sight).
When properly presented, a time draft is accepted by the
drawee. This means the drawee indicates an acknowledgement
that the necessary conditions to its payment were met and the
drawee is obligated to pay on the appointed date.
Paying a sight draft or accepting a time draft when documents or
goods have been presented is known as honoring the draft.
If the Letter of Credit states "payment at sight", the seller should
receive payment within a reasonable time (usually not exceeding
seven days) after documents are presented within the validity
period of the Letter of Credit and accepted by the negotiating
(paying) bank.
Usual Letter of Credit conditions
The usual conditions included in a Letter of Credit include
delivery dates, product specifications and receipt by the bank of
specific documents (such as negotiable bills of lading, inspection
certificates, commercial invoices and packing lists). Any required
documents must be presented to the bank within a specific
period of time. There may also be other terms and conditions as
negotiated between the buyer and seller.
Letter of Credit terms and conditions (and all required
documents) should be agreed upon between the buyer and
seller, in advance of opening of a Letter of Credit. Letter of
Credit issuance instructions should then conform to the terms of
such an agreement.
Exporters in the United States should request the overseas
buyer to open an Irrevocable Commercial Letter of Credit,
payable 100% at sight, freely negotiable or confirmed by a bank.
If the Letter of Credit is to be confirmed, the seller should also
request the buyer to instruct the issuing bank to obtain the
Letter of Credit confirmed by a bank in the United States.
International Letter of Credit
CreditManagementWorld.com
Letter of Credit Glossary of Terms
Acceptance Draft - payable at a fixed or determinable future date, upon the
face of which the drawee has acknowledged in writing his or her obligation to
pay at maturity. See also "banker's acceptance" and "trade acceptance".
Account Party - The party instructing the bank to open a letter of credit and on
whose behalf the bank agrees to make payment. In most cases, the account
party is the importer/buyer, and is also known as the applicant.
Advice of Fate - Notification of the status of a collection that is still outstanding.When a draft bears this phrase, the time begins to run from its date. The date of maturity is therefore fixed and does not depend on the date of acceptance of the draft.
Advising Bank - A bank that accepts a letter of credit from the issuing bank,
verifies its authenticity, and forwards it to the beneficiary. The advising bank
does not take on any payment obligations.
After Sight - When a draft bears this phrase, the time begins to run from the
date of its acceptance.
Air Waybill (of lading) - A signed receipt and a contract to deliver goods by
air. Such bills are non-negotiable and do not convey title to the goods as do “To
Order” bills of lading used by ocean and land carriers. The title passes to the
party to whom the goods are consigned (the Consignee).
Amendment - Change to terms of a letter of credit. Beneficiary has the right to
refuse the amendment under an irrevocable letter of credit.
Applicant - See "account party".
Assignment of Proceeds - A request by the beneficiary to pay all or part of the
funds due to him to a third party. This instrument does not transfer rights in the
letter of credit nor the title to the goods.
Back-to-Back Letter of Credit (L/C) - Letter of credit issued for the account
of a buyer who is already holding an L/C in his or her favor. The back-to-back
L/C is issued in favor of the supplier to cover the same shipment as stipulated in
the credit already held by the buyer. Terms of both L/Cs, except for the amount
and expiration date, are so similar that the same documents presented under the
back-to-back credit are subsequently applied against the credit in favor of the
buyer. However, the buyer/beneficiary of the first credit substitutes this draft
and invoice for those presented by the supplier. See also “letter of credit”.
Banker’s Acceptance - Form of credit created when a bank “accepts” a time
draft typically drawn on the bank by a seller of goods. By accepting a draft, the
bank is obligated to pay the face amount at a specified time in the future, usually
six months or less after acceptance. A seller of merchandise can sell the banker's
acceptance for an amount less than face value and have immediate use of funds.
See also “acceptance”.
Bank Draft - A check drawn by a bank on another bank payable to the seller at
the request of the buyer. The check may be denominated in U.S. Dollars or most
foreign currencies.
Beneficiary - The party who receives payment as stipulated in a letter of credit.
This party is usually the seller/exporter.
Bill of Exchange - Formal written order addressed by one person (drawer) to
another (drawee), signed by the drawer, and directing the drawee to pay on
demand or at a fixed or determinable future time, a certain sum in money to the
order of a specified person (payee).
Bill of Lading (Air, Ocean, Railroad, Truck) - A document of title issued by
the carrier (transport company) or its agent. Bill of lading is a receipt for the
merchandise in transit, as well as a contract for delivery to a specified party at a
specified destination.
“BLANK ENDORSED” - A negotiable bill of lading in which the title to the
merchandise is passed on to another party by means of an endorsement. The
holder of the “blank endorsed” bill of lading is entitled to take possession of the
merchandise.
“CLEAN BILL OF LADING” - One in which the goods are described as having
been received by the carrier in “apparent good order and condition” and without
qualification. “LATE PRESENTATION” (STALE): A bill of lading is presented to
a bank for payment or negotiation after the stipulated date in the letter of credit,
or later than 21 days after the date of its issuance.
“NEGOTIABLE OR ‘TO ORDER’” - A bill of lading in which the merchandise is
consigned directly “to order” or “to the order of” a designated party, usually the
shipper or a bank. The phrase “to order” or “to the order of (a designated party)”
signifies negotiability permitting the title of the merchandise to be transferred
many times by means of appropriate endorsements.
“NOTIFY” - This phrase requires the carrier to notify a designed party upon
arrival of the merchandise, but does not transfer title of the merchandise to that
party.
“STRAIGHT OR NON-NEGOTIABLE” - A bill of lading in which the merchandise is consigned directly to a designated party, generally the buyer, but not to his “order”. Delivery of the merchandise is made only to the designated
party, usually without surrendering the bill of lading.
“THROUGH” - A bill of lading issued by a shipping company or their agent
covering more than one mode of transportation.
Cash Against Documents (CAD) - Payment for goods in which an intermediary (usually a bank) releases title documents to the buyer upon payment in cash.
Cash in Advance (CIA) - A term of trade in which the exporter does not ship
goods until payment is received; offers the least risk to sellers and the most risk
to buyers.
Clean Draft - A sight or time draft (bill of exchange) which is not accompanied
by additional documents. Also referred to as "Clean Collection".
Collecting Bank - Bank that acts as an agent for a remitting bank that wishes to
have its collections handled. The collecting bank demands payment from the
buyer and handles the funds received as instructed; generally the funds are sent
back to the remitting bank.
Commercial Invoice - A written and signed list of merchandise and/or services
with associated quantities, prices and expenses. It contains the terms of the sale
and is prepared by the seller to show the total amount owed by the buyer.
Confirmed Credit - A letter of credit in which the issuing bank’s obligation to
pay is backed (confirmed) by a second bank.
Deferred Letter of Credit (L/C) - Letter of credit that calls for payment at a
future date, but does not require a draft. See also “letter of credit” and “usance
letter of credit”.
Direct Collection - Method of payment for goods in which the seller sends a
draft drawn on the buyer, the shipping documents, invoices, insurance
certificates, other appropriate documents directly to the buyer’s bank for
collection. Only an information copy of the advice is sent to the exporter’s bank
to establish and monitor the collection transaction for the seller.
Discrepancy - Any deviation from the terms and conditions of a letter of credit
or from the documents presented under the letter of credit.
Documentary Credit - A letter of credit issued to support the movement of
merchandise supported by shipping documents presented by the beneficiary to
the Issuing Bank for payment or acceptance.
Documents Against Acceptance (D/A) - Instructions given by a shipper to his
or her acceptance bank that the documents attached to a time draft for collection
are deliverable to the drawee/payer against his or her acceptance of the draft.
Documents Against Payment (D/P) - Instructions given by a shipper to his or
her bank that the documents are deliverable to the drawee/payer only against his
or her payment of the draft.
Draft - A draft is a formal demand for payment. It is an unconditional order in
writing, addressed by one party (drawer) to another party (drawee), requiring
the drawee to pay, at a designated or determinable future date, a specified sum in
lawful currency (either in dollars or other currency) to the order of a named
party (the Payee). In international trade, drafts are also known as “Bills of
Exchange.”
Eurodollars - A term used for U.S. dollars held on deposit or traded anywhere
else in the world except in the USA.
Eximbank (Export-Import Bank of the United States) - A U.S. government
agency that offers insurance/guarantees of commercial or political risks
associated with U.S. export transactions. These programs encourage U.S.
exports by reducing the exporter’s risk.
Expiry or Expiration Date - The date on which the draft and documents drawn
under a letter of credit must be presented to the negotiating, accepting, paying,
or issuing bank in order to effect payment. The issuing bank’s obligation ceases
on that date if the letter of credit is a “straight credit.” If the letter of credit is a “negotiable credit,” the issuing bank must honor the credit, provided the
complying documents were submitted prior to the expiry (or expiration) date.
Foreign Exchange - The process of trading the currency of one country for
that of another.
Foreign Exchange Exposure - A situation in which a U.S. company,
selling/purchasing in a currency other than U.S. Dollars, runs the risk of
receiving a reduced dollar amount or paying an increased dollar amount due to a
fluctuating exchange rate.
Forward Transactions - Foreign exchange transactions settling between three
business days and one year (and sometimes longer).
Freight Forwarder - An independent business that arranges for the shipment of
export cargo and completes the necessary export documentation on behalf of the
exporter.
Irrevocable Letter of Credit (L/C) - Letter of credit that cannot be changed or
cancelled without the consent of all parties involved. Almost all L/Cs are
irrevocable unless otherwise stated on L/C. See also “letter of credit”.
Issuing Bank - Bank that draws up and issues the letter of credit and that
makes payment according to the conditions
Letter of Credit - An instrument issued by a bank, at the request of the
applicant, promising to pay the beneficiary upon his presentation of stipulated
documents in accordance with the terms and conditions of the credit.
“CONFIRMED”: A letter of credit issued by one bank to which another bank
added its irrevocable confirmation to pay, thereby obligating itself in the same
manner as the opening bank.
“STAND-BY”: A letter of credit that generally guarantees payment due for an
unfulfilled obligation on the part of the applicant or another party. It is payable
upon presentation of a draft, as well as a signed statement or certification by the
beneficiary that the applicant has failed in his obligation.
Maturity Date - The date on which negotiable instruments become due for
payment.
Negotiate - Take action to verify that the documents presented under an L/C
conform to the requirements in order to release funds to the seller.
Negotiating Bank - The bank that reviews the documents required in the letter
of credit for compliance with its terms and remits payment to the beneficiary.
The bank may be specifically named in the letter of credit, or may be a bank
chosen by the seller.
Opening Bank - See "Issuing Bank".
Paying Bank - Bank that effects payment of documents negotiated under a letter
of credit, customarily the buyer's bank. It is usually also the negotiating bank,
unless the L/C allows another bank to negotiate or the paying bank is unable to
negotiate. See also "negotiating bank".
Presentation - Presentation for acceptance or payment on a collection or letter
of credit.
Proforma Invoice - An invoice sent in advance of shipment, to enable the buyer
to obtain an import permit or exchange permit or both. The proforma invoice
gives a close approximation of the weights and values of the intended shipment.
Protest - Legal process of demanding payment of a negotiable item from the
maker who has refused to pay.
Red Clause - Clause in a letter of credit that authorizes the advising/negotiating
bank to make an advance payment to the beneficiary before presentation of
shipping documents, usually against a simple receipt.
Reimbursing Bank - The bank names in a letter of credit as the bank authorized
by the issuing bank to honor claims presented by the paying, accepting, or
negotiating bank.
Revocable Letter of Credit (L/C) - A letter of credit that can be modified or
canceled by the issuing bank without the beneficiary’s consent unless the
negotiation of complying documents has already taken place. The issuing bank
must honor the draft(s) negotiated before the notice of revocation has been made.
Spot Transaction - Foreign exchange transaction in which foreign currency is
bought at the current rate of exchange and delivered within two business days
after the transaction date.
Spread - The difference between the buying (bid) rate and the selling (offer) rate
of any foreign currency for any particular period.
Standby Letter of Credit (L/C) - Letter of credit issued to back an obligation
of the applicant, but typically not intended to be the primary method of payment.
Usually payable against drafts and statements, but not against commercial
documents. See also “letter of credit”.
Trade Acceptance - Draft drawn by the seller of goods on the buyer and
accepted by the buyer for payment at a specified future date. See also
“acceptance”.
Transferable Letter of Credit (L/C) - Letter of credit that permits the
beneficiary to transfer all or some of the rights and obligations under the credit to a second beneficiary. See also “letter of credit”.
UCP - Uniform Customs and Practices for Documentary Credits. Publication
issued by the International Chamber of Commerce (2007 revision, ICC
Publication No. 600, or “UCP 600”) that outlines the rules and guidelines
involved in a letter of credit transaction.
Usance (Time) Credit - Letter of credit that calls for payment against drafts
calling for payment at some specified date in the future. Gives buyers time to sell
the goods to get the funds to reimburse the issuer.
Usance Letter of Credit (L/C) - Letter of credit that calls for payment at a
future date -- generally within six months -- and requires a draft drawn on the
issuing/paying bank for the amount of the invoice. See also “letter of credit”.
Value (Settlement) Date - Contracted date on which the foreign exchange is to
be delivered or received.
face of which the drawee has acknowledged in writing his or her obligation to
pay at maturity. See also "banker's acceptance" and "trade acceptance".
Account Party - The party instructing the bank to open a letter of credit and on
whose behalf the bank agrees to make payment. In most cases, the account
party is the importer/buyer, and is also known as the applicant.
Advice of Fate - Notification of the status of a collection that is still outstanding.When a draft bears this phrase, the time begins to run from its date. The date of maturity is therefore fixed and does not depend on the date of acceptance of the draft.
Advising Bank - A bank that accepts a letter of credit from the issuing bank,
verifies its authenticity, and forwards it to the beneficiary. The advising bank
does not take on any payment obligations.
After Sight - When a draft bears this phrase, the time begins to run from the
date of its acceptance.
Air Waybill (of lading) - A signed receipt and a contract to deliver goods by
air. Such bills are non-negotiable and do not convey title to the goods as do “To
Order” bills of lading used by ocean and land carriers. The title passes to the
party to whom the goods are consigned (the Consignee).
Amendment - Change to terms of a letter of credit. Beneficiary has the right to
refuse the amendment under an irrevocable letter of credit.
Applicant - See "account party".
Assignment of Proceeds - A request by the beneficiary to pay all or part of the
funds due to him to a third party. This instrument does not transfer rights in the
letter of credit nor the title to the goods.
Back-to-Back Letter of Credit (L/C) - Letter of credit issued for the account
of a buyer who is already holding an L/C in his or her favor. The back-to-back
L/C is issued in favor of the supplier to cover the same shipment as stipulated in
the credit already held by the buyer. Terms of both L/Cs, except for the amount
and expiration date, are so similar that the same documents presented under the
back-to-back credit are subsequently applied against the credit in favor of the
buyer. However, the buyer/beneficiary of the first credit substitutes this draft
and invoice for those presented by the supplier. See also “letter of credit”.
Banker’s Acceptance - Form of credit created when a bank “accepts” a time
draft typically drawn on the bank by a seller of goods. By accepting a draft, the
bank is obligated to pay the face amount at a specified time in the future, usually
six months or less after acceptance. A seller of merchandise can sell the banker's
acceptance for an amount less than face value and have immediate use of funds.
See also “acceptance”.
Bank Draft - A check drawn by a bank on another bank payable to the seller at
the request of the buyer. The check may be denominated in U.S. Dollars or most
foreign currencies.
Beneficiary - The party who receives payment as stipulated in a letter of credit.
This party is usually the seller/exporter.
Bill of Exchange - Formal written order addressed by one person (drawer) to
another (drawee), signed by the drawer, and directing the drawee to pay on
demand or at a fixed or determinable future time, a certain sum in money to the
order of a specified person (payee).
Bill of Lading (Air, Ocean, Railroad, Truck) - A document of title issued by
the carrier (transport company) or its agent. Bill of lading is a receipt for the
merchandise in transit, as well as a contract for delivery to a specified party at a
specified destination.
“BLANK ENDORSED” - A negotiable bill of lading in which the title to the
merchandise is passed on to another party by means of an endorsement. The
holder of the “blank endorsed” bill of lading is entitled to take possession of the
merchandise.
“CLEAN BILL OF LADING” - One in which the goods are described as having
been received by the carrier in “apparent good order and condition” and without
qualification. “LATE PRESENTATION” (STALE): A bill of lading is presented to
a bank for payment or negotiation after the stipulated date in the letter of credit,
or later than 21 days after the date of its issuance.
“NEGOTIABLE OR ‘TO ORDER’” - A bill of lading in which the merchandise is
consigned directly “to order” or “to the order of” a designated party, usually the
shipper or a bank. The phrase “to order” or “to the order of (a designated party)”
signifies negotiability permitting the title of the merchandise to be transferred
many times by means of appropriate endorsements.
“NOTIFY” - This phrase requires the carrier to notify a designed party upon
arrival of the merchandise, but does not transfer title of the merchandise to that
party.
“STRAIGHT OR NON-NEGOTIABLE” - A bill of lading in which the merchandise is consigned directly to a designated party, generally the buyer, but not to his “order”. Delivery of the merchandise is made only to the designated
party, usually without surrendering the bill of lading.
“THROUGH” - A bill of lading issued by a shipping company or their agent
covering more than one mode of transportation.
Cash Against Documents (CAD) - Payment for goods in which an intermediary (usually a bank) releases title documents to the buyer upon payment in cash.
Cash in Advance (CIA) - A term of trade in which the exporter does not ship
goods until payment is received; offers the least risk to sellers and the most risk
to buyers.
Clean Draft - A sight or time draft (bill of exchange) which is not accompanied
by additional documents. Also referred to as "Clean Collection".
Collecting Bank - Bank that acts as an agent for a remitting bank that wishes to
have its collections handled. The collecting bank demands payment from the
buyer and handles the funds received as instructed; generally the funds are sent
back to the remitting bank.
Commercial Invoice - A written and signed list of merchandise and/or services
with associated quantities, prices and expenses. It contains the terms of the sale
and is prepared by the seller to show the total amount owed by the buyer.
Confirmed Credit - A letter of credit in which the issuing bank’s obligation to
pay is backed (confirmed) by a second bank.
Deferred Letter of Credit (L/C) - Letter of credit that calls for payment at a
future date, but does not require a draft. See also “letter of credit” and “usance
letter of credit”.
Direct Collection - Method of payment for goods in which the seller sends a
draft drawn on the buyer, the shipping documents, invoices, insurance
certificates, other appropriate documents directly to the buyer’s bank for
collection. Only an information copy of the advice is sent to the exporter’s bank
to establish and monitor the collection transaction for the seller.
Discrepancy - Any deviation from the terms and conditions of a letter of credit
or from the documents presented under the letter of credit.
Documentary Credit - A letter of credit issued to support the movement of
merchandise supported by shipping documents presented by the beneficiary to
the Issuing Bank for payment or acceptance.
Documents Against Acceptance (D/A) - Instructions given by a shipper to his
or her acceptance bank that the documents attached to a time draft for collection
are deliverable to the drawee/payer against his or her acceptance of the draft.
Documents Against Payment (D/P) - Instructions given by a shipper to his or
her bank that the documents are deliverable to the drawee/payer only against his
or her payment of the draft.
Draft - A draft is a formal demand for payment. It is an unconditional order in
writing, addressed by one party (drawer) to another party (drawee), requiring
the drawee to pay, at a designated or determinable future date, a specified sum in
lawful currency (either in dollars or other currency) to the order of a named
party (the Payee). In international trade, drafts are also known as “Bills of
Exchange.”
Eurodollars - A term used for U.S. dollars held on deposit or traded anywhere
else in the world except in the USA.
Eximbank (Export-Import Bank of the United States) - A U.S. government
agency that offers insurance/guarantees of commercial or political risks
associated with U.S. export transactions. These programs encourage U.S.
exports by reducing the exporter’s risk.
Expiry or Expiration Date - The date on which the draft and documents drawn
under a letter of credit must be presented to the negotiating, accepting, paying,
or issuing bank in order to effect payment. The issuing bank’s obligation ceases
on that date if the letter of credit is a “straight credit.” If the letter of credit is a “negotiable credit,” the issuing bank must honor the credit, provided the
complying documents were submitted prior to the expiry (or expiration) date.
Foreign Exchange - The process of trading the currency of one country for
that of another.
Foreign Exchange Exposure - A situation in which a U.S. company,
selling/purchasing in a currency other than U.S. Dollars, runs the risk of
receiving a reduced dollar amount or paying an increased dollar amount due to a
fluctuating exchange rate.
Forward Transactions - Foreign exchange transactions settling between three
business days and one year (and sometimes longer).
Freight Forwarder - An independent business that arranges for the shipment of
export cargo and completes the necessary export documentation on behalf of the
exporter.
Irrevocable Letter of Credit (L/C) - Letter of credit that cannot be changed or
cancelled without the consent of all parties involved. Almost all L/Cs are
irrevocable unless otherwise stated on L/C. See also “letter of credit”.
Issuing Bank - Bank that draws up and issues the letter of credit and that
makes payment according to the conditions
Letter of Credit - An instrument issued by a bank, at the request of the
applicant, promising to pay the beneficiary upon his presentation of stipulated
documents in accordance with the terms and conditions of the credit.
“CONFIRMED”: A letter of credit issued by one bank to which another bank
added its irrevocable confirmation to pay, thereby obligating itself in the same
manner as the opening bank.
“STAND-BY”: A letter of credit that generally guarantees payment due for an
unfulfilled obligation on the part of the applicant or another party. It is payable
upon presentation of a draft, as well as a signed statement or certification by the
beneficiary that the applicant has failed in his obligation.
Maturity Date - The date on which negotiable instruments become due for
payment.
Negotiate - Take action to verify that the documents presented under an L/C
conform to the requirements in order to release funds to the seller.
Negotiating Bank - The bank that reviews the documents required in the letter
of credit for compliance with its terms and remits payment to the beneficiary.
The bank may be specifically named in the letter of credit, or may be a bank
chosen by the seller.
Opening Bank - See "Issuing Bank".
Paying Bank - Bank that effects payment of documents negotiated under a letter
of credit, customarily the buyer's bank. It is usually also the negotiating bank,
unless the L/C allows another bank to negotiate or the paying bank is unable to
negotiate. See also "negotiating bank".
Presentation - Presentation for acceptance or payment on a collection or letter
of credit.
Proforma Invoice - An invoice sent in advance of shipment, to enable the buyer
to obtain an import permit or exchange permit or both. The proforma invoice
gives a close approximation of the weights and values of the intended shipment.
Protest - Legal process of demanding payment of a negotiable item from the
maker who has refused to pay.
Red Clause - Clause in a letter of credit that authorizes the advising/negotiating
bank to make an advance payment to the beneficiary before presentation of
shipping documents, usually against a simple receipt.
Reimbursing Bank - The bank names in a letter of credit as the bank authorized
by the issuing bank to honor claims presented by the paying, accepting, or
negotiating bank.
Revocable Letter of Credit (L/C) - A letter of credit that can be modified or
canceled by the issuing bank without the beneficiary’s consent unless the
negotiation of complying documents has already taken place. The issuing bank
must honor the draft(s) negotiated before the notice of revocation has been made.
Spot Transaction - Foreign exchange transaction in which foreign currency is
bought at the current rate of exchange and delivered within two business days
after the transaction date.
Spread - The difference between the buying (bid) rate and the selling (offer) rate
of any foreign currency for any particular period.
Standby Letter of Credit (L/C) - Letter of credit issued to back an obligation
of the applicant, but typically not intended to be the primary method of payment.
Usually payable against drafts and statements, but not against commercial
documents. See also “letter of credit”.
Trade Acceptance - Draft drawn by the seller of goods on the buyer and
accepted by the buyer for payment at a specified future date. See also
“acceptance”.
Transferable Letter of Credit (L/C) - Letter of credit that permits the
beneficiary to transfer all or some of the rights and obligations under the credit to a second beneficiary. See also “letter of credit”.
UCP - Uniform Customs and Practices for Documentary Credits. Publication
issued by the International Chamber of Commerce (2007 revision, ICC
Publication No. 600, or “UCP 600”) that outlines the rules and guidelines
involved in a letter of credit transaction.
Usance (Time) Credit - Letter of credit that calls for payment against drafts
calling for payment at some specified date in the future. Gives buyers time to sell
the goods to get the funds to reimburse the issuer.
Usance Letter of Credit (L/C) - Letter of credit that calls for payment at a
future date -- generally within six months -- and requires a draft drawn on the
issuing/paying bank for the amount of the invoice. See also “letter of credit”.
Value (Settlement) Date - Contracted date on which the foreign exchange is to
be delivered or received.
Standby Letter of Credit
What is a standby letter of credit?
A Standby Letter of Credit (called“SLC or “LC” ) are written obligations
of an issuing bank to pay a sum of money to a beneficiary on behalf of
their customer in the event that the customer does not pay the
beneficiary. It is important to note that standby letters of credit apply
only whenever the issuing bank's commitment to pay is not contingent
on the existence, validity and enforceability of it’s customer’s obligation;
this is called an “abstract” guarantee; that is, the bank’s obligation is to
pay regardless of any disputes between its customer and the
beneficiary. The issuance of letters of credit is a private transaction
and does not result in the issuance of any public trading securities.
Why do we have standby letters of credit?
The standby letter of credit comes from the banking legislation of the
United States, which forbids US credit institutions from assuming
guarantee obligations of third parties. (Most other countries outside of
the USA continue to allow bank guaruntees.) To circumvent this US
banking rule, the US banks created the standby letter of credit, which is
based on the uniform customs and practice for documentary credits. In
1998 the International Chamber of Commerce (ICC) added ISP98
(International Standby Practices 98) as the rules to guide standby
letters of credit. These rules are slowly being adopted; however,
many of the standby letters of credit continue to rely on the ICC’s older
guide, Uniform Customs and Practices for Documentary Credits, 1993
revision, ICC Publication 500.
Who are the parties to the standby letter of credit?
(1) The Applicant. This is the customer of the bank who applies to the
bank for the standby letter of credit. He must provide collateral to the
bank or have sufficient credit to induce the bank to issue the
instrument. He also must pay the bank a fee for issuing the instrument.
(2) The Issuing Bank. This is the applicant’s bank that issues the
standby letter of credit.
(3) The Beneficiary. This is the party in whose favor the instrument is
issued.
(4) Confirming Bank. This is a bank (usually located near the
beneficiary) that agrees (confirms) to pay the beneficiary rather than
have the issuing bank pay the beneficiary. The beneficiary pays the
Confirming Bank a fee for this convenience. The Confirming Bank then
collects from the Issuing Bank the amount paid to the beneficiary.
(5) Advising Bank. This is the bank that represents the beneficiary. It
may accept the letter of credit on behalf of the beneficiary and collect
on it on behalf of the beneficiary. In order for the transaction to be a
bank-to-bank transaction, the advising bank works for the beneficiary
to keep the instrument in the banking system. Sometimes the Advising
Bank also is the Confirming Bank, but not always.
What is the purpose of the standby letter of credit?
The standby basically fulfills the same purpose as a bank guarantee: it
is payable upon first demand and without objections or defenses on
the basis of the underlying transaction between the applicant and the
beneficiary. It is up to the beneficiary to decide whether he may accept
a standby.
What are the types of standby letters of credit?
(1) Performance Standby. This instrument supports an obligation to
perform other than to pay money including the purpose of covering
losses arising from a default of the applicant in completion of the
underlying transaction.
(2) Advance Payment Standby. This instrument supports an obligation
to account for an advance payment made by the beneficiary to the
applicant.
(3) Bid Bond/Tender Standby. This standby supports an obligation of
the applicant to execute a contract if the applicant is awarded a bid.
(4) Counter Standby. This instrument supports the issuance of a
separate standby or other undertaking by the beneficiary of the
counter standby.
(5) Direct Pay Standby. This instrument serves to support payment
when due of an underlying payment obligation typically in connection
with a financial standby without regard to default. This standby is also
used to directly pay an obligation where the only conditions of payment
are the passage of the term and presentment of payment.
(6) Insurance Standby. This instrument is an insurance or reinsurance
obligation of the applicant.
(7) Commercial Standby. This is the most used standby and it
supports the obligations of an applicant to pay for goods or services in
the event of non-payment by a business debtor.
Are standby letter of credits transferable?
Assignment of Standby letter of credit proceeds -The beneficiary can
assign the proceeds of a standby letter of credit. But this assignment
does not assign the rights of the beneficiary as “drawer” on the
standby letter of credit, and only the beneficiary may exercise the
“drawer” rights and present the demand for payment under the terms
of the standby letter of credit unless the terms of the instrument
provide otherwise. This means that the assignee may receive the
proceeds of the standby, but in order to obtain those proceeds the
beneficiary must first make the demand for payment. This also means
that the beneficiary can sell by assignment, at discount, the benefits of
the standby. An assignment of proceeds requires notice to the issuing
bank of this action; otherwise the issuing bank would pay the
beneficiary rather than the assignee.
Transfer of Standby letter of credits. Standby letter of credits can be
transferred to a third party ONLY with the written consent of the
issuing bank AND the beneficiary.
Are standby letter of credits the subject of trading?
There is no public market for the trading of standby letters of credits.
Standby letters of credits can only be transferred or the proceeds
assigned in private transactions (as previously noted above).
Standby letters of credit do not have CUSIP or ISIN numbering.
Standby letters of credits are not trading securities, trading debt
instruments, or trading investment funds, and therefore are not
subject to the rules and regulations of the Security and Exchange
Commission.
CreditManagementWorld.com
A Standby Letter of Credit (called“SLC or “LC” ) are written obligations
of an issuing bank to pay a sum of money to a beneficiary on behalf of
their customer in the event that the customer does not pay the
beneficiary. It is important to note that standby letters of credit apply
only whenever the issuing bank's commitment to pay is not contingent
on the existence, validity and enforceability of it’s customer’s obligation;
this is called an “abstract” guarantee; that is, the bank’s obligation is to
pay regardless of any disputes between its customer and the
beneficiary. The issuance of letters of credit is a private transaction
and does not result in the issuance of any public trading securities.
Why do we have standby letters of credit?
The standby letter of credit comes from the banking legislation of the
United States, which forbids US credit institutions from assuming
guarantee obligations of third parties. (Most other countries outside of
the USA continue to allow bank guaruntees.) To circumvent this US
banking rule, the US banks created the standby letter of credit, which is
based on the uniform customs and practice for documentary credits. In
1998 the International Chamber of Commerce (ICC) added ISP98
(International Standby Practices 98) as the rules to guide standby
letters of credit. These rules are slowly being adopted; however,
many of the standby letters of credit continue to rely on the ICC’s older
guide, Uniform Customs and Practices for Documentary Credits, 1993
revision, ICC Publication 500.
Who are the parties to the standby letter of credit?
(1) The Applicant. This is the customer of the bank who applies to the
bank for the standby letter of credit. He must provide collateral to the
bank or have sufficient credit to induce the bank to issue the
instrument. He also must pay the bank a fee for issuing the instrument.
(2) The Issuing Bank. This is the applicant’s bank that issues the
standby letter of credit.
(3) The Beneficiary. This is the party in whose favor the instrument is
issued.
(4) Confirming Bank. This is a bank (usually located near the
beneficiary) that agrees (confirms) to pay the beneficiary rather than
have the issuing bank pay the beneficiary. The beneficiary pays the
Confirming Bank a fee for this convenience. The Confirming Bank then
collects from the Issuing Bank the amount paid to the beneficiary.
(5) Advising Bank. This is the bank that represents the beneficiary. It
may accept the letter of credit on behalf of the beneficiary and collect
on it on behalf of the beneficiary. In order for the transaction to be a
bank-to-bank transaction, the advising bank works for the beneficiary
to keep the instrument in the banking system. Sometimes the Advising
Bank also is the Confirming Bank, but not always.
What is the purpose of the standby letter of credit?
The standby basically fulfills the same purpose as a bank guarantee: it
is payable upon first demand and without objections or defenses on
the basis of the underlying transaction between the applicant and the
beneficiary. It is up to the beneficiary to decide whether he may accept
a standby.
What are the types of standby letters of credit?
(1) Performance Standby. This instrument supports an obligation to
perform other than to pay money including the purpose of covering
losses arising from a default of the applicant in completion of the
underlying transaction.
(2) Advance Payment Standby. This instrument supports an obligation
to account for an advance payment made by the beneficiary to the
applicant.
(3) Bid Bond/Tender Standby. This standby supports an obligation of
the applicant to execute a contract if the applicant is awarded a bid.
(4) Counter Standby. This instrument supports the issuance of a
separate standby or other undertaking by the beneficiary of the
counter standby.
(5) Direct Pay Standby. This instrument serves to support payment
when due of an underlying payment obligation typically in connection
with a financial standby without regard to default. This standby is also
used to directly pay an obligation where the only conditions of payment
are the passage of the term and presentment of payment.
(6) Insurance Standby. This instrument is an insurance or reinsurance
obligation of the applicant.
(7) Commercial Standby. This is the most used standby and it
supports the obligations of an applicant to pay for goods or services in
the event of non-payment by a business debtor.
Are standby letter of credits transferable?
Assignment of Standby letter of credit proceeds -The beneficiary can
assign the proceeds of a standby letter of credit. But this assignment
does not assign the rights of the beneficiary as “drawer” on the
standby letter of credit, and only the beneficiary may exercise the
“drawer” rights and present the demand for payment under the terms
of the standby letter of credit unless the terms of the instrument
provide otherwise. This means that the assignee may receive the
proceeds of the standby, but in order to obtain those proceeds the
beneficiary must first make the demand for payment. This also means
that the beneficiary can sell by assignment, at discount, the benefits of
the standby. An assignment of proceeds requires notice to the issuing
bank of this action; otherwise the issuing bank would pay the
beneficiary rather than the assignee.
Transfer of Standby letter of credits. Standby letter of credits can be
transferred to a third party ONLY with the written consent of the
issuing bank AND the beneficiary.
Are standby letter of credits the subject of trading?
There is no public market for the trading of standby letters of credits.
Standby letters of credits can only be transferred or the proceeds
assigned in private transactions (as previously noted above).
Standby letters of credit do not have CUSIP or ISIN numbering.
Standby letters of credits are not trading securities, trading debt
instruments, or trading investment funds, and therefore are not
subject to the rules and regulations of the Security and Exchange
Commission.
CreditManagementWorld.com
The Export-Import Bank of the United States
The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency of the United States federal government. It was established in 1934 by an executive order, and made an independent agencyIndependent agencies of the United States government
Independent agencies of the United States Government are those Executive Government agency of the federal government of the United States that exist outside of the United States federal executive departments....
in the Executive branch by Congress in 1945, for the purposes of financing and insuring foreign purchases of United States goods for customers unable or unwilling to accept credit riskCredit risk
Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit ...
. The mission of the Bank is to create and sustain U.S. jobs by financing sales of U.S. exports to international buyers. The Bank is chartered as a government corporation by the Congress of the United States; it was last chartered for a five year term in 2006. Its Charter spells out the Bank's authorities and limitations. Among them is the principle that Ex-Im Bank does not compete with private sector lenders, but rather provides financing for transactions that would otherwise not take place because commercial lenders are either unable or unwilling to accept the political or commercial risks inherent in the deal. Its current chairman is James H. LambrightJames H. Lambright
James H. Lambright is the 22nd Chairman of the Export-Import Bank of the United States. As such he is on the 46th level of the United States Order of Precedence....
.
Export-Import Bank
The U.S. Export-Import Bank (Ex-Im Bank) is the principal government agency responsible for aiding the export of American goods and services, and thereby creating and sustaining U.S. jobs, through a variety of loan, guarantee, and insurance programs. Generally, its programs are available to any American export firm regardless of size. Similar banks, or export credit agencies (ECAs), are operated by a number of foreign countries. Many ECAs agree to conduct their activities by following a set of common rules and principles through their membership in the Organization for Economic Cooperation and Development (OECD); these ECAs are generally in the so-called "developed" countries. The goal is to permit exporters in various countries to compete on the basis of the quality of their goods and services, not on preferential financing terms. Other ECAs, such as the China Exim Bank (in the People's Republic of ChinaPeople's Republic of China
The People's Republic of China , commonly known as China, is the largest country in East Asia and the List of countries by population in the world with over 1.3 billion people, approximately a fifth of the world's population....
) do not abide by the OECD rules.
Small Business Programs
The Export-Import Bank of the United States focuses much of its energy and resources to providing support to U.S. small businesses for export of U.S. made products. There are no transactions, in terms of dollars, that are too small for the Ex-Im Bank to consider. Programs aimed at this sector include Export Credit Insurance, and Working Capital Guarantee programs. From October 2005 through September 2006 the Ex-Im Bank authorized $3.2 billion in financing directly to U.S. small businesses.
Export Credit Insurance
Export Credit Insurance from Export-Import Bank of the United States provides insurance policies to U.S. companies and banks to mitigate risks of non-collection from foreign buyers and borrowers. Risks covered include default due to commercial reasons, such as buyer insolvency and cash-flow problems, as well as political risks such as war, civil unrest and currency flow restrictions.
Export Credit Insurance policies can be issued to companies directly exporting, or to banks lending to foreign buyers. Export-Import Bank of the United States has a special insurance program for small businesses, with no premium minimum, and a pay-as-you-go premium structure. This is often the most affordable trade credit insurance available for new and small exporters.
Working Capital Guarantee
The Working Capital Guarantee program provides loan guarantees to banks willing to lend to exporting companies. The loan guarantee is secured against foreign accounts receivable, and against work in process and finished goods inventory destined for export.
Direct and Intermediary Loans
The Ex-Im Bank provides two types of loans: direct loans to foreign buyers of American exports and intermediary loans to responsible parties, such as foreign government lending agencies which relend to foreign buyers of capital goods and related services (for example, a maintenance contract for a jet passenger plane). Both programs cover up to 85 percent of the value of the exported goods and services, with repayment terms of one year or more.
Criticism
The Bank has come under criticism for allegedly favoring special interests ahead of that of the U.S. taxpayer. These interests include that of heavily subsidized corporations such as BoeingBoeing
The Boeing Company is a major aerospace and defense corporation, originally founded by William Edward Boeing in Seattle, Washington. Boeing has expanded over the years, merging with McDonnell Douglas in 1997....
or EnronEnron
Enron Creditors Recovery Corporation was an American energy company based in Houston, Texas, Texas. Before its bankruptcy in late 2001, Enron employed approximately 22,000 and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of nearly $101 billion in 2000....
as well as those of well-connected foreign governments and nationals (such as a 1996 $120 million low-interest loan to the China National Nuclear Power CorporationChina National Nuclear Corporation
The China National Nuclear Corporation was established on 16 September 1988 by a Government of China decree. CNNC's president and vice-president are appointed by the Premier of the State Council....
(CNNP).
However, the current congressional mandate for the Export-Import Bank of the United States is to focus on small business support.
In 2007, WFAA-TV in Dallas revealed that the Ex-Im Bank had given at least $243 million in fraudulent loans to companies doing business with Mexico, including giving loans to companies with no verifiable address and individuals who were known associates of the Sinaloa and Juarez drug trafficking cartels.
Independent agencies of the United States Government are those Executive Government agency of the federal government of the United States that exist outside of the United States federal executive departments....
in the Executive branch by Congress in 1945, for the purposes of financing and insuring foreign purchases of United States goods for customers unable or unwilling to accept credit riskCredit risk
Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit ...
. The mission of the Bank is to create and sustain U.S. jobs by financing sales of U.S. exports to international buyers. The Bank is chartered as a government corporation by the Congress of the United States; it was last chartered for a five year term in 2006. Its Charter spells out the Bank's authorities and limitations. Among them is the principle that Ex-Im Bank does not compete with private sector lenders, but rather provides financing for transactions that would otherwise not take place because commercial lenders are either unable or unwilling to accept the political or commercial risks inherent in the deal. Its current chairman is James H. LambrightJames H. Lambright
James H. Lambright is the 22nd Chairman of the Export-Import Bank of the United States. As such he is on the 46th level of the United States Order of Precedence....
.
Export-Import Bank
The U.S. Export-Import Bank (Ex-Im Bank) is the principal government agency responsible for aiding the export of American goods and services, and thereby creating and sustaining U.S. jobs, through a variety of loan, guarantee, and insurance programs. Generally, its programs are available to any American export firm regardless of size. Similar banks, or export credit agencies (ECAs), are operated by a number of foreign countries. Many ECAs agree to conduct their activities by following a set of common rules and principles through their membership in the Organization for Economic Cooperation and Development (OECD); these ECAs are generally in the so-called "developed" countries. The goal is to permit exporters in various countries to compete on the basis of the quality of their goods and services, not on preferential financing terms. Other ECAs, such as the China Exim Bank (in the People's Republic of ChinaPeople's Republic of China
The People's Republic of China , commonly known as China, is the largest country in East Asia and the List of countries by population in the world with over 1.3 billion people, approximately a fifth of the world's population....
) do not abide by the OECD rules.
Small Business Programs
The Export-Import Bank of the United States focuses much of its energy and resources to providing support to U.S. small businesses for export of U.S. made products. There are no transactions, in terms of dollars, that are too small for the Ex-Im Bank to consider. Programs aimed at this sector include Export Credit Insurance, and Working Capital Guarantee programs. From October 2005 through September 2006 the Ex-Im Bank authorized $3.2 billion in financing directly to U.S. small businesses.
Export Credit Insurance
Export Credit Insurance from Export-Import Bank of the United States provides insurance policies to U.S. companies and banks to mitigate risks of non-collection from foreign buyers and borrowers. Risks covered include default due to commercial reasons, such as buyer insolvency and cash-flow problems, as well as political risks such as war, civil unrest and currency flow restrictions.
Export Credit Insurance policies can be issued to companies directly exporting, or to banks lending to foreign buyers. Export-Import Bank of the United States has a special insurance program for small businesses, with no premium minimum, and a pay-as-you-go premium structure. This is often the most affordable trade credit insurance available for new and small exporters.
Working Capital Guarantee
The Working Capital Guarantee program provides loan guarantees to banks willing to lend to exporting companies. The loan guarantee is secured against foreign accounts receivable, and against work in process and finished goods inventory destined for export.
Direct and Intermediary Loans
The Ex-Im Bank provides two types of loans: direct loans to foreign buyers of American exports and intermediary loans to responsible parties, such as foreign government lending agencies which relend to foreign buyers of capital goods and related services (for example, a maintenance contract for a jet passenger plane). Both programs cover up to 85 percent of the value of the exported goods and services, with repayment terms of one year or more.
Criticism
The Bank has come under criticism for allegedly favoring special interests ahead of that of the U.S. taxpayer. These interests include that of heavily subsidized corporations such as BoeingBoeing
The Boeing Company is a major aerospace and defense corporation, originally founded by William Edward Boeing in Seattle, Washington. Boeing has expanded over the years, merging with McDonnell Douglas in 1997....
or EnronEnron
Enron Creditors Recovery Corporation was an American energy company based in Houston, Texas, Texas. Before its bankruptcy in late 2001, Enron employed approximately 22,000 and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of nearly $101 billion in 2000....
as well as those of well-connected foreign governments and nationals (such as a 1996 $120 million low-interest loan to the China National Nuclear Power CorporationChina National Nuclear Corporation
The China National Nuclear Corporation was established on 16 September 1988 by a Government of China decree. CNNC's president and vice-president are appointed by the Premier of the State Council....
(CNNP).
However, the current congressional mandate for the Export-Import Bank of the United States is to focus on small business support.
In 2007, WFAA-TV in Dallas revealed that the Ex-Im Bank had given at least $243 million in fraudulent loans to companies doing business with Mexico, including giving loans to companies with no verifiable address and individuals who were known associates of the Sinaloa and Juarez drug trafficking cartels.
Monday, September 28, 2009
Managed Futures Accounts, What ROI is Possible?
The great thing about the world is, everyone is unique in their own way. One person may have completely opposite characteristics from another, but both seem the same at first glance. As with most alternative investments, things are no different in the managed futures market. Though many of the less experienced may create blanket assumptions, every managed futures trader is different in their strategy, risk assessment, and underlying skill set.
In this article, we will explain the potential profit of managed futures by grouping traders based upon the “risk” of their strategy. This will allow you to understand what profits you can expect for various risk tolerances, and will define which is right you. Remember, though high returns are not always associated with high risk, most of the time they go hand in hand. Scroll down, and take a look below.
Managed Futures Trading Strategies
Low Risk: Low risk managed futures accounts will aim primarily for one goal, positive returns every month. The main focus is preservation of capital, and long term growth through account compounding. Many times, these traders may have expertise in only one futures market, and will make their profits the same way year after year. In addition, they may have “stop losses” as low as 2-5% of the account value to prevent large draw downs. This is the most common type of trader you will find in the managed futures industry, and will typically produce returns between 20-45% per year.
Moderate Risk: Managed futures traders with moderate risk strategies capitalize on big swings to make profits, and may trade futures positions without cover (“naked”). Though these traders may aim for high profits, they have a predefined stop loss %, and a profit goal for every month. Also, many traders may implement trades in a few major commodities, rather than specializing in just one futures market. With a moderate risk strategy, the returns for managed futures investments may range between 50-90% per year.
High Risk: Those who would be considered “high risk” managed futures traders only have one goal in mind, profit. Some of these traders can use such high leverage that they can turn 50k into 1M in 6 months, but during that time they are always “naked” and exposed to risk. Despite their amazing success, there is usually a huge reality check at some point that refines their strategy. Generally speaking, you are more likely to find “high risk traders” who manage futures privately. In most cases, traders with a license want to mitigate their risk and achieve steady profits, not aim for record-setting returns. With “high risk” managed futures investments, the returns usually range between 100-300% per year, but can be far greater!
As we have explained before, each trader is unique. Despite the common assumption, many traders can have low risk strategies, and still be able to achieve very high profits. Though strategies like this are extremely complex, options traders from all over the world profit in low risk environments every day.
If someone is to ask you, “what returns can be produced in a managed futures account”, you should now know, it depends on your investment background. The fact is, you must always match your risk tolerance and investment goals with that of the managed futures trader you are investing with. Each trader is right for a certain type of investor, and is not for everyone. Though we wish it was this simple, you should never base your decisions solely upon the returns offered by a futures trader. This can lead you to invest with a trader with conflicting goals, which will most likely present a problem for you in the future.
To summarize, managed futures investments are great, but only for the savvy investor with large investment goals. If you are an investor with money to risk and are looking for high returns, then you may want to give managed futures a shot! If you have a limited amount of capital and are thinking about striking it big, then you are following a path to disappointment.
InsideTrade LLC Staff
(412) 235-2855 (412) 235-2855
Submitted by InsideTrade Staff on Wednesday, 23 September 2009
Private Placement Programs, How High are Yields?
Seemingly every day there are hundreds of more people learning about the private placement business, usually either through online research or word of mouth. Once an exclusive opportunity which was limited to just a few privileged individuals, the private placement business is now full of thousands of “professional brokers”. As you would expect, some of them are very successful, but the other 99% are not!
You may ask yourself, why are “private placement programs” growing so fast when it is such a tough business to succeed in? Well it’s unfortunately become the nature of most humans to chase the dollar, and claims of fast money. Let’s face it, if you’re rich, it is rather intriguing to consider something that can double your money every month, or “better”!!
With all of the recent hype about private placement programs, the most common question I have received over the last few years is:
I’ve heard of all kinds of programs out there, and I want to know, what returns are actually possible in REAL private placement programs?
Since this is such a frequent question and a critical topic to understand, we felt that an article explaining private placement yields was essential.
Below, we have listed different investment levels, and will explain what your opportunities, risks, and prospective yields could be if you found a REAL private placement trader.
Please note, this is not a solicitation or description of any programs associated with InsideTrade LLC. It is rather an explanation of information we have attained from reliable sources that have been successful in the private placement business. All returns shall be considered hypothetical, and for informational purposes only.
Various Investment Levels
1 Million: This is the level that most investors lose money, or have less than expected success. Whether it is because they fell for the “piggy back” program, “Bank of America” program, “PING” program, “Bullet” program, or the bank instrument/ proof of funds program, most are never successful. Though there are real programs at 1M, they do NOT trade bank instruments, and offer far lower returns.
MAX POSSIBLE RETURNS: 20% per month
10 Million: At this level, you may be able to find legitimate private placement programs, but your success depends on if the trader will accept such a small file. Sometimes there may be other larger files applying concurrently that you can be pooled with, but your yields won’t be as high as the larger file. In this case, at such a small level, it is still very tough to even be placed in a REAL bank instrument trading program. As you may know, bank instruments are cut in 100M+ increments, and even with a steep discount, you still need over 65M to purchase just one note.
MAX POSSIBLE RETURNS: 10% per week
50 Million: Usually at this level, you can find a trader that will combine your file with another concurrent applicant to meet the minimum needed to purchase a discounted bank instrument. Though this is possible, it is not guaranteed that you can enter into a program unless you find a REAL trader, who is happy to make an exception for you.
MAX POSSIBLE RETURNS: 20% per week
100 Million: At this level, the trader can purchase instruments with the line of credit that is drawn against the client’s collateral. Typically, traders can make spreads of about 7-15 points on each trade (ex. buy 65% of face value, sell at 72%). In addition, there is no need to combine the account with another client, since the client’s funds are sufficient to purchase the note alone. Needless to say, this dramatically increases your potential returns, and opens up opportunities for project funding and humanitarian developments.
MAX POSSIBLE RETURNS: 40% per week
As you may already know, there are many programs out there that may talk the talk, but when it comes to actually paying out, most of them disappear, or change the expected yields at the last minute. Though yields can be even higher for some opportunities, it is very unlikely that you will find a safe and stable program earning more profit than the numbers listed above.
Unfortunately, everyone knows that brokers run the business, and the traders “hide in the shadows” until the client’s information has been attained. For most desperate brokers, the goal is to attain as many files as possible. In having this goal, many brokers twist words and sugar coat information to get more applicants. As you can see, it is not uncommon to have inflated and unrealistic yields communicated to clients. In fact, it has become less common to speak with experienced brokers with reasonable yield expectations, than it is to speak with uneducated brokers with big promises.
Though it may be needless to repeat, be careful and use common sense when entering private placement transactions. Just like everything else, if it sounds too good to be true, it usually is.
InsideTrade LLC Staff
(412) 235-2855
Submitted by InsideTrade Staff on Saturday, 15 August 2009
Subscribe to:
Posts (Atom)
