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Presented to:Western Maquiladora Trade Association
April 15, 2009
Introduction of Basic Terms of Trade Payment
Buyer Seller
Open Account
Documentary Collection
Letter of Credit
Cash in AdvanceHigh
Low
RISK Low
High
RISK
Risks Associated with Terms of Payment
Documentary Collections
An order by the seller to his bank to collect payment/acceptance from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods.
Unlike letters of credit, banks involved in the transaction do not guarantee payment but act only as collectors of payment.
Letters of Credit
Bank’s commitment to pay the seller a specified sum of money on behalf of the buyer under precisely defined terms and conditions. The buyer specifies certain documents (including a title document) from the seller before the bank is to make payment, and the seller is assured that payment will be received after goods are shipped so long as the specified documents are provided.
Letters of Credit
• Governed by Rules– Uniform Customs and Practice for
Documentary Credits, International Chamber of Commerce Publication No. 600
• Banks Deal in Documents, not Goods.
• Payment Must be Made for Conforming Documents.
Common Letter of Credit Terms
• Sight– Payment is Due When Conforming
Documents Are Presented
• Usance - Banker’s Acceptance – Payment is Due at a Later Date up to 180
Days– Can be Paid at a Discount Before Maturity
Usance Letters of Credit
• Importer Receives Terms of Sale to 180 Days
• Seller Receives Payment at Sight
• Favorable US Dollar Financing Rates
Common Usage Of Standby Credit
• Bid Bond
• Performance Bond
• Advance Payment Bond
• Customs Bond
• Credit Enhancement
• Trade Support
Standby Letters of Credit
• Not Intended as Primary Source of Payment– Backup Source of Payment
• Used for– Credit Enhancement– Bonds– Financial Backing to a Guarantee
Transferable Letter of Credit
One where the original beneficiary transfers all or part of the proceeds of an existing credit to another party (typically the ultimate supplier of the goods). It is normally used by middleman as a financing tool.
Transferable Credit
• Having any credit line
• Disclosing his profit margin
• Disclosing the identities of the buyer
Allows a middleman to get a deal done without:
Red Clause Credit
Provides LC beneficiary a pre-shipment advance payment (usually a portion of the LC face value).
In essence, it represents a working capital loan from buyer (importer) to seller/manufacturer.
Financing Trade
• Import Financing- Usance Letter of Credit
- Trade Loan - Banker’s Acceptance (B/A)