Replying to [Camy]:

"Yes, I appreciate your efforts to inform us -as BUYERS - , but WHY all chinese company did not accept this type of commerce?"

Camy - Letter of Credit has also risk for Chinese sellers.

Consider this , L/C subject to goods landing in India , what happen is that buyer bribed Indian port officer to release goods without proper documentation. The buyer later tell seller that they have not receive goods, that port people cannot ind goods. Thus L/C wasn't honoured , the seller lost out on all his payment. Ths is true, it happen to our factory. After , we don't do L/C anymore, especially to some of the more "suspect" country , and definitely not to first time buyer.

Also other point to the problem for seller , L/C guarantees the delivery of goods , BUT not to the quality of the goods. You may still get a shipment of crap. I think the best thing is to hire an agent to do pre-shipment inspection for you, so everyone will be happy , we factory get our money before shipment, you get what you want - everyone happy. A L/C process is a pain in the ......

Jason

Replying to [MikePTY-HK]:


First:



The "Letter of Credit" is based on assessing the capability of the Buyer to pay, and the saller to deliver by their respective banks. No other risk - and a "Line of Credit" is drawn between these parties. This is a banking instrument, and the risk is taken by the banks.



There are now only 2 types of L/C:


1. Stand-bye Letter of Credit - SBLC, and


2. Documentary Letter of Credit - DLC.



Forget the SBLC and then the rest of the discussion covers only DLC. It is called "Documentary" because you activate the instrument by documents that the buyer and seller has agreed on, and the banks have reviewed the terms and agreed that these are acceptable and easy to identify. The Pre-DLC is thus "Released" first, for all four parties to review, and essentially allow the banks to negotiate the terms. The final form is activated when released by the Buyer's bank, and will now be "opened" to the seller when evidence is provided as documents.




DLC requires that the parties agrees in a form that both the Seller's bank and the Buyer's bank can understand that a set of documents has to be presented to "Open" the L/C.


So you demand that the commodity has to be inspected by SGS or similar - and their reported presented.


Then you ask for the Shipment papers, or certificate for Customs and Excise that all duties are made, and a list of the items,
and DHL or FedEx Wayfare Bill.


This is simple to prove - and for the bank to verifiy the authenticity of the document presented. Until this is in place, the money is in the bank of the Seller, but will not be transfered to his account. Once all documents are presented - the funds are transfered and made available.


Revolving: The same DLC is used over and over again say where you have a monthly delivery. (This replaced the old term "renewable".)


Transferable: The payment is issued to one seller first that then can transfer this to another seller, sub-contractor or (usually) account. This allows a company to be paid on the Cayman islands and transfer just what is needed home.


Divisible: You can divite the amount, and dispose of the open L/C in parts - with sets of documents. A cost can be covered by presentation of valid invoice as stated in the DLC.


Non-revocable: Once payment is done the Buyer cannot recall the amount. This is a superfluous term. Reason for revokation is failure to deliver - but terms for partial payment may be included in the DLC - then making it "divisble".


Non-Negotiable: Also superluous: relates to the documents and implies that the amount cannot be changed. Of course they can - e.g. oil is paid for with a discount from average of 3 days before and 3 days after lifting of Platt in the region as specified in the contract - and DLC. However, the Buyer cannot change to 5 days marketscan or from Singapore Platt to Caribbean Platt.


Amendable: Superflous: Not permitted. You cannot amend new terms to an DLC - then you have to cancel it and release & open a new.


Confirmed: Almost forgot - this is where you use a small bank, but some other huge bank will "confirm" the L/C - giving the bank the credit rating to the seller as that of the big bank. Here the "advising" banks seek an alliance that allows the small bank to provide a payment instrument also to own clients. E.g. a broker will often be able to help you get the L/C confirmed, if your bank is unsure. When negotiating - the seller will treat the confirmed L/C as if it was issued by the large bank.The credit-rating system of the banks determines the commission paid for the "confirmation".

Replying to [MikePTY-HK]:



Bank Guarantee vs. L/C.


The BG is an insurance against - usually inability to deliver and subsequently pay. The BG is a tradable bond, where the risk is distributed from the bank to its underwriters. A BG will be issued by the bank if need to state that the Buyer will be able to pay - or the underwriters will pay for him - not the bank. likewise, the Seller may have to provide a BG - against incomplete delivery. In construction this is usually formed so that the buyer of e.g. a building is covered by all expenses should the contractor fail - with a BG. A BG can be underwritten by any insurance company - such as Lloyds. This is considered much "better" as any claims can be settled quickly where it is easy to call on the funds.The bank will "sell" the BG, and will only issue it.



The BG is an insurance and not a payment instrument.


The purpose of the Letter of Credit is to provide a payment instrument that is best suited for both the buyer and the seller based on the framework that the banks can offer. L/C can also be used for consulting services - to ensure that you are paid by the end of an assignment. The L/C will fail if the bank defaults - here the BG will still provide cover since this is an insurance document. The BG will be of no more value than the capability of its underwriters. BG and L/C can both be used: L/C for payment per delivery, while a BG to guarantee that a contract for delivery is nor terminated prematurely e.g. by US companies seekign shelter under "Chapter 11" - where they will default out of obligations taken on in the DLC. Then the underwriters will be called on to pay Note that the BG will not insure the monthly payment - just that the last 3 payments are made. Then you will be paid in 3 months to sign for a new production, reconfigure factories and start the new line.

Replying to [Jason Shenzhen]:I don't know what problems you have - the usual problem is the surveying company at the Buyers port.


It is fully possible to make the condition that the survey report on shipping shall be applied if the survey report on discharge (on buyers expense) fails to be provided in say 3 days. Or that quantity shall be quantity according to Bill of Laden subtracted any damaged gods as reported to the insurance company.


Terms CIF is pretty clear - it is seller's responsility until the goods passed the side of the ship. Now if anything is lost at sea - that remains for the Seller to cover -. but the Buyer to prove. If anything is lost or damaged once it p the ship's side - including slips of crane and lands in the water - this is the Buyer's responsibility.You can also sell inside duty(CID), which is unusual. But it sounds like you are suffering from bad lawyers.

Replying to [MrPlum]: You issue a DLC that is "Divisible" - where the L/C may be divided and used for partial payment. Add to that "Transferable" and you get what you want - as an intermediary, you may issue new "partial" L/C to each subcontractor - and negotiate terms with your bank - and each sub-contractor's bank.

Replying to [Vishal Kelkar]:Payment "at sight" is a CIF only term. it indicates that the delivery is to a safe harbour well equipped for discharge (Buyer's responsibility) - and payment is immediate. It is one of many terms used. Usual term is also "per 5 days following presentation of" named documents.

Replying to [ac japan]: The reason is usually because you are ignorant of how the instrument works. The work involved with wire transfer and running around shaking hands and making sure is vastly more complex and time consuming. My guess is that you use L/C base on experience.

Replying to [crunchy]:Not allowed. Confirmed just implies that another bank is also backing up the payment.
The documents accompanying a Documentary Letter of Credit (DLC) shall state the time to pay - e.g. within 3 banking days. If the bank then fails to pay they will be removed from swift and called default.

Replying to [deenaboo]:A revocable L/C is used (in the US only) to explicit indicate the terms that permits the buyer to pull out of the transaction. E.g. has the winter goods not been supplied before spring sets in - it is time for a revoce the funds. This is not permitted in all countries - so you can assume that the L/C has to be non-revocable.Then you have to enter into the contract that governs the trade the penalties for being late - e.g. that the goods has to be delivered before the spring - or the payment instrument will be witdrawn and all funds revoked. Futhermore the Seller will be held liable for consequential damages...

Replying to [XBOXBRASIL]:Wise guy - usually you will include a precise definition of just what you want - detailed specification that will include inspection and evidence that the right goods is sent. You have surveying companies that will inspect and report - such as SGS, and you will require them to report adherance to specifications to be allowed to pay.

We use this in oil trading all the time - SGS samples and reports e.g.content of sulphur. If this is too high the cargo may be rejected...