Discussion: Important details about L/C's (Letter of Credit)
Post 62 of 84
Replying to [fbx_wood]:You ask a surveyor to inspect, and attached what is to be reported to the DLC. The Surveyor - like SGS, will inspect, weight and measure, test and report findings as in adherance to specifications or not. These are independent inspectors from a well known surveying company. In many countries they have provided "own" inspectors. That introduces a problem with bribery. If a national inspector is to be used - always amend that arbitration related to the quality of the delivered shall be with and aproved international survey company, and that its ruling shall be accepted by both parties without right to apeal.
10 May 2007 17:59
Post 63 of 84
Replying to [dhavie]: First you use a Standbye Letter of Credit - which is a different payment instrument - and is as here combined with a BG. This is difficult to make divisible. The SBLC will be used to secure each delivery - and I presume this happens e.g. when stock need to be refilled.
The SBLC is expensive, and if you need to open this to a number of sub-contractors, you have to convert to a transferable, divisible Revolving DLC. Here the bank will pay on exhibit of documents, and you can view it as the Buyer has to refill his account with a new deposit to maintain the credit with the bank.
The BG will then be used to secure that you stick with the production consortium for the time of the contract.
The SBLC is expensive, and if you need to open this to a number of sub-contractors, you have to convert to a transferable, divisible Revolving DLC. Here the bank will pay on exhibit of documents, and you can view it as the Buyer has to refill his account with a new deposit to maintain the credit with the bank.
The BG will then be used to secure that you stick with the production consortium for the time of the contract.
10 May 2007 18:07
Post 64 of 84
Replying to [kattan]:The other answer is wrong.
A transferable L/C is where the "Line of credit" between the seller and buyer is retained - established once - but the beneficiary may choose to change to final bank account to even another bank - or open new L/C on the basis of this. It is all related to "credit" and "credit rating". The new L/C to subcontracts will have new "line of credits" that will be negotiated with the main beneficiary.
A back-to-back is a break in the "Line of Credit". Here you have negotiated the payment instrument with the subscontractors first - and "if you were awarded the contract you wou.." issue L/C "back-to-back. The terms will be matched to be identical - textually, the documents are the same, but there is not line of credit to the main advisor to the final beneficiaries. They are catered for by the bank issuing their L/C. So if the main bank defaults - the bank in-between will have to pay them. The Text and terms - "verbiage" remains the same.
A transferable L/C is where the "Line of credit" between the seller and buyer is retained - established once - but the beneficiary may choose to change to final bank account to even another bank - or open new L/C on the basis of this. It is all related to "credit" and "credit rating". The new L/C to subcontracts will have new "line of credits" that will be negotiated with the main beneficiary.
A back-to-back is a break in the "Line of Credit". Here you have negotiated the payment instrument with the subscontractors first - and "if you were awarded the contract you wou.." issue L/C "back-to-back. The terms will be matched to be identical - textually, the documents are the same, but there is not line of credit to the main advisor to the final beneficiaries. They are catered for by the bank issuing their L/C. So if the main bank defaults - the bank in-between will have to pay them. The Text and terms - "verbiage" remains the same.
10 May 2007 18:15
Post 65 of 84
Replying to [zealotwan]:well written article but
You forgot a 4th condition
4. Method of Inspection: By international renowned survey company...
Seller pays on loading/export, buyer on discharge. That will produce the document that will determine if the goods has been delivered or not - and also if it delivered as agreed.
You forgot a 4th condition
4. Method of Inspection: By international renowned survey company...
Seller pays on loading/export, buyer on discharge. That will produce the document that will determine if the goods has been delivered or not - and also if it delivered as agreed.
10 May 2007 18:22
Post 66 of 84
Replying to [foshansun]:The credibility of the Buyer's bank is imperative - which is why we use "CONFIRMED" DLC. That is where the small bank will approach a larger bank to get this to endorse the trade - by "confirming" the L/C.They are then liable should the first "small" bank fail.
This is a very rare occasion. It is more frequent that BG fails because of insufficient funds with the underwriters.
This is a very rare occasion. It is more frequent that BG fails because of insufficient funds with the underwriters.
10 May 2007 18:26
Post 67 of 84
Replying to [zealotwan]: What u said is totally correct and agree with that. I had learnt a lot from you and really appreciate it. Thanks.
09 Jun 2007 01:14
Post 68 of 84
Replying to [khflottorp]:
Revocable LCs would no longer be a part of UCP 600. Because of its unstability, and transient nature, it is being dropped from the next UCP. If you still want to issue a revocable LC (why on earth one would, I don't know!) a bank can still do so under UCP 500.
Revocable LCs have gone out of fashion long ago.
Revocable LCs would no longer be a part of UCP 600. Because of its unstability, and transient nature, it is being dropped from the next UCP. If you still want to issue a revocable LC (why on earth one would, I don't know!) a bank can still do so under UCP 500.
Revocable LCs have gone out of fashion long ago.
09 Jun 2007 01:55
Post 69 of 84
Replying to [khflottorp]:
There is an error in your line of reasoning. In a Transferable LC transaction, the beneficiary cannot open a new LC. He can only transfer that SAME LC, in whole or in parts (divisible) to another or a few others. Please refer UCP 600, article 38.
A Back-to-Back LC is where the first beneficiary opens another (new) LC through his banker, on receipt of the original (the first) LC. The second LC is independent of the first, so the beneficiary's bank must take a credit decision whether to open the (Back-to-Back) LC or not. The risk of this bank is on the beneficiary. If the original LC does not get paid, the beneficiary must independently meet the payment of the Back-to-Back LC on its due date (at sight or on maturity).
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There is an error in your line of reasoning. In a Transferable LC transaction, the beneficiary cannot open a new LC. He can only transfer that SAME LC, in whole or in parts (divisible) to another or a few others. Please refer UCP 600, article 38.
A Back-to-Back LC is where the first beneficiary opens another (new) LC through his banker, on receipt of the original (the first) LC. The second LC is independent of the first, so the beneficiary's bank must take a credit decision whether to open the (Back-to-Back) LC or not. The risk of this bank is on the beneficiary. If the original LC does not get paid, the beneficiary must independently meet the payment of the Back-to-Back LC on its due date (at sight or on maturity).
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09 Jun 2007 02:02
Post 70 of 84
Replying to [khflottorp]:
I am sorry to have to contradict in certain places, to set the record straight. The definitions are as follows:
Transferable LC: Where an LC is issued to A (beneficiary) say for $100,000. A transfers the whole to B. Or A transfers $10,000 to B, $20,000 to C, $40,000 to D, and retains the rest for himself. Certain terms can be changed while the transfer is made. See article 38 of UCP 600 for details.
Divisible: You said: "You can divide the amount, and dispose of the open L/C in parts - with sets of documents." I agree. This applies to Transferable LCs. See just above. THis is NOT a different TYPE OF LC. Even for straight LCs, allowing part shipment makes it 'divisible'.
Non-revocable: You said: "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"."
This is incorrect. There is nothing called non-revocable LC/Credit. There are only TWO types: Revocable LCs (see articles 2 and 8 of UCP 500), and Irrevocable LCs (see Articles 2 and 9 of UCP 500). Irrevocable LCs, once issued, cannot be modified or cancelled unless all the parties to the Credit (i.e., applicant, issuing bank, confirming bank, if any, and the beneficiary) have agreed to the change.
Non-Negotiable: You said "Also superluous: relates to the documents and implies that the amount cannot be changed. Of course they can....". Non-negotiable means where value cannot be passed on to the holder. Examples: Non-negotiable LCs mean LCs under which no negotiation or discount of documents can take place. Non-negotiable transport documents do not represent title to goods. Non-negotiable instruments (of payment) cannot be purchased or discounted by a bank.
Amendable: You said "Superflous: Not permitted. You cannot amend new terms to an DLC - then you have to cancel it and release & open a new."
INCORRECT: Any term in an LC can be amended ANY NUMBER of times. In an Irrevocable LC, for an amendment to become operative, ALL PARTIES must agree to the amendment(s). For example, only after a beneficiary has formally accepted an amendment (either by letter, or by submission of documents under the amendment) an LC would stand amended. But ALL LCs can be amendment. (See article 10 on Amendments, UCP 600).
Confirmed: Your explanation generally gives the correct picture. But, do see article 8 of UCP 600.
I am sorry to have to contradict in certain places, to set the record straight. The definitions are as follows:
Transferable LC: Where an LC is issued to A (beneficiary) say for $100,000. A transfers the whole to B. Or A transfers $10,000 to B, $20,000 to C, $40,000 to D, and retains the rest for himself. Certain terms can be changed while the transfer is made. See article 38 of UCP 600 for details.
Divisible: You said: "You can divide the amount, and dispose of the open L/C in parts - with sets of documents." I agree. This applies to Transferable LCs. See just above. THis is NOT a different TYPE OF LC. Even for straight LCs, allowing part shipment makes it 'divisible'.
Non-revocable: You said: "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"."
This is incorrect. There is nothing called non-revocable LC/Credit. There are only TWO types: Revocable LCs (see articles 2 and 8 of UCP 500), and Irrevocable LCs (see Articles 2 and 9 of UCP 500). Irrevocable LCs, once issued, cannot be modified or cancelled unless all the parties to the Credit (i.e., applicant, issuing bank, confirming bank, if any, and the beneficiary) have agreed to the change.
Non-Negotiable: You said "Also superluous: relates to the documents and implies that the amount cannot be changed. Of course they can....". Non-negotiable means where value cannot be passed on to the holder. Examples: Non-negotiable LCs mean LCs under which no negotiation or discount of documents can take place. Non-negotiable transport documents do not represent title to goods. Non-negotiable instruments (of payment) cannot be purchased or discounted by a bank.
Amendable: You said "Superflous: Not permitted. You cannot amend new terms to an DLC - then you have to cancel it and release & open a new."
INCORRECT: Any term in an LC can be amended ANY NUMBER of times. In an Irrevocable LC, for an amendment to become operative, ALL PARTIES must agree to the amendment(s). For example, only after a beneficiary has formally accepted an amendment (either by letter, or by submission of documents under the amendment) an LC would stand amended. But ALL LCs can be amendment. (See article 10 on Amendments, UCP 600).
Confirmed: Your explanation generally gives the correct picture. But, do see article 8 of UCP 600.
09 Jun 2007 02:26
Post 71 of 84
Replying to [MrPlum]:
Get a Transferable LC, and part-Transfer to the suppliers. OR, get your own LC as beneficiary, buy the goods and export. How you pay YOUR suppliers, (the manner of sourcing of goods by you,) is up to you and your suppliers; can be through various modes of payment - including cash, * bills, DA bills, or (Back-to-Back) LCs.
Get a Transferable LC, and part-Transfer to the suppliers. OR, get your own LC as beneficiary, buy the goods and export. How you pay YOUR suppliers, (the manner of sourcing of goods by you,) is up to you and your suppliers; can be through various modes of payment - including cash, * bills, DA bills, or (Back-to-Back) LCs.
09 Jun 2007 19:21