I mentioned in an earlier post that some suppliers will loan money for production based upon an LC once it is in place. I am not sure whether this was the root of the discussion about banks loaning money on an LC but if so then my post was misinterpreted.

What I was referring to may be something that is unique to China so let's keep it in that context. In China many factories choose not to get export rights as there are benefits to exporting through an outside trading company. This includes big and small factories so is not a cost consideration.

One of the benefits of the above is that the LC will be opened through the trading company and that the trading company will then lend money to the factory to buy raw materials for production. None of this has anything to do with banks - it is a business to business arrangement.

So while that is not a scam it is something that is worth bearing in mind but is likely to have no effect on you as the buyer.

 In response to your last question.  I dont know of a single bank that is going to loan 130 Million to any one for 90 days without charging some kind of interest.  Surely that interest is going to be more than they could get by setting the money aside in some kind of investment fund.   Then the problem still arrises that the supplier is responsible for repayment of the loan to their own bank, not your friend the buyer, nor does he incurr any further fee's beyond the cost to open the L/C until such time the draft and the documents are presented.  To open an L/C of that size with out a preformance bond in place is ludicrous in the first place.

Egernia, talks about an advance payment for materials on an L/C this is known as a red clause.  Still no one in their right mind is going to allow an advance like this without a preformance bond, BG, or SBLC for less than the amount of the opening cost plus the advance and many times interest damages for non compliance to the L/C. 

Therefore at any rate, if your friend instructed his bank to open the L/C with out a PB he made a very bad business blunder.

Ranger

 

 

 

 

 

YES. They can do it.

Depending on their relations with their bank and based on the clauses mentioned in your LC , they can do it. But as a opener you do not have to worry about it since the suppliers bank is working on their own risk and responsibility.

Whats to worry is the supplier submitting falsefied documents to cover their tracks after borrowing the money initially ,to claim money from your bank. In this case the negotiating bank (suppliers bank ) will go all out to recover the funds based on the documents submitted since they have already paid out the money to the supplier initially.

You have to be very carefull and things do get dirty at times.

Cheers

Boss

 

 

 

 

 

Egernia, talks about an advance payment for materials on an L/C this is known as a red clause.  Still no one in their right mind is going to allow an advance like this without a preformance bond, BG, or SBLC for less than the amount of the opening cost plus the advance and many times interest damages for non compliance to the L/C.

That may be the theory behind this but in practice it is very common in China and I don't think that they are out of their minds as it works for them and has done for a long time.

As I wrote earlier I am talking about trading companies not banks lending this money so although they do not require any of the documentation from the factory that Ranger refers to they do have an ongoing relationship with the factory which I guess is their security.

So from a customers point of view this is unlikely to affect you, but I think that it is an interesting aside to be aware of so that if it pops up you know that it is not unusual. It is also another explanation as to why some legitimate factories choose not to get their own export rights which is an area that seems to confuse some newcomers (the mistaken idea being that if the factory does not export rights then it must be a scammer).