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INTERNATIONAL TRADE SERVICES. M&T Bank. Country Risk. Risk of Doing Business in Buyer’s Country. Commercial Risk. Risk associated with the Individual or Institution responsible for Payment. Parties to a Letter of Credit. Seller. Buyer. Issuing Bank. Advising Bank. Seller. Exporter

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slide2

Country Risk

  • Risk of Doing Business in Buyer’s Country
slide3

Commercial Risk

  • Risk associated with the Individual or Institution responsible for Payment
parties to a letter of credit
Parties to a Letter of Credit

Seller

Buyer

Issuing Bank

Advising Bank

seller
Seller
  • Exporter
  • Beneficiary of letter of credit
buyer
Buyer
  • Importer
  • Applicant for letter of credit
slide7

Issuing Bank

  • Opens or issues the letter of credit
  • Substitutes its credit-worthiness for that of the buyer
slide8

Advising Bank

  • Notifies seller:
    • letter of credit has been opened
    • seller is beneficiary
  • Authenticates and forwards letter of credit to the beneficiary
  • May be a local bank chosen by beneficiary
  • May be a correspondent chosen by issuing bank
confirming bank
Confirms letter of credit

Must pay beneficiary:

if all conditions of letter of credit are satisfied

whether or not issuing bank pays

Confirmation requested by beneficiary (if unsure of issuing bank or its country)

Usually a local bank chosen by beneficiary

Confirming Bank
negotiating bank
A bank, usually in the locale of the beneficiary, that chooses to advance funds to beneficiary against presentation of documents required by terms of L/CNegotiating Bank
indirect parties to an l c customs house broker or freight forwarder
Indirect Parties to an L/CCustoms House Broker or Freight Forwarder
  • Usually unnamed in the letter of credit
  • Facilitates transaction:
    • coordinates the transportation of merchandise
trade agreements underlying sales contract
Trade Agreements:Underlying Sales Contract
  • What merchandise will be purchased
  • In what quantity
  • At what price
  • Shipping method (sea, air, rail, etc.)
  • When it will be shipped
  • Who will insure it (buyer or seller)
  • How and when payment will be made
methods of payments
Methods of Payments

Cash in Letter of Documentary Open

Advance Credit Collections Account

Most Advantageous to the Exporter

Most Advantageous to the Importer

slide14

What is the Bank’s Role?

  • To provide advice
    • Review transactions, country information, business customs
  • To provide financing
    • Supporting sales, purchases and investments
  • To mitigate risk
    • Country Risk & Commercial Risk
slide15

DOCUMENTARY COLLECTION

The handling by banks, on instructions received, of documents in order to:

  • Obtain acceptance and/or payment
  • Deliver commercial documents against acceptance and/or against payment
  • Deliver documents on other terms and conditions
documentary collections advantages to the exporter
Documentary CollectionsAdvantages to the Exporter
  • Seller retains title to goods until payment or acceptance
  • Relies on banks to collect payment from buyer
slide17

Common Types

of Letters of Credit

  • Commercial - Used to provide for payment
  • by a bank to a named beneficiary against the
  • delivery of documents.
  • Standby - Used to assure performance by
  • the applicant. It is not expected to be drawn
  • upon by the beneficiary.
slide18

Commercial Letter of Credit

  • A definite undertaking issued by the bank of applicant to pay the beneficiary at sight or at maturity.
  • A letter of credit is a bank’s undertaking to pay the beneficiary even if the applicant cannot do so.
  • It is a primary payment mechanism.
  • Failure to meet all terms and conditions can result in the loss of the bank(s) undertaking(s) to pay.
commercial letters of credit
Commercial Letters of Credit
  • Specifies documents the seller must produce
  • Specifies amount of time seller has:
    • to act
    • to present proof of actions
  • Protects both parties
slide20

Sight Letter of Credit

  • The letter of credit is available for payment after examination of conforming documents.
slide21

Time Letter of Credit

  • Letter of credit with drafts that are payable at a fixed or determinable future date, normally within 180 days. This type of letter of credit generates bankers’ acceptances. Financing costs of the transaction can be borne by the buyer or seller.
slide22

Discount Letter of Credit

  • When a Time Letter of Credit is used you may have a desire to get paid sooner than the maturity. This can be done through the use of a Discount Letter of Credit. You get paid at document presentment and the Bank waits the term.

Sales Advantage:

  • Now you can provide your buyer with short term financing solution.
  • Costs are often paid for by the buyer.
slide24

Advised Irrevocable Letter of Credit

  • Most import letters of credit fall into this category. Undertaking by issuing bank to pay the seller. Exporter looks at the credit standing of the issuing bank and assumes the political risk of the issuing bank.
slide25

Confirmed Irrevocable Letter of Credit

  • The confirming bank (usually the seller’s bank) adds its undertaking to the credit. Confirmation costs are added and are often borne by the buyer. The exporter looks at the credit standing of the confirming bank which assumes the commercial and political risk of the issuing bank.
slide26

Standby Letter of Credit

  • Standby letter of credit – a documentary letter of credit that is used to undertake to pay if the applicant does not meet or fails to perform an obligation. It is generally not a primary payment mechanism and is not intended to be drawn upon.
  • Uses:

- Bid Bonds - Performance Bonds

- Advance payment - Assuring payment

- Loan warranty

slide27

Advance Payment Standby

Standby Letters of Credit can by used when a buyer is required to make an up-front payment to the supplier, in advance of the actual supply of goods or construction of a facility. In such circumstances, the buyer may require a separate assurance, issued by the supplier’s bank, that the advance payment will be refunded in the event that the supplier fails to perform under the contract.

slide28

Invoice Support Standby

Standby letters of credit can be issued in conjunction with open account payment terms. A supplier may be willing to ship on open account terms, but only if it has received a separate assurance, from a bank, that the buyer will pay those invoices. The Invoice Support Standby serves that purpose, and provides the buyer with a bank undertaking that the invoices will be promptly paid.

slide29

Guarantees

Federal Reserve Regulations prevent nationally chartered banks in the United States from issuing Guarantees. That is the reason why US banks generally issue Standby Letters of Credit in lieu of Guarantees.

slide30

Counter Standby Guarantees

Some international contracts require that a Standby Letter of Credit or Guarantee be issued in a specific foreign country and under the laws, or in the language of that foreign country. When we cannot issue our own Standby or Guarantee under the required terms, our bank will instead issue a Counter Standby to a correspondent bank in the foreign country. The correspondent bank will then use M&T’s standby guarantee as security for its issuance of the local Guarantee in the required format.

protection offered by letters of credit
Protection Offered byLetters of Credit
  • Substitutes credit-worthiness of bank for that of buyer
  • Provides third party to validate that stipulated terms have been met
  • Assures seller of payment when he satisfies terms of letter of credit
  • Assures buyer payment will be made only if terms of letter of credit are met.
limitations of letters of credit
Limitations of Letters of Credit
  • Banks deal in documents only
  • Detailed merchandise description does not prevent fraud
  • Documents, Documents, Documents !!
slide33

Letter of Credit Discrepancies

A discrepancy occurs when documents presented do not conform with the terms and conditions of the letter of credit.

Common Discrepancies

- Late Shipment

- Incorrect Consignment of Goods

- Late Presentation of Documents

- Incorrect Description of Goods

slide34

Discrepant Documents!

What’s an Exporter

to do??

  • Ask Negotiating Bank to return documents for corrections and resubmit them.
  • Ask Negotiating Bank to contact Issuing Bank for permission to pay or accept documents with discrepancies.
  • Instruct the Negotiating Bank to forward the documents on approval.
slide35

The Rules Governing Letters of Credit

U.C.P. - The International Chamber of Commerce (I.C.C.) Publication, “Uniform Customs and Practice for Documentary Credits” Comprehensive record of customs and usage.

ISP 98 – The International Standby Practices reflects generally accepted practice, custom, and usage of standby letters of credit (including performance, financial, and direct pay)

slide36

The M&T Advantage

  • Correspondent banking relationship with over 2000 banks in over 3000 locations worldwide.
  • Web-based letter of credit generation and reporting system for our customers – free of charge.
  • M&T Banks acts as the international for over 80 domestic banks.
  • Provides discounting and financing of Chinese letters of credit.
slide38

Contact Information:John VilardoVice PresidentInternational Trade FinanceOne Fountain Plaza – 12th FloorBuffalo, New York 14203-1495(716) 848-7344jvilardo@mandtbank.com