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Wednesday, September 4, 2013

Understanding Letters of Credit

FREQUENTLY ASKED QUESTIONS ON L/C's (LETTER OF CREDIT)

An L/C is issued by a bank at the rqst. of the buyer. This payment instrument sets forth specific conditions the exporter must meet to rcv. payment. Any misunderstanding in the terms of the L/ C will result in serious financial prblms. for the exporter.
Q: What is an IRREVOCABLE L/C?
A: The buyer cannot cancel the L/C for any reason whatsoever if shipment is made PRIOR to EXPIRATION and ALL CONDITIONS met. A REVOCABLE L/C can be modified by the buyer without any consideration of the exporter's wishes.
Q: How does a REVOLVING L/C work?
A: Specific amounts are paid to the exporter at specific intervals as shipments are made, however pre agreed shipping deadlines are established. If those dates are not met, that portion of the L/C is null & voided. The L/C automatically re-opens each time a shipment is made.
Q: What is TENOR?
A: Refers to DRAFT payments. On a SPECIFIC DATE a payment when must be made is defined as the: TENOR of the payment.
Q: What is difference between DATE & SIGHT DRAFTS?
A: SIGHT is payable on demand when presented to the buyers bank by the exporter. DATE stipulates agreement between the buyer and exporter on a date in the future when payment is to be made. CAUTION: This method of receiving your funds is pre requisite you have checked the buyers credit worthiness. You are urged to contact the writer for more details.
Q: What is an ADVISING bank?
A: The bank informs you that an L/C is open in your favor. Generally it will be your bank or the buyers U.S. partner.
Q: What is diff. between ISSUING bank and CONFIRMING bank?
A: The ISSUING bank is generally the customer's bank who opens the L/C. The CONFIRMING bank generally is the U.S. bank
that tells you they are pledged irrevocably to pay you IF IF IF you meet the conditions of the L/C. CAUTION: The reader is urged to contact the writer for full details.
Q: What is a TRUST RECEIPT?
A; A document signed by the buyer on strength of which a bank will retain title to the goods and has the obligation to release the merchandise only when the buyer makes the funds available. It is a form of financing the purchase with payment after arrival rather than pre-payment through an IRREVOCABLE L/C.
Q: What is STEAMSHIP INDEMNITY?
A: In the case that a B/L (Bill of Lading) is lost, the bank will provide back up funding to cover the cost of freight & mdse.
Q: What is EX-DOCK?
A: This is a unique TERMS OF SALE concept. The selling price includes all shipping costs, insurance, including IMPORT DUTY to the importers personal warehouse dock. CAUTION: Very complicated and not recommended EVER!
Q: What is TRANSSHIPMEMT?
A If the buyer is in a different location than the destination of the steamship company. Exmpl: Shipment to a customer in Macao but no cargo carrier goes there. Shipment in that case is made to Hong Kong and TRANSSHIPPED TO Macao. Such arrangements are stipulated in the L/C. Must be pre-arranged and specified as a condition of the L/C.
Q; What is difference between "ON DECK" & "ON BOARD"
A: ON Deck means on top of the ship. ON BOARD means inside the hold. Not an issue with container cargo. Only prblm. arises if goods are loose-crated. The L/C will stipulate what is acceptable. The L/C should state BOTH!
The writer urges the reader to exercise extreme caution when selling overseas. You are invited to contact us for one-on-one discussion regarding any of above, We are prepared to hand-hold you as you enter the global marketplace.

Hank Samuel
Certified SCORE mentor
hank.samuel2@gmail.com
SCORE South Fl
Boca Raton FL

visit us at: www.scoresouthflorida.net


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