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Letter of Credit
Cash Against Documents
Cash Against Goods
Basing on the demand and order of the buyer (issuer/exporter), it is a commitment of a bank (issuing bank) that it will make a payment to the seller in a defined amount and within a defined maturity period, upon issuance of the documents, which are specified for the letter of credit.
By means of letter of credit international commercial activities will be regulated by banks, a mutual guarantee will be assured in favor of the parties, the payment will be guaranteed when the letter of credit terms are fulfilled and the payment in question will be based on the documents.
Letter of credit processes are subjected to International Chamber of Commerce’s (ICC) example procedures and application rules related to letter of credit. The leaflet in question is binding on all parties unless otherwise indicated in the letter of credit.
For letter of credit processes, banks make their transactions by taking into account not the goods but the documents. Opening of a letter of credit is determined by sales contract. So as to meet the provisions of this sales contract, the buyer offers his own bank (issuing bank) to open a letter of credit.
Seller’s bank informs the seller about the letter of credit. Then, seller loads the goods and via his intermediary bank sends the documents, which are supposed to be issued in accordance with the letter of credit, to the issuing bank. Providing that the documents issued are in line with the letter of credit terms, it’s the bank that makes the payment to the seller. By collecting the cost from issuer, the bank which has opened the letter of credit, delivers the documents in order to clear the goods from the customs.
Letter of credit is a reliable payment method as,
•On condition that the beneficiary meets all the requirements of the letter of credit and issues all the required documents thereof, as the issuing bank has to fulfill its obligations relevant to payment to the beneficiary, this method is very safe for the latter.
•This method is very safe for the issuer as he knows that he will not have to make any payment to the beneficiary against improper documents.
Letter of credit can be opened as confirmed or unconfirmed. Confirmed letter of credit is opened when the seller cannot do with only guarantee of issuer’s bank, he also wants to get another bank’s guarantee either his own country or another.
Confirmation for a letter of credit by a bank means the exact commitment of the confirming bank along with the commitment of the issuing bank on condition that the required documents to the confirming bank or other authorized bank are issued. For unconfirmed letter of credit, it is only the issuer’s bank that has the irrevocable commitment against the issuance of the proper documents.
4 types of usage of letter of credit are available:
• Sight payment / payment
• Deferred payment
Types of Letter of Credit
Revolving Letter of Credit (Revolving Documentary Credit)
Revolving Letter of Credit is generally used by buyers and sellers that are constantly signing purchase and sale agreements. Instead of opening for each loading time, they open only one letter of credit that will be valid between the dates specified. Letter of credit is automatically renewed and becomes valid.
Revolving Letter of Credits is opened on the basis of time and quality.
Red-Clause Letter of Credit (Red-Clause Documentary Credit)
Red-Clause Letter of Credits is used when there is a need for a pre-financing for the preparation of goods. For this type of credit, partial or total amount of the letter of credit is paid in advance to the seller before the shipment of goods. The reason why it is called red-clause is advance payment condition for this kind of credit is written in red to attract the attention. Nowadays, there is not such an application, but all the same this letter of credit continues to be called as red-clause.
Standby Credit Letter of Credit (Standby Credit)
Standby Letter of Credit is a sort of a guarantee. The bank that opens the letter of credit gives guarantee for a third party against the beneficiary and the bank confirms that it will make the relevant payment unless the contracts that are made with the third party are applied. For Stand-by letter of credits, the document issued that enables the payment to be made is not the shipment document but the document proving fulfillment of the process which is the subject of the guarantee.
Transferable Letter of Credit (Transferable Documentary Credit)
Transferable Letter of Credit is used when the first beneficiary is not the real seller or producer of the goods but the middleman/mediator. This middleman gives the opportunity to the producer or supplier of the goods or else let the beneficiary to export the goods instead of producing on its own, when they have not enough money or they cannot get a bank guarantee, transferable letter of credits are preferred as a financing means. A letter of credit can only be transferred when the issuing bank calls clearly it as “transferable”.
Collection means; acceptance of the documents, payment and/or realization of the acceptance in accordance with the orders; delivery of the documents against payment and/or acceptance; or else putting the documents into process by the bank for the delivery of the documents depending on other conditions. Exporter benefits from a bank in order to make a collection of the goods sold from the importer.
For cash against documents process, after the shipment the exporter sends the documents in the enclosed of the collection order to the bank in the importer’s country via a bank in his own country or a representative in the importer’s country and the exporter wants that the documents are to be delivered to the importer after he gets his money or the acceptance of the bill by the importer. The bank of the importer will not deliver the documents (shipment documents, invoice, etc.) that are required to clear the goods from the customs unless the importer makes the payment and accept the bill for transactions with a bill.
For collection processes, the banks do not guarantee any payment to the exporter.
Collection processes are subjected to the leaflet named “Uniform Rules for Collections” numbered 522 of the International Chamber of Commerce.
An exporter, who decides to make a collection of his goods or services on the basis of collection process, definitely takes a risk whatever its degree. Because he makes the shipment of the goods or the delivery of the services before he guarantees that the payment will be done.
Therefore, for collection processes,
•Exporter should have a great trust in the importer,
•Exporter should have no doubts about the ability to pay of the importer,
•Political, economic and legal status of the country that the goods are imported should be stable.
Cash Against Goods is the form of payment made after the arrival of the goods their destination and delivered to the importer.
After the delivery of the goods on behalf of the buyer, the exporter sends the documents of the goods to the importer either direct or free of charge delivery via the bank. The importer makes the payment after he clears the goods from the customs. This payment method is advantageous for the importer as he has room to clear the goods from the customs and check them before the payment is made. When it comes to the exporter he is at risk since the importer may not make the payment. Payment of the goods can only be guaranteed when the bill destined for the importer is accepted. By this way the bank may give a sign of surety to the exporter.
Advance Payment means the payment made by the importer via his own bank to the exporter, and the transfer of the goods to the importer who made the payment. In this scope, it is regarded as a credit for the exporter.
While the exporter is under a great guarantee, the importer is at risk. If the exporter does not send the goods or the goods sent do not match with the order, the importer can be in trouble and suffer from a loss. Therefore, the buyer must have trust in the seller.
For this payment method, the exporter bases his rights of receivables on a short-dated bill and a payment is made within the maturity to the exporter.
In practice, the issuing bank can sign a surety for the bills after the acceptance within the issuer, so the bills will be under the payment guarantee of the bank. That’s why there is no difference between the company acceptance/ bills with bank surety and bills with bank acceptance related to payment commitment.
On condition that the bills issued on behalf of a foreign corresponding bank, an order to the correspondent is given by our bank for the acceptance of the bills and then the bills are accepted by foreign bank.
For acceptance credit process, if the creditor in abroad demands and accepts, promissory note may be accepted in accordance with the principles related to the bill.
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2016 Türkiye İş Bankası A.Ş.
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2016 Türkiye İş Bankası A.Ş.
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