Free Online Course in International BusinessKnowledge StatementKnowledge of Types of Letters of Credit: Confirmed/ Unconfirmed, Transferable, StandbyGoalThe goal of this material is to introduce you to the different types of letters of credit that are available to use for international business transactions, their risks and opportunities. This information will provide you with an understanding of the benefits of each type of letter of credit and the support they provide in obtaining timely payments for the sales of goods and/or services.Learning ObjectivesYou will be able to• identify the different types of letters of credit.• identify the risks and opportunities for each type of letter of credit. • identify the appropriate transactional scenario when each could be implemented. IntroductionAn international manager needs to be able to understand the different types of letters of credit available for use in international transactions along with the risks, costs and benefits of each. The international manager must be able to communicate these opportunities to their accounting/finance department and often to their customers. The use of these types of letters of credit may be critical in meeting both the business and collection goals of an organization.Letters of CreditDocumentary or letters of credit, as they are more commonly referred to, come in many forms. These options were created to make this banking instrument flexible and applicable to a wide variety of business transactions. The different types of letters of credit can be used in many combinations or independently. The type of letter of credit chosen for a transaction is based on the parties and countries involved, the risks associated with the transaction as well as the products or services being bought and sold. To easily understand the different types of letters of credit, an international manager must be comfortable with the terminology and definitions of the parties and actions associated with this banking instrument, including, but not limited to, terms such as applicant, beneficiary, issuing bank, advising bank, discrepancy, and amendment.Types of Letters of CreditRevocableA revocable letter of credit is one which can be amended or cancelled by the applicant or the issuing bank at any time, without prior notice, discussion or agreement with the beneficiary. A revocable letter of credit offers no protection to the beneficiary and is seldom if ever used.IrrevocableAn irrevocable letter of credit can not be amended or revoked without the agreement of ALL the parties to the letter of credit, so it provides the assurance that providing the beneficiary complies with the terms, he/she will be paid for the goods or services. Under UCP 500, a letter of credit is deemed irrevocable unless otherwise stated.UnconfirmedAn unconfirmed irrevocable letter of credit provides a commitment by the issuing bank to pay, accept, or negotiate a letter of credit. An advising bank forwards the letter of credit to the beneficiary without responsibility or undertaking on its part except that it must use reasonable care to check the authenticity of the credit which it advised. It does not provide a commitment from the advising bank to pay, so the beneficiary is reliant upon the undertaking of the overseas bank. The beneficiary is not protected from the credit risk of the issuing bank nor the country risk.ConfirmedA confirmed irrevocable letter of credit is one to which the advising bank adds its confirmation, makes its own independent undertaking to effect payment, negotiation or acceptance, providing documents are presented which comply with the terms of the letter of credit. The advising bank, which may also be the confirming bank, assumes the country (political and economic) risk of the applicant’s country as well as the credit risk, failure and default of the issuing bank and effects payment to the beneficiary without recourse. In order for a letter of credit to be confirmed, a bank accepting this risk would have a correspondent relationship with the issuing bank. If the advising bank does not have such a relationship, the letter of credit can be confirmed by an independent bank. The negative aspect here is the cost of adding another bank to the scenario.A seller should consider requesting a confirmed credit when • the credit standing of the issuing bank is unknown to the seller or viewed by the seller as questionable. • exchange controls in the buyer’s country may prevent local banks from honoring certain external payments. • the importing country is suffering economic difficulties: large external debt and/or high debt service ratios, a persistent negative balance of payments, or a record of being late or having defaulted on its international payments.
|
About Us | Terms of Use | Contact Us | Partner with Us | Press Release | Sitemap | Disclaimer | Privacy Policy
©1999-2011 OpenLearningWorld . com - All Rights Reserved