Free Online Course in International BusinessD/A – Documents against AcceptanceThe export documents and a time/usance bill of exchange are sent to a remitting bank. The documents are then sent to a collecting bank with instructions to release the documents against a buyer's acceptance of the bill of exchange.Clean CollectionThe exporter creates a bill of exchange, which is sent without any export documents to a buyer for collection through the remitting bank to the collecting bank. There is less security for an exporter since the documents are sent directly to the importer.Cash Against DocumentsThis process lacks the security and legal protection of a documentary collection since the exports documents are sent through a remitting bank to a collection bank without a bill of exchange. It is, however, still a collection through the banking system.
Letters of CreditA letter of credit is a bank instrument that can be used to even the risk between a buyer and a seller since a buyer is guaranteed to receive payment if when he/she has complied with the exact requirements of this buyer. A letter of credit offers a seller numerous advantages but only if that seller complies exactly with its terms and conditions of the transaction. In addition to providing reduced risk for both a seller and a buyer, there are many variables that can be used with a letter of credit to reduce the political and commercial risks that may accompany the transaction as well as provide extended terms to a buyer through the letter of credit instrument. The terminology that is used when working with letters of credit is very specific and should be understood.Involved Parties: • Applicant = Buyer/ Importer • Beneficiary = Seller/Exporter • Opening Bank = Importer’s Bank >> Issues L/C • Advising Bank= Exporter’s Bank >> Advises L/C • Confirming Bank = Advising Bank or 3rd Party Bank >> Confirms L/C • Paying Bank = Any Bank as Specified in L/C >> Pays the Draft Activities and Terms: • Advice – review and approval of L/C • Amendment – change to L/C • Confirmed – the commercial, political and economic risk of the transaction absorbed by the confirming bank • Discrepancy – mistake in the documentation • Documentation – documents required within L/C • Draft – negotiable order to pay • Sight Draft – payment assured upon shipment and presentation of documents in compliance with its terms • Time Draft – bank assurance of payment at the maturity of the banker’s acceptance with option of obtaining immediate funds by discounting the BA (30, 60, 90 days at sight or acceptance) • Irrevocable – cannot be changed without approval from beneficiary or advising bank • Issuance – opening of L/C • Negotiation – review of documents • Revocable – can be changed without approval of beneficiary or advising bank Types of L/Cs: • Back to Back – credit and terms of a transaction rollover to a new transaction upon completion, which eliminates the need to apply or issue a new L/C for identical shipments • Confirmed – credit risk taken by bank and agreement to pay (fee charged) • Straight – payable only at paying bank • Negotiation – payable at negotiating bank • Sight – payable at acceptance of documents • Standby – used by the beneficiary for payment should the applicant not pay the exporter directly • Transferable – part or all of the proceeds from the L/C may be transferred to another party, used by sales brokers or agents to disguise buyers and sellers • Usance – time draft based on invoice, bill of lading, or documents, up to 180 days 
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