qwertyuiopasdfghjklzxcvbnmqwerty

uiopasdfghjklzxcvbnmqwertyuiopasd
fghjklzxcvbnmqwertyuiopasdfghjklzx
cvbnmqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwertyui
FOREIGN TRADE
opasdfghjklzxcvbnmqwertyuiopasdfg
FINANCING

hjklzxcvbnmqwertyuiopasdfghjklzxc
vbnmqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopasdfg
hjklzxcvbnmqwertyuiopasdfghjklzxc
vbnmqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopasdfg
hjklzxcvbnmrtyuiopasdfghjklzxcvbn
mqwertyuiopasdfghjklzxcvbnmqwert
yuiopasdfghjklzxcvbnmqwertyuiopas
 ACKNOWLEDGEMENTS
All the praises are for the almighty, Allah who bestowed us with the ability and potential to
complete this report. We also pay our gratitude to the Almighty for enabling us to complete
this report within due course of time.

Words are very few to express enormous humble obligations to our affectionate parents for
their prayers and strong determination for enabling us to achieve this job.

2|Page
 DEDICATION
We dedicate this report to our beloved parents for all their love & attention which has made it
possible for us to make it up to this point and as well as all our teachers, who bestowed us
with the courage, the commitment and the awareness to follow the best possible route.

3|Page
WHY TRADE FINANCE IS NEEDED? 6
GENERAL CONSIDERATIONS 7
ROLE OF EXPORT INTERMEDIARIES 7
TYPES OF TRADE FINANCE 8

TRADE FINANCE PRODUCTS 9

SOURCES OF EXPORT FINANCING 10

EXPORT CREDIT INSURANCE 10
EXPORT WORKING CAPITAL FINANCING 10
GOVERNMENT GUARANTEED EXPORT WORKING CAPITAL LOAN PROGRAM 11

1. CASH IN ADVANCE 13

WIRE TRANSFER 13
CREDIT CARD 13
PAYMENT BY CHEQUE 13
WHEN TO USE CASH-IN-ADVANCE TERMS 14
PROS & CONS 14

2. OPEN ACCOUNT 14

WHEN TO USE OPEN ACCOUNT TERMS 15

EXPORT WORKING CAPITAL FINANCING 15
GOVERNMENT-GUARANTEED EXPORT WORKING CAPITAL PROGRAMS 15
EXPORT CREDIT INSURANCE 15
EXPORT FACTORING 15
FORFEITING 16
PROS & CONS 16

3. DOCUMENTARY COLLECTIONS 16

4|Page
WHEN TO USE DOCUMENTARY COLLECTIONS 16
TYPICAL SIMPLIFIED D/C TRANSACTION FLOW 17
PARTIES IN A DOCUMENTARY COLLECTION TRANSACTION 18
PROS & CONS 19

4. LETTERS OF CREDIT 19

ILLUSTRATIVE LETTER OF CREDIT TRANSACTION 19

IRREVOCABLE LETTER OF CREDIT 20
REVOCABLE LETTER OF CREDIT 20
CONFIRMED LETTER OF CREDIT 22
TRANSFERRABLE LC 22
UNTRANSFERABLE LC 23
USANCE LC 23
RED CLAUSE LC 23
DOCUMENTS THAT CAN BE PRESENTED FOR PAYMENT 23
TIPS FOR EXPORTERS 25
PROS & CONS 25

5. COUNTER TRADE & BARTER 25

6. CREDIT CARDS 26

5|Page
 TRADE FINANCE

A
Product is sold and shipped overseas; therefore, it takes longer to get paid. Extra
time and energy is required to make sure that buyers are reliable and creditworthy.
Also, foreign buyers - just like domestic buyers - prefer to delay payment until they
receive and resell the goods.

All sellers want to get paid as quickly as possible, while buyers usually prefer to delay
payment, at least until they have received and resold the goods. This is true in domestic as
well as international markets. Increasing globalization has created intense competition for
export markets. Importers and exporters are looking for any competitive advantage that
would help them to increase their sales. Flexible payment terms have become a fundamental
part of any sales package.

Selling on open account, which may be best from a marketing and sales standpoint, places
all of the risk with the seller. The seller ships and turns over title of the product on a promise
to pay from the buyer.

Cash-in-advance terms place all of the risk with the buyer as they send payment on a
promise that the product will be shipped on time and it will work as advertised.

Today, open account terms with extended dating are becoming more common despite the
dangers. Trade finance provides alternative solutions that balance risk and payment.

Trade finance, also known as purchase finance provides funding for

companies to pay suppliers for the purchase of finished goods, normally against
firm customer order or where there is a proven demand for the product.
There are two broad categories of Trade Finance:

Pre-shipment financing to produce or purchase the material and labour necessary to

fulfil the sales order; or

Post-shipment financing to generate immediate cash while offering payment terms

to buyers.

WHY TRADE FINANCE IS NEEDED?

Favourable payment terms make a product more competitive. If the competition offers better
terms and has a similar product, a sale can be lost.

6|Page
In other cases, the exporter may need financing to produce the goods or to finance other
aspects of a sale, such as promotion and selling costs, engineering modifications and shipping
costs. Various financing sources are available to exporters, depending on the specifics of the
transaction and the exporter's overall financing needs.

GENERAL CONSIDERATIONS
The following factors and considerations apply to financing in general.

Financing Costs:
The costs of borrowing, including interest rates, insurance and fees will vary. The total cost
and its effect on the price of the product and profit from the transaction should be well
understood before a pro forma invoice is submitted to the buyer.

Financing Terms:
Costs increase with the length of terms. Different methods of financing are available for
short, medium, and long terms. Exporters need to be fully aware of financing limitations so
that they secure the right solution with the most favourable terms for seller and buyer.

Risk:
The greater the risks associated with the transaction, the greater the cost. The
creditworthiness of the buyer directly affects the probability of payment to an exporter, but it
is not the only factor of concern to a potential lender. The political and economic stability of
the buyer's country are taken into consideration.

Lenders are generally concerned with two questions:

Can the exporter perform? They want to know that the exporter can produce and
ship the product on time, and that the product will be accepted by the buyer.

Can the buyer pay? They want to know that the buyer is reliable with a good credit
history. They will evaluate any commercial or political risk.

If a lender is uncertain about the exporter's ability to perform, or if additional credit capacity
is needed, government guarantee programs are available that may enable the lender to
provide additional financing.

ROLE OF EXPORT INTERMEDIARIES

Many times, small business owners may not have the time or resources to pursue
international sales. If there is a demand for the company's product, use of export
intermediaries may prove beneficial.

Export Trading Companies (ETCs) and Export Management Companies (EMCs) can help
with international sales and marketing efforts. In some instances, EMCs can help finance
7|Page
export sales. Some of these companies may provide short-term financing or may simply
purchase the goods to be exported directly from the manufacturer. This eliminates any risks
associated with the export transaction as well as the need for financing.

TYPES OF TRADE FINANCE

Trade finance generally refers to the financing of
individual transactions or a series of revolving
transactions. Also, trade finance loans are often self- Self liquidating loan is a
liquidatingthat is, the lending bank stipulates that type of short- or
all sales proceeds are to be collected, and then applied intermediate-term credit
to pay-off the loan. The remainder is credited to the that is repaid with money
exporter's account. generated by the assets it is
used to purchase.
The self-liquidating feature of trade finance is critical
to many small, undercapitalized businesses. Lenders
who may otherwise have reached their lending limits
for such businesses may nevertheless finance individual export sales, if the lenders are
assured that the loan proceeds will be used solely for pre-export production; and any export
sale proceeds will first be collected by them before the balance is passed on to the exporter.

Given the extent of control lenders can exercise over such transactions and the existence of
guaranteed payment mechanisms unique to or established for international trade, trade
finance can be less risky for lenders than general working capital loans.

Working Capital Loans

For exporters, working capital loan programs are normally associated with pre-shipment
financing. Many small businesses need pre-export financing to cover the operating costs
related to a sales order or contract. Loan proceeds are commonly used to finance three
different areas:

Labour: The people needed to build or buy the export product.

Materials: The raw materials needed to produce the export product.

Inventory: The costs associated with buying the export product.

Term Financing for Foreign Buyers

Frequently, foreign buyers don't have the cash on hand to pay for major purchases. So the
buyers ask for extended credit terms and/or financing. Few exporters can manage the cash
flow dilemma or commercial and political risks caused by these long-term contracts.

Buyer Credit Programs are often an effective solution that benefits the exporter, their buyer
and commercial lenders providing the loans. Programs typically provide loan guarantees to
commercial lenders. These kinds of programs benefit all the parties involved.

8|Page
 The exporter benefits because theyre paid cash on delivery and acceptance of the
product or service.

The foreign buyer benefits because they get extended credit terms at markets rates or
better.

The lender benefits because guarantees, many backed by the Government, mean full
repayment of the loan and a reasonable return on funds loaned.

TRADE FINANCE PRODUCTS

Factoring
Once a product has been shipped, that inventory is converted to an Account Receivable
(A/R). A list of all Accounts Receivable is maintained on an aging report while the exporter
waits for final payment. If there is a need for immediate cash, it's possible to sell the A/R at a
discount. This solution is called Factoring.

Factoring is the discounting of foreign accounts receivable that do not involve drafts as the
method of payment. A Factor (an organization that specializes in the financing of accounts
receivable) takes title for immediate cash at a discount from the face value.

Factors typically provide 70% of the face value with 3-5 working days, and assume
responsibility for collection from the buyer. After final payment, the Factor will pay the
remaining 30% - less a service fee of 4% - 5%.

Forfeiting
Forfeiting is the selling, at a discount, of longer term accounts receivable or promissory notes
of the foreign buyer. These instruments may also carry the guarantee of the foreign
government.

Purchase Order Financing

A Purchase Order (P.O.) is a legal agreement signed by a buyer requesting a seller to provide
goods or services. Purchase orders normally list the amount of goods or services required and
the terms and conditions of delivery and payment.

Buyers will normally issue a P.O. with Net 30 to 60 day terms. For an exporter, this
difference in terms of sale means that there wont be any cash coming in during the
manufacturing process or the transit period. Unless a bank or factor will finance the A/R
period, the exporter is out of cash until the invoices are finally paid off.

Purchase Order Financing can be an alternative solution to this cash flow dilemma. P.O.
Financing is a short-term funding technique used to finance the purchase or manufacture of
goods that have been presold to a creditworthy customer. Lenders that offer this specialized

9|Page
form of financing will assist in the purchase of
product inventory by using the inventory and Due Diligence
confirmed purchase orders as collateral.
Reasonable steps taken by
Importers, Exporters, Distributors or Manufacturers a person in order to satisfy
can use Purchase Order Financing. Funds are used for a legal requirement, esp. in
issuing Letters of Credit, payment to suppliers for buying or selling
finished goods, raw materials or direct labour. something.
Purchase Order Funding is a risky form of financing
and therefore costs more than traditional financing. It
requires extensive due diligence, and lenders are
highly selective.

SOURCES OF EXPORT FINANCING

Sources of trade financing in Pakistan are:

Local and foreign banks operating in Pakistan provide the service of trade financing
to local manufacturers.

Barclays Pakistan, a specialized institute in trade financing operating in Pakistan.

Recently commenced operations in 2008.

Pakistan Export Finance Guarantee (PEFG) agency, working in Pakistan under

supervision of State Bank Pakistan.

EXPORT CREDIT INSURANCE

You need to extend competitive credit terms to grow your international business, but what
happens if you dont get paid? Your foreign customers could go out of business or file
bankruptcy, face currency devaluations or foreign exchange problems, run short on cash, take
you for a ride, or fail to pay you for any number of other commercial or political reasons.
You can protect your foreign receivables against virtually all non-payment risks with an
export credit insurance policy.

Export credit insurance is an effective sales tool that enables you to extend competitive
payment terms with confidence. It can help you penetrate new markets, negotiate larger order
quantities, establish or expand distribution, and increase the profitability of your export
business. In case, you dont receive payment from foreign customer the insurer or the
insurance company will pay you.

EXPORT WORKING CAPITAL FINANCING

Export working capital (EWC) financing allows exporters to purchase the goods and services
they need to support their export sales. More specifically, EWC facilities extended by
commercial banks can provide a means for exporters who lack sufficient internal liquidity to

10 | P a g e
process and acquire goods and services to fulfil export orders and extend open account terms
to their foreign buyers. EWC funds are commonly used to finance three different areas: (1)
materials, (2) labour, and (3) inventory, but they can also be used to finance receivables
generated from export sales and/or standby letters of credit used as performance bonds or
payment guarantees to foreign buyers. An unexpected large export order or many incremental
export orders can often place challenging demands on working capital. EWC financing helps
to ease and stabilize the cash flow problems of exporters while they fulfil export sales and
grow competitively in the global market.

GOVERNMENT GUARANTEED EXPORT WORKING

CAPITAL LOAN PROGRAM
Financing offered by commercial lenders on export inventory and foreign accounts
receivables is not always sufficient to meet the needs of exporters. Early-stage small and
medium-sized exporters are usually not eligible for commercial financing without a
government guarantee. In addition, commercial lenders are generally reluctant to extend
credit due to the repayment risk associated with export sales. In such cases, government-
guaranteed export working capital (EWC) loans can provide the exporter with the liquidity to
accept new business, can help grow export sales, and can let firms compete more effectively
in the global marketplace.

11 | P a g e
 PAYMENT METHODS IN

INTERNATIONAL TRADE
o succeed in todays global marketplace and win sales against foreign competitors,

T exporters must offer their customers attractive sales terms supported by appropriate
payment methods. Because getting paid in full and on time is the ultimate goal for
each export sale, an appropriate payment method must be chosen carefully to minimize the
payment risk while also accommodating the needs of the buyer.

There are five methods of payment in international trade, commonly used in business to
business trading:

Cash In Advance. Documentary Collections.

Open Account. Letters of Credit.

Barter/Counter Trade

There are some other methods of payments as well that are used mostly in B2C transactions
they are:

Credit Cards/Debit Cards

Figure 1.1 describes the risk associated with each method of payment for exporter and
importer.

12 | P a g e
 1. CASH IN ADVANCE

W
ith the cash-in-advance payment method, the exporter can avoid credit risk or the
risk of non payment, since payment is received prior to the transfer of ownership
of the goods. Wire transfers and credit cards are the most commonly used cash-
in-advance options available to exporters. However, requiring payment in advance is the least
attractive option for the buyer, as this method tends to create cash flow problems, and unless
the seller sees no other option or the buyer has other vendors to choose from, it often is not a
competitive option. In addition, foreign buyers are often concerned that the goods may not be
sent if payment is made in advance. Exporters that insist on this method of payment as their
sole method of doing business may find themselves losing out to competitors who may be
willing to offer more attractive payment terms.

WIRE TRANSFER
Wire transfer or credit transfer is a method of electronic funds transfer from one person or
institution (entity) to another. Exporters should provide clear routing instructions to the
importer when using this method, including the name and address of the receiving bank, the
banks SWIFT, Telex, and ABA numbers, and the sellers name and address, bank account
title, and account number. This option is more costly to the importer than other options of
cash-in-advance method, as the fee for an international wire transfer is usually paid by the
sender.

CREDIT CARD
Exporters who sell directly to the importer may select credit cards as a viable method of cash-
in-advance payment, especially for consumer goods or small transactions. Exporters should
check with their credit card companies for specific rules on international use of credit cards
as the rules governing international credit card transactions differs from those for domestic
use. As international credit card transactions are typically placed via online, telephone, or fax
methods that facilitate fraudulent transactions, proper precautions should be taken to
determine the validity of transactions before the goods are shipped. Although exporters must
endure the fees charged by credit card companies, this option may help the business grow
because of its convenience.

PAYMENT BY CHEQUE
A less attractive cash-in-advance method is making an advance payment using cheque.
Advance payment using an international check may result in a lengthy collection delay of
several weeks to months. Therefore, this method may defeat the original intention of
receiving payment before shipment. If the check is in a foreign currency or drawn on a
foreign bank, the collection process is likely to become more complicated and can

13 | P a g e
significantly delay the availability of funds. Moreover, there is always a risk that a check may
be returned due to insufficient funds in the buyers account.

WHEN TO USE CASH-IN-ADVANCE TERMS

The importer is a new customer and/or has a less-established operating history.

The importers creditworthiness is doubtful, unsatisfactory, or unverifiable.

The political and commercial risks of the importers home country are very high.

The exporters product is unique, not available elsewhere, or in heavy demand.

The exporter operates an Internet-based business where the use of convenient

payment methods is a must to remain competitive.

PROS & CONS

For Exporter:

Payment before shipment.

Eliminates risk of non payment.

May lose customers to competitors over payment terms.

For Importer:

Burden of risk is placed nearly completely on the importer.

He may not get goods delivered on time.

2. OPEN ACCOUNT

A
n open account transaction means that the goods are shipped and delivered before
payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous
option to the importer in cash flow and cost terms, but it is consequently the highest
risk option for an exporter. Because of the intense competition for export markets, foreign
buyers often press exporters for open account terms. In addition, the extension of credit by
the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to
extend credit may face the possibility of the loss of the sale to their competitors. However,
while this method of payment will definitely enhance export competitiveness, exporters
should thoroughly examine the political, economic, and commercial risks, as well as cultural
influences to ensure that payment will be received in full and on time. It is possible to
substantially mitigate the risk of non payment associated with open account trade by using

14 | P a g e
such trade finance techniques as export credit insurance and factoring. Exporters may also
wish to seek export working capital financing to ensure that they have access to financing for
both the production for export and for any credit while waiting to be paid.

WHEN TO USE OPEN ACCOUNT TERMS

Open account terms should be offered in competitive markets with the use of one or more of
the following trade finance techniques:

(1) Export Working Capital Financing,

(2) Government-Guaranteed Export Working Capital Programs,

(3) Export Credit Insurance,

(4) Export Factoring, and

(5) Forfeiting.

EXPORT WORKING CAPITAL FINANCING

To extend open account terms in the global market, the exporter who lacks sufficient liquidity
needs export working capital financing that covers the entire cash cycle from purchase of raw
materials through the ultimate collection of the sales proceeds. Export working capital
facilities can be provided to support export sales in the form of a loan or revolving line of
credit.

GOVERNMENT-GUARANTEED EXPORT WORKING

CAPITAL PROGRAMS
With these programs, exporters are able to obtain needed facilities from commercial lenders
when financing is otherwise not available or when their borrowing capacity needs to be
increased.

EXPORT CREDIT INSURANCE

Export credit insurance provides protection against commercial lossesdefault, insolvency,
bankruptcy, and political losseswar, nationalization, currency inconvertibility, etc. It allows
exporters to increase sales by offering liberal open account terms to new and existing
customers. Insurance also provides security for banks providing working capital and
financing exports.

EXPORT FACTORING
Factoring in international trade is the discounting of a short-term receivable (up to 180 days).
The exporter transfers title to its short-term foreign accounts receivable to a factoring house

15 | P a g e
for cash at a discount from the face value. It allows an exporter to ship on open account as the
factor assumes the financial ability of the importer to pay and handles collections on the
receivables. The factoring house usually works with consumer goods.

FORFEITING
Forfeiting is a method of trade financing that allows the exporter to sell its medium-term
receivables (180 days to 7 years) to the forfeiter at a discount, in exchange for cash. With this
method, the forfeiter assumes all the risks, enabling the exporter to extend open account
terms and incorporate the discount into the selling price. Forfeiters usually work with capital
goods, commodities, and large projects.

PROS & CONS

Boost competitiveness in the global market.

Establish and maintain a successful trade relationship.

Exposed significantly to the risk of non-payment.

Additional costs associated with risk mitigation measures.

3. DOCUMENTARY COLLECTIONS

A
documentary collection (D/C) is a transaction whereby the exporter entrusts the
collection of payment to the remitting bank (exporters bank), which sends docu-
ments to a collecting bank (importers bank), along with instructions for payment.
Funds are received from the importer and remitted to the exporter through the banks involved
in the collection in exchange for those documents. D/Cs involve the use of a draft that
requires the importer to pay the face amount either on sight (document against payment
D/P) or on a specified date in the future (document against acceptanceD/A). The draft lists
instructions that specify the documents required for the transfer of title to the goods.
Although banks do act as facilitators for their clients under collections, documentary
collections offer no verification process and limited recourse in the event of non-payment.
Drafts are generally less expensive than letters of credit (LCs).

WHEN TO USE DOCUMENTARY COLLECTIONS

Under D/C transactions, the exporter has little recourse against the importer in case of non-
payment. Thus, the D/C mechanism should only be used under the following conditions:

The exporter and importer have a well-established relationship.

16 | P a g e
 The exporter is confident that the importing country is stable politically and
economically.

An open account sale is considered too risky, but an LC is also too expensive for the
importer.

TYPICAL SIMPLIFIED D/C TRANSACTION FLOW

Step 1: Seller ships the goods to the buyers country as per the sales contract.

Step 2: Seller presents documents to the Remitting Bank with clear instructions for
collection of payment.

Step 3: Remitting Bank forwards the documents and collection instructions to the
Collecting/Presenting Bank.

Step 4: Collecting/Presenting Bank presents documents to the buyer for payment.

Step 5: Buyer pays for the document or take up import financing.

Step 6: Collecting/Presenting Bank remits the net proceeds to the Remitting Bank after
deducting its own charges.

17 | P a g e
Step 7: Remitting Bank credits the net proceeds into the sellers account after deducting its
own charges.

Documents Against Payment (D/P) Collection

Under a D/P collection, the exporter ships the goods, and then gives the documents to his
bank, which will forward them to the importers collecting bank, along with instructions on
how to collect the money from the importer. In this arrangement, the collecting bank releases
the documents to the importer only on payment for the goods. Upon receipt of payment, the
collecting bank transmits the funds to the remitting bank for payment to the exporter.

Time of Payment: After shipment, but before documents are released

Transfer of Goods: After payment is made on sight

Exporter Risk: If draft is unpaid, goods may need to be disposed

Documents Against Acceptance (D/A) Collection

Under a D/A collection, the exporter extends credit to the importer by using a time draft. In
this case, the documents are released to the importer to receive the goods upon acceptance of
the time draft. By accepting the draft, the importer becomes legally obligated to pay at a
future date. At maturity, the collecting bank contacts the importer for payment. Upon receipt
of payment, the collecting bank transmits the funds to the remitting bank for payment to the
exporter.

Time of Payment: On maturity of draft at a specified future date

Transfer of Goods: Before payment, but upon acceptance of draft

Exporter Risk: Has no control of goods and may not get paid at due date

PARTIES IN A DOCUMENTARY COLLECTION

TRANSACTION
1. Seller/Exporter
The seller/exporter is also known as the Drawer in documentary collection. The seller/
exporter will ship the goods to the buyer based on the sales contract and submit documents to
his banker with instructions for collection of payment.

2. Remitting Bank
The remitting bank is the seller/exporters bank. It will send the documents to the buyers
bank with instructions for collection of payment. Upon receipt of payment from the buyers
bank, the remitting bank will credit the net proceeds to the seller/exporters account.

18 | P a g e
 3. Collecting/Presenting Bank
The collecting bank is the agent of the remitting bank in the buyers country, its main role is
to forward the documents and collection instructions to the buyers bank. The presenting
bank is the bank that presents the documents to the buyer for payment or acceptance based on
the collection instructions. Upon receipt of payment from the buyer, the presenting bank will
pay the net proceeds to the collecting bank, which will in turn pay the remitting bank after
deducting its own charges.

4. Buyer/Importer
The buyer/importer is also known as a drawee in documentary collection. The buyer will pay
the documents or accept the bill of exchange. In return, the buyer/importer will obtain the
documents to allow him to clear his goods.

PROS & CONS

Bank assistance in obtaining payment

The process is simple, fast, and less costly than LCs

Banks role is limited and they do not guarantee payment

Banks do not verify the accuracy of the documents

4. LETTERS OF CREDIT

L
etters of credit (LCs) are among the most secure instruments available to international
traders. An LC is a commitment by a bank on behalf of the buyer that payment will
be made to the beneficiary (exporter) provided that the terms and conditions have
been met, as verified through the presentation of all required documents. The buyer pays its
bank to render this service. An LC is useful when reliable credit information about a foreign
buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyers
foreign bank. This method also protects the buyer, since no payment obligation arises until
the documents proving that the goods have been shipped or delivered as promised are
presented. However, since LCs have many opportunities for discrepancies, they should be
prepared by well-trained documenters or the function may need to be outsourced.

ILLUSTRATIVE LETTER OF CREDIT TRANSACTION

1. The importer arranges for the issuing bank to open an LC in favour of the exporter.

2. The issuing bank transmits the LC to the advising bank, which forwards it to the exporter.

19 | P a g e
3. The exporter forwards the goods and documents to a freight forwarder.

4. The freight forwarder dispatches the goods and submits documents to the advising bank.

5. The advising bank checks documents for compliance with the LC and pays the exporter.

6. The importers account at the issuing bank is debited.

7. The issuing bank releases documents to the importer to claim the goods from the carrier.

IRREVOCABLE LETTER OF CREDIT

LCs can be issued as revocable or irrevocable. Most LCs are irrevocable, which means they
may not be changed or cancelled unless both the buyer and seller agree. If the LC does not
mention whether it is revocable or irrevocable, it automatically defaults to irrevocable.

REVOCABLE LETTER OF CREDIT

Revocable LCs are occasionally used between parent companies and their subsidiaries
conducting business across borders. In this type of credit buyer and the bank which has
established the LC, are able to manipulate the letter of credits or make any kinds of
corrections without informing the seller and getting permissions from him.

20 | P a g e
21 | P a g e
CONFIRMED LETTER OF CREDIT
A greater degree of protection is afforded to the exporter when a LC issued by a foreign bank
(the importers issuing bank) is confirmed by another bank (the exporters advising bank).
This confirmation means that the other bank adds its guarantee to pay the exporter to that of
the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of the
foreign bank and the political risk of the importing country. Exporters should consider
confirming LCs if they are concerned about the credit standing of the foreign bank or when
they are operating in a high-risk market, where political upheaval, economic collapse,
devaluation or exchange controls could put the payment at risk.

TRANSFERRABLE LC
A Transferable Credit is one under which the exporter has the right to make the credit
available to one or more subsequent beneficiaries. Credits are made transferable when the
original beneficiary is a middleman and does not supply the merchandise himself but
procures goods from the suppliers and arrange them to be sent to the buyer and does not want
the buyer and supplier know each other. The middleman is entitled to substitute its own
invoice for the one of the supplier and acquire the difference as his profit in transferable letter
of credit mechanism.

Important Points of Consideration

A letter of credit can be transferred to the second beneficiary at the request of the first
beneficiary only if it expressly states that the letter of credit is "transferable". A bank is not
obligated to transfer a credit.

A transferable letter of credit can be transferred to more than one second beneficiary as long
as credit allows partial shipments.

The terms and conditions of the original credit must be indicated exactly in the transferred
credit. However, in order to keep the workability of the transferable letter of credit below
figures can be reduced or curtailed:

Letter of credit amount

Any unit price of the merchandise (if stated)

The expiry date

The presentation period or

The latest shipment date or given period for shipment.

The first beneficiary may demand from the transferring bank to substitute his name for that of
the applicant. However, if a document other than invoice required in the transferable credit

22 | P a g e
must be issued in a way to show the applicant's name, in such a case that requirement must be
indicated in the transferred credit.

Transferred credit cannot be transferred once again to any third beneficiary according to the
request of the second beneficiary.

UNTRANSFERABLE LC
It is said to the credit that seller cannot give a part or completely right of assigned credit to
somebody or to the persons he wants. In international commerce, it is required that the credit
will be untransferable.

USANCE LC
It is kind of credit that won't be paid and assigned immediately after checking the valid
documents but paying and assigning it requires an indicated duration which is accepted by
both of the buyer and seller. The intention behind usance LC is that, seller wants to give an
opportunity to the buyer to pay the required money after taking the related goods and selling
them.

RED CLAUSE LC
In this kind of credit assignment seller before sending the products can take the pre-paid and
parts of the money from the bank. The reason why it named so, is that the first time when this
LC was issued, the terms and conditions were written by red ink, from that time it became
famous with that name.

DOCUMENTS THAT CAN BE PRESENTED FOR PAYMENT

To receive payment, an exporter or shipper must present the documents required by the letter
of credit. Typically, the payee presents a document proving the goods were sent instead of
showing the actual goods. The Original Bill of Lading (OBL) is normally the document
accepted by banks as proof that goods have been shipped. However, the list and form of
documents is open to imagination and negotiation and might contain requirements to present
documents issued by a neutral third party evidencing the quality of the goods shipped, or their
place of origin or place. Typical types of documents in such contracts might include:

Financial Documents
Bill of Exchange- A written order to pay a sum of money on a given date to the drawer or to
a named payee; a promissory note.

Commercial Documents
Invoice, Packing list.

23 | P a g e
 Shipping Documents
Transport Document, Insurance Certificate, Commercial, Official or Legal Documents.

Official Documents
License, Embassy legalization, Inspection Certificate.

Transport Documents
Bill of lading, Airway bill, Lorry/truck receipt, railway receipt, Forwarder Cargo Receipt,
Deliver Challan... etc

Insurance documents
Insurance policy, or Certificate but not a cover note.

24 | P a g e
TIPS FOR EXPORTERS
Consult with your bank before the importer applies for an LC.

Consider whether a confirmed LC is needed.

Negotiate with the importer and agree upon detailed terms to be incorporated into the
LC.

Determine if all LC terms can be compiled within the prescribed time limits.

Ensure that all the documents are consistent with the terms and conditions of the LC.

Beware of many discrepancy opportunities that may cause non-payment or delayed

payment.

PROS & CONS

Payment after shipment

A variety of payment, financing and risk mitigation options

Process is complex

Relatively expensive in terms of transaction costs

5. COUNTER TRADE & BARTER

C
ounter trade can be a risky venture and should be undertaken only when the
Producer/Exporter has a clear understanding of the obligations and risks involved. In
essence, counter trade is a trading mechanism by which a Producer/Exporter (to
generate sales) contractually commits to undertaking agreed and specified initiatives that
compensate and benefit another party - as a condition of sales. The resulting linked trade
fulfils certain specific financial, commercial and/or policy objectives of both the trading
parties.

Many Producers/Exporters consider counter trade a necessary cost of doing business in

markets where exports would otherwise not be possible. Due to some level of financial
problems in the target market, such as the potential export customer and/or the importing
country is lacking foreign exchange or does not readily have availability to funds, or some
similar/related problem.

In these circumstances, the Producers/Exporters can take advantage of counter trade

opportunities by trading through an intermediary with counter trade expertise. i.e. an
international broker, an international bank, or an export management company (some export

25 | P a g e
management companies offer specialised counter trade services). Ultimately before taking on
counter trade commitments, the company should bear in mind that counter trade often
involves higher transaction costs and greater risks than just simple export transactions.

In its simplest form, a barter transaction is the direct exchange of goods or services between
two parties. Where no money changes hands. Pure barter arrangements in international trade
are rare. The main reason for this is because one trading partys needs for the goods of the
other party seldom coincide. The other important factor is that the need for the two
participating parties to agree on the financial valuation of the goods to be purchased - which
may pose problems. For this reason the most common form of compensatory trade practiced
today involves contractually linked, parallel trade transactions each of which involves a
separate financial settlement. To ensure a profitable conclusion to such trade, it is imperative
to have a reliable third party who is a specialist in the product sector(s) and who can act as
both a buying and selling intermediary in the parallel transactions.

6. CREDIT CARDS

M
any Producers/Exporters of consumer and other products (generally of low value)
that are sold directly to the end-user accept Visa, or MasterCard, or another
known credit card in payment for export sales. International credit card
transactions are typically placed by telephone or fax or over the internet - methods that can
facilitate fraudulent transactions. Normally a phone call is made to the purchaser for
verification of the transaction before shipping the goods. And Credit Card Company also
calls user before making payment to the producer. So in a sense a dual verification is done in
such transactions. In all cases the Producer/Exporter should determine the validity of
transactions and obtain proper credit authorisations from the card issuing authority before
shipping the concerned products.

26 | P a g e