Bank Collections, Trade Finance, and Letters of Credit
The Bill of Exchange
The Origin of the bill of exchange
Lies in the history of the merchants and traders of four teenth and fifteent century Europe
Brief Requirements of a Bill of Exchange
The English Bills of Exchange Act requires
An uncoditional order in writing
Addressed by one person to another
Signed by the person giving it
Guarantee that it will be payed
A sum certain in money
To: an specific person
The Documentary Draft and the Bank Collection Process
SightDraft
Payable on sight
Time Draft
Sent to the buyer for its acceptance
Documentary Drafts Used in Trade Finance
Trade finance
Assists the buyer in financing its purchase
Provides immediate cash to the seller for the sale
The Documentary Draft
Provides the seller and buyer with a mechanism for financing the international sale
Credit Risks
Seller assigns rights to collect to assignee or factor
Letter of Credit
Documentary Letter of Credit
Can be used in transactions for the sale of goods or services or to guarantee performance of other business obligations
Domestic
International
Law Applicable
Article 5 of the Uniform Commercial Code
The Independence Principle
States the independent of the sales contract between buyer and seller
Following a Letter of Credit Transaction
Buyer's Application
Between the buyer and the bank
Seller's Compliance
Tells the seller
What it must do
What to ship
How to ship
When to ship
The Rule of Strict Compliance
The terms of the documents must strictly conform to the requirements of the letter of credit and the UCP
The UCP 600 Rule
Funcional Standard of Compliance
Enjoining Banks from Purchasing Documents in Cases of Fraud
Confirming banks are not permited to refuse a demand for payment when the documents comply with the LOC
Confirmed Letters of Credit
One in which a second bank, has agreed to purchase documents and honor drafts onthe same terms as the original issuing bank
Standby Letters of Credit
One in which the issuer is obligated to pay a beneficiary upon the presentation of documents indicating a default by
The account party in the payment of a debt
.
The performance of an obligation
Others Specialized Uses for LOC
Transferable Credits
Red Clauses in Credits
Revolving and Evergreen Credits
Back-to-Back Letter of Credit Financing
LOC in Trade Finance Programs
A partial loss to the insured’s cargo