The Documentary Letter of Credit

Our message is clear, if you are not in it for the long haul, then learning to grasp the basic procedures offered from us is an exercise in futility.

 

International trade rules do allow intermediaries to trade as a the Buyer or Seller and we are going to demonstrate the application to the intermediary acting as the "Seller."  As we mentioned in the last newsletter UCP 600 rules give an opportunity to the intermediary as an international trader.

 

The Documentary Letter of Credit is the basic to all credit applications and has many forms to it depending on the deal.  Therefore, what we are going to start with is the Irrevocable Documentary Letter of Credit.  The IDLC (IRDLC), cannot be canceled once "UCP 600" is applied and accepted by the seller or YOU!. The only case it would not be applied is when the seller (YOU) perpetrate fraud and you do not have the product.  So once an end buyer issues an irrevocable credit in any form then the bank takes over in guaranteeing its payment by applying UCP 600 rules to the credit, which is necessary within the verbiage of the form.  With the letter of credit you are getting confirmation, not from the end buyer, but from the bank.  One important thing to understand, as the intermediary, you are going to be a document collector and not the actual buyer or seller.  In this instance, it would be you collecting the proper documentation in lieu of the seller.

 

The brokering intermediary has to learn a lot about trading commodities internationally when it come to handling the financial instrument.  The IDLC used to pay for the product the end buyer tells his bank to issue a guarantee, not from the end buyer, but from the buyer's bank, following a set issuance rule, which is UCP 600 that have to be applied to the issuance of the guarantee.  What do we mean?  It's the bank that will guarantee the payment for the product being purchased to the supplier (which you have as the intermediary) and not the end buyer which in turn is obligated to the bank.  A big no-no is the intermediary cannot obtain the DLC and use it for his own purchases.  Certain conditions must be apparent for the ability to transfer a large part of the credit value to the seller.  Upon presenting relevantly corrected documents to the buyer's bank the issuing bank will allow collection of the guarantee to occur using another set of rules which we will mention in the next article.

 

The important factor to the intermediary are the documents produced.  The bank is one of the conditions that must be apparent before collection on the financial instrument is able to proceed.  Therefore, the intermediary transfers the portion of the purchase price to the seller who in turn provides to the intermediary the required delivery documents.  The intermediary then makes the changes to the seller's invoice from the one the seller gave to reflect the end buyer's purchase price and all the documents are sent to the end buyer's bank.  The documents are checked to apply the credit and the issuing bank allows payment.  Now, you have just done a deal because the seller has gotten paid, but now the seller has to deliver.  To learn about the Standby Letter of Credit


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