Why do you need Documentary Credit?

It is an irrevocable undertaking issued by a bank whereby it undertakes to make payment to the named beneficiary.

What do you expect to learn from here?

You will find alot of informations containing herein ie. letter of credit, document examination, documentary collection, international and local trade law...

What information should I look for ?

This blog provides a basic understanding of international trade where you need it most.

Will we tell you more besides our content?

We shall answer your enquiry as soon as we receive.

Pre-shipment Finance

As far as i know, Pre-shipment finance is a kind of working-capital finance provided by  the bank
to an exporter, with-recourse basis,  against either an export sell contract/ perchase order (not our bank practice) or against a Letter of Credit.

Key benefits to exporter
+ The exporter is offered credit terms so that it can add flexibility to its cash flow.
1. Procure raw materials.
2. Process and pack the goods.
3. Ship the goods to the buyers.
4. Meet other financial cost of the business.
5. Secure warehousing

key risks
+  Non payment risk or buyer risk: the risk that the foreign buyer does not pay exporters.
+  Non performance risk or supplier risk: the risk that the exporter will not fulfill the export order, cannot manufacture the product for technical reasons,
or cannot deliver it on time and according to the price and quality standards identified in the export purchase order or the letter of credit (L/C).
+  Third party risk: other risks that are involved in the transactions process, such as risks related to transport, bank, country risks, international regulation risks
ie. Antimoney Laundering, Economic sanction, Financial crime.

How to mitigate risks
Be a ware of the following terms:
+ Promissary note?
Protect against non payment
+ Document of title ?
Allow the holder to hold the possession of that of title
+ Credit rating ?
Investment indicator
+ Warehousing managment?
The control the movement of goods
+ Trade credit insurance?
To secure buyer payment risk
+ Loan guarantee by third party
Add gurantee to the preshipment finance
+ Transportation and insurance
Holding possession of goods until the documents is presented and Insuring any lose or demage during the shipment of goods.

Insurance policy- Franchise and excess

ISBP paragraph K14 state that An insurance document may indicate that cover is subject to a franchise or excess (deductible). However, when a credit requires the insurance cover to be irrespective of percentage, the insurance document is not to contain a clause stating that the insurance cover is subject to a franchise or an excess (deductible). An insurance document need not state "irrespective of percentage".
What is franchise and excess mean?

A franchise is a provision in the insurance policy whereby the insurer will not pay unless damage exceeds the franchise amount.

For example - You are shipping goods and your insurace is for $50,000. The insurance policy contains the
franchise provision that claims must exceed 10% ($5000).
If the total value of the damage to the goods is $4000, you are responsible for the entire $4000.
If the total value of the damage to the goods is $8000, the insurance company is responsible for the entire $8000.
You do NOT have to pay $5000 of your own money first.

An excess (deductible) is a provision in the insurance policy whereby the
insurer will pay any amounts of damage that exceed the excess (deductible) amount.
For example - You are shipping goods and your insurace is for $50,000.
The insurance policy contains the excess (deductible) provision that the insurance company will not pay the first 10% ($5000).
If the total value of the damage to the goods is $4000, you are responsible for the entire $4000.
If the total value of the damage to the goods is $8000,
you are responsible for the first $5000 and the insurance company is responsible for the remaining $3000.

Can a Letter of Credit survive without trade and supply chain finance

72 years since letter of credit is adopted and governed by international chamber of commerce. It is utilized by a trader as tool for trade settlement and it is believed to be the most secured method of payment. Above 10% volume of international trade equivalent to trillion us dollars utilizes letter of credit each year.

With an advance technology, importer and exporter seem to understand and trust each other well and offer a cheap payment methods than that of letter of credit.

However, letter of credit get a popularity in term of financing. It offers the competitive financing service to both import and exporter. Exporter may get preshipment/packing credit to pay for the cost of goods and transportation and post shipment finance that can secure the exporter fund shortage, while the importer may get the TR finance to settle the bill.

The bank should be flexible in supporting trade business. The world is now changing ; loan against land and building seem to be out of date( traditional loan). The bank should learn more about finance base on secured transaction rather than that land and building to support international trade.

Without giving a better support to trader, letter of credit service in one bank is not as attractive as where it was long before. And it will be faded by another competitive payment method ie. Bank payment obligations or another bank that offer a better trade and supply chain finance.

Functions of Bill of Lading

   In theory, there are three main functions of bill of lading. They are a document of title, a contract of carriage, and a receipt of goods.

      A.     Document of Title:

A title in the context of bills of lading means right to possession of the goods from the carrier. It does not mean right to ownership – the sales contract usually determines this. If the right to possession of the goods from the carrier is determined by the possession of a document such as a bill of lading, then that document is a document of title. Therefore, the person presenting an original bill of lading is entitled to delivery of the goods at the place of destination.

Closely connected with the function of document of title is negotiability. if the bill of lading is negotiable it can be transferred from a person with title to a person without title, for example from a consignee named in the bill of lading to a consignee not named in the bill of lading several times during the voyage. This is why delivery should only be made against presentation of an original bill of lading.

The most common negotiable bills of lading are order bills of lading and have the words “order (or assigns)” inserted instead of or against a named consignee, respectively allowing the shipper or named consignee to transfer the bill of lading to another person. To transfer the bill of lading in this case the shipper or consignee endorses the bill of lading and then hands the bill of lading on. An endorsement in this case is made by the shipper or consignee signing his name on the bill of lading (an endorsement in blank), allowing transfer to any person to whom the bill of lading is handed.

If the name of the person to whom the bill of lading is to be transferred is written in the bill of lading, in addition to the signature, the bill of lading can only be passed to the named endorsee 
(an endorsement in full). To allow the endorsee to transfer the bill of lading further, the words “to order (or assigns)” would have to be added against the named endorsee.

What are commonly known as bearer bills of lading are also negotiable documents. However, unlike order bills of lading, they can be transferred without endorsement. The bearer bill of lading can simply be transferred by hand from one person to another. A bearer bill of lading is either blank or the word bearer is inserted instead of a named consignee. An order bill of lading may also become a bearer bill of lading if it is endorsed in blank by the person named in the order bill of lading.

      B.      Evidence Contract of Carriages

The bill of lading also acts as evidence of the contract of carriage between the carrier and the shipper. This is a function of bills of lading whether negotiable or not, as well as waybills. The carrier may be the owner, charterer or freight forwarder and is the party who enters into a contract of carriage of goods with the shipper. Normally, the Master will be deemed to be in the employment of the shipowner and the Master’s signature will more often than not constitute a contract with the shipowner. Regardless of who the carrier is, the Master should assume that he will be signing the bills of lading or authorizing another to sign on his behalf.

The terms of carriage are usually found on the reverse side of the bill of lading, however the carrier may have agreed special terms of carriage with a charterer.
The bill of lading, evidencing the terms of the contract of carriage, frequently ends up in the possession of somebody who is not the charterer. To ensure that the Company is not exposed to risks in excess of its charterparty obligations, and that the contract terms are uniform, the terms of the applicable charterparty should be incorporated in the bill of lading using appropriate wording on the face of the bill of lading.

      C.      Receipt for the goods loaded

The function of receipt applies to all bills of lading whether negotiable or not, and to waybills. The bill of lading will normally be evidence of when the goods were received and their status on receipt in terms of marks (to identify the goods), apparent order and condition and number, quantity or weight.

The accuracy of the information in the bill of lading is very important for reasons. A Master will normally play an important part in ensuring the accuracy of such information. Most bills of lading (and the mate’s receipts as well) presented to the Master/his authorized agent for signature contain information from the shipper and should this information be inaccurate the bills of lading (and the mate’s receipts as well) will need to be claused before signing to reflect the true state of the cargo. Clause basically involves writing a remark on the bill of lading which contains the Master’s factual findings.

• Order basically means general type. The inspection should determine and record the general type of cargo, e.g. corn or soya bean, and the general type of packing, e.g. polythene bags or jute bags.
• Condition primarily describes how the cargo and/or any packing looks, smells and feels. The inspection should determine and record whether there is any apparent damage, defect or abnormality with the cargo and/or packing compared with how the cargo and/or packing is normally expected to look, smell and feel when in good condition.
• Condition also describes the sufficiency and/or adequacy of the packing for the intended carriage and the ability of perishable goods to withstand such carriage. The inspection should determine and record any observations in these regards.
• Apparent means what is recognizable to a proper and responsible ship’s officer with reasonable knowledge and experience and not what might be recognizable to an expert.
• Apparent also means what is apparent by reasonable inspection. Clearly this will vary depending on the circumstances. Generally, however, whilst a Master is usually expected to identify apparent damage etc., by sight and/or smell, he is not expected to identify hidden damage etc. Accordingly, the Master is not expected to remove packing or have the cargo analysed or tested.
• If the cargo has been loaded from open storage and/or from ground which might damage (e.g. by wetting) the lower parts of cargo not visible from inspection this should also be recorded. Similarly, if the cargo is loaded from barges or other means whilst not alongside a berth, this should be recorded.
• With regard to bulk cargoes, it is not generally sufficient to only inspect the cargo at completion of loading. it should, if reasonable and safe to do so, be inspected at regular intervals during loading in order to obtain a picture of the entire cargo’s apparent order and condition.
• Containers will be regarded as packing if provided by the shippers, but, if provided by the Company, they may be considered an extension of the ship’s cargo spaces. Container seals should be inspected to check that they are intact and the seal number recorded. If the seal is broken, the container should be opened if practicable and the outward appearance of the contents inspected. The container should then be re-sealed and the new seal number recorded.
• Any damage, defect, abnormality or inadequacy should be accurately recorded in sufficient detail,

• Inspection is also done to record the marks made on the cargo for the purposes of identification and to determine and record whether the marks are clear and that they will remain legible until the end of the carriage. This includes seal numbers (mostly on containers) and hazardous goods identification numbers or codes.
• If the marks cannot be determined during a reasonable inspection by the Master or his representative, the Master should make a record of the circumstances and reasons why determining the marks was not possible.

• If the number, quantity or weight cannot be determined by reasonable inspection by the Master or his representative, the Master should make a record of the circumstances and reasons why. As an example, the Master may not be able to determine the weight of a cargo of steel coils, although he will be able to determine the number of coils.
• If the number, quantity or weight can be determined by reasonable inspection, the calculation and results of the draft survey, tally, ullaged, or other inspection/survey should be accurately recorded in sufficient detail, identifying the location of the inspection and any relevant cargo marks. 

Payment time frame of letter of credit

Availability of time under letter of credit normally have been known as two: sight and usance. This two words use mostly in Bill of Exchange/ Draft as stipulate in UK Bill of Exchange Act 1882 and League of Nation -Geneva Convention on Bill of Exchange and Promissory note. Sight simply mean to pay immediately upon presentation of document at nominated bank, confirming bank, or issuing bank, while usance means to pay xxxdays after sight/ after specific date or the date of document ie. B/L date...

As per LC rule UCP600, bank has maximum 5 working days to determine whether the presentation is complied. If the documents comply with the LC, bank will pay within 5 working days in case sight credit and to advise payment undertaking, to advise acceptance, or to advise deferred payment undertaking in case usance credit.

The payment through intermediary bank may take few day to reach presenter/ seller bank account as normally the presenter can not receive fund directly from issuing bank. Fund may receive via her correspondence bank based on the currency of the credit.
In conclusion, whether Timeframe of LC as sight or Usance, the payment may be received few days later than sight or xxxdays sight.