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DOCUMENTARY LETTER OF CREDITS
Suppliers and End Buyers become perplexed with matters of payments involving the use of a Documentary Letter of Credit (DLC) because many suppliers that we deal with are not familiar with the use of UCP endorsed revolving instruments as it applies to long term contracts. Fakes news and false information about letters of credit is running unabated on the internet. We hope this article adds to clarify some important matters in a very simple way as we attempt to educate another part of the market place aimed at Banks, law firms, Exporters and Importers. FTNX as a leading expert and with over 30 years presence in the market place, offers information not just based on standing rules and laws, but also upon the reality of trading situations as well, where so many precarious aspects found in a genuine trade event, are not readily found nor disclosed on the net. FTNX does not deal in small single type of export import transactions as there are many ‘entities’ in the market place already trading on such goods using their own cash and other direct payment methods other than a DLC. We are specialised traders applying to transact on high value contracts and long term revolving deliveries as well as green or brown-field resource projects where a new exporter is entering the international arena for the first time-i.e: a local coal or iron ore producer wanting to attempt an international export deal etc.etc.in where such entities appreciate the advice we serve intently.
NON CUMULATIVE REVOVLING CREDIT
Many end buyers that we deal with, often think that they need to support the whole value of a revolving credit–when the don’t.The term ‘non cumulative’ revolving credit means just that; as one payment clears, another payment is made available for collection. Hence, if a shipment is worth $10,000,000.00, and there are 12 shipments in a year, the end buyer will need to assure the first ten millions dollars, and not the whole 120 millions dollars–in accordance with the terms and conditions of the sales contract. A revolving letter of credit for half a billion dollars does not mean that the end buyer will need to have ‘a half a billion dollars’ in cash in its account to open the credit.The end buyer will need have a good credit status and have at least the capacity to pay for the first delivery, to effectively ‘apply’ for a DLC. This aspect is tested once the DLC lodgement advice is served to its bank long before the offer is accepted or before a contract is signed. This is why an end buyer should first approach its bank to test their ability to open a DLC before even approaching a Supplier or PCT like FTNX. A BCL means nothing to a seller like FTNX because while a Bank Comfort Letter (BCL) is ideal for interstate or localised business, it does not mean that the end buyer will buy anything. The commercial and legally defined term “Ready Willing and Financially Able “ (RWA) is a far more important aspect, in that–by the time the contract is signed with the Seller, the Buyer has the already verified and confirmed its own ability to be ‘RWA’ to purchase goods ordered at that time. This is the area where export ready suppliers have missed out on huge potential orders; “when they come to realise that I.e: FTNX is not the end user or it does not have a ‘billion dollars’ in its account to buy goods sought the supplier will often fail to respond with serious intent. End buyers act the same way when they see that FTNX does not own the goods they are offering.” FTNX understands this kind of angst, which we can state has become a ‘minor issue’ from around 2016, as a growing number or suppliers and end buyers are now assessing FTNX offers intently. Suppliers and end buyers (and FTNX) have been hounded by ill informed, ignorant and unprofessional ’intermediaries’ for decades if not centuries. Such Corporations have learned in recent times, how to evaluate a real inquiry from one which is ‘non-sensical.’ A supplier will need to set aside their own procedures, to favour ours if they want to test securing large revolving sales. To date we have had only compliments on our trading structure and routine which includes payment methods. We need to apply superior international trading methods, way beyond the basic standard aspects being taught in colleges and universities. FTNX conducts business applying advanced trading applications, as tested by FTNX over a long period of time, which means, we add a whole lot more to the basic trade application based on actual events and experience. Small issues to do with DLC could mean huge expenses being incurred, is a subject matter hardly mentioned anywhere even though such trivial mistakes do often occur.
THE DLC AND CHARGES
Every aspect after the contract is signed, attracts fees and charges. To pay such fees and charges before, and again after the contract is signed, to appease the demands made by an end buyers is simply not an ‘economically viable’ aspect of conducting business. We are sometimes dumbfounded at the demands made by end buyers–where an offer has not even been issued. “We will open the DLC after inspecting goods at port of loading? Can we have SGS do tests first ? We need to book ship first?” etc.etc. Some end buyers think that a supplier is going to spend hundreds and thousands of dollars to accommodate the demands made, without a DLC being advised. Neither party to a deal has any great expense incurred, because one party is offering goods to another, or because an end buyer is ‘thinking about’ an offer, produced by a seller. It costs literally ‘nothing’ to issue or serve an offer or quote. This aspect however dramatically changes once a contract and subsequent DLC is advised. In most cases the exporter promoting exports from a country, often pay less ‘fees and charges’ than an importer when it comes to DLC and subsequent expenses incurred after it’s issued, which are ongoing from first delivery.
“If current comparable goods from various suppliers is priced at $103.00 per MT, and FTNX offers the end buyer a price of $93.00 per MT, even if the added cost of issuing and using a DLC end up representing $1.00 per MT more to the price of goods, the end buyer would have purchased goods at an excellent market price. To provide such a good price, our own gross profit margins are reduced to a bare minimum, strictly based on the kind of DLC being advised. The price of goods offered is directly related to the type of DLC being offered”
While most deals are entered into at FOB or FCA incoterms, when CFR, CIP or CIF delivery modes is sought , such information is simply not readily available for the same reason stated previously that too many ill informed traders approach insurance and shipping companies as they do banks, who have simply ‘shut them out.’ The Buyer has to buy goods form FTNX i.e: at FOB Incoterms; if we are able to secure a good freight rate or insurance rate that’s discussed later in where much more accurate prices can be secured when the delivery date has been formally served on the offer in where the option to change the FOB delivery mode, to another delivery mode, on the contract, if we are able to later secure such freight and insurance cover at a good and fair price acceptable to the end buyer. If our price for added services is not accepted the fall back position is the FOB or FCA basis. This is an important matter as FTNX shipping freight rates are higher than what the buyer could secure, as our BOL must be endorsed by the shipowners as the issuing bank under UCP rules will not accept a Charter-party BOL as part of the collection process. This kind of ‘added security’ will always cost more which we cannot circumvent when a UCP DLC is sought–is another unseen security factor that most end buyers do not comprehend.
As a guiding non valid but good example, lets examine the kind of expense that an exporter or importer could face when using a DLC as prescribed by a top 100 ranked bank (from 2018.) When reading below think about the following; a revolving contract supporting a poorly applied transaction, which has attracted many issues on every delivery will eventually incur huge losses both for the end buyer and supplier. This is why its crucial to start all export deals correctly and in an informed state.The start of a deal dictates how the deal will end.
Documentary Credits: Import Letters of Credit
- Establishment Fee:
- Electronic delivery $50 – Facsimile/Manual delivery$150
- Amendment fee: Electronic delivery.$50 – Facsimile/manual delivery $100
- Document handling fee. 0.375% of face valueCancellation fee 0.25%
- Discrepancy fee: USD50
- Acceptance fee: 1.5% p.a. of face value
- Reimbursement USD65
Export Documentary Letter of Credit
- Advising Fee: Electronic Delivery:FREE.Facsimile/Delivery: $100
- Amendment Fee:Electronic Delivery:FREE – Facsimile: $25
- Negotiation Fee: 0.25% of face value
- Assignment of Proceeds Fee: $100
- Confirmation fee: On application (Assume it's the same as Transfer Fee)
- Document pre-read/re-examination fee (Per read): $50
- Indemnity Fee: $75
- Transferable Credit: Served on request (Lets Assume it’s 0.30%)
- Documents for release of payment: Per set: $80
- Extension/re-presentation: $65
The DLC issuance fee and ongoing charges applied to the end buyer is served under UCP, and then we have the fee and charges that apply when the DLC is collected by the supplier or seller as specified under current ICC Uniform ‘Rules of Collection’ (URC) when the supplier or seller draws on the value of the credit. Most bank will not disclose all charges, as good customers of the bank may receive a better rates than the posted rates. Issuing a credit and collecting on a credit attract small fees, and some not so small fees and charges based on the face value of the credit. On top of this, if the end buyer is financing a DLC, interest rate charges will also apply. It does not matter whether the bank issuing or collecting on the credit is situated in China, Russia or Timbuktu.etc.etc. if it’s UCP and URC endorsed such charges and fees will apply. This is the cost of the ‘security’ and the virtues therein of using a UCP endorsed DLC. Peace of mind costs money–to make money.
(A) DLC: FIRST RULE
Never pay for commodities using an SLC (Standby Letter of Credit )
(B) DLC: SECOND RULE
Keep the terms and conditions on the Documentary Letter of Credit simple.
(C) DLC: THIRD RULE
Use only UCP endorsed Documentary Letter of Credits
This is a huge subject matter accordingly very broad aspect are being served, assume there is much more. The buyer makes an appointment with its bank asking for the issuance of a DLC. Banks are able to issue its own L/C’s with localised rules, likewise a business could write an in-house L/C as well called a Corporate in-house UCP ruling DLC. The effect of the secondary aspects means that a PCT could write a DLC on its computer and issue it the supplier, once the non transferable bank issued instrument is advised by the end buyer to the PCT, is held in the account of the PCT as ‘accepted.’ The first DLC serves to ‘back’ and support the issuance of the in-house DLC. The majority of suppliers do not understand this in-house issuance concept, nevertheless it is a legitimate and lawful aspect and is very workable for a supplier on the condition that the PCT has indicated as much on its Offer to Procure made to the supplier that such a In-house DLC is to be advised. A PCT could only do as much once the DLC is secured from the end buyer, from top 100 ranked bank , is in the bank account of the seller first. FTNX rarely uses in-house credits except in a situation where a long drawn out deal has become apparent, and in where the end buyer would not issue a Transferable credit to FTNX preferring to advise a confirmed credit instead; thinking that the a TDLC offer a risker proposition when it fact it’s the ‘confirmed’ credit that could create added security issues. The buyer will often cite that they will not issue a TDLC because of the added expenses involved, without realising that the end buyer will still need to pay for the ‘confirmation’ fee attached to the credit.
ICC GOVERNING ASPECT
The DLC that FTNX requires is defined as ‘bank issued’ instrument abiding by ICC UCP (Uniforms Customs and Practice for Documentary Credit ) rules as administered under International Chamber of Commerce (ICC) current publication rules ( Edition 600) Paris, France. If the term ‘Bank Issued’ DLC is not apparent on the offer or contract and the end buyer advises an ‘in-house’ credit, the Seller has to accept it or face a breach of contract situation. The seller and end buyer must specify matters of the DLC intently and agree upon such expectations.
THE ROLE OF THE BANK
The bank earns a commissions when handling and advising a TDLC’s ( via the advising bank ) accordingly without bank being involved, the idea of issuing a DLC to pay for goods would be a precarious situation, because it’s the issuing bank who takes over ‘honouring’ payment for goods ordered by its end buyer regardless if a PCT is involved in the deal. The term ‘irrevocable’ is just that; even if the buyer tries to cancel the credit, the DLC will remain irrevocable and active on the condition that the transport /shipping documents continue to be presented ‘at sight’ in a ‘clean’ manner. The term ‘at sight’ means the bank issuing the TDLC will examine all the required documents listed on the credit intently and if no ambiguous marks or conditions are apparent, in contrary to the terms and conditions of credit, the bank will ‘honour’ payment. If it’s not honoured, the issue(s) causing delay on payments, must be rectified, before the DLC will be honoured, which means more fees, charges and delays. The corrections (amendment) to the DLC must take place within 21 days of the BOL date. There are many unseen aspect to a UCP DLC which simply add to the overall security aspect of the whole transactions. The end buyer wants to receive goods as ordered. The Supplier wants to be paid for goods delivered, before the risk passes to the end buyer. An End Buyer cannot obtain possession of goods unless payment has been made prior to ship leaving the port of loading no matter the delivery mode used. FTNX does not makes such rules, we simply interpret their use correctly.
IRREVOCABLE CREDIT?
There is a little known understanding, unbeknown to many end buyers and suppliers that the term ‘irrevocable’ can be removed from the credit, which could cause the credit to be cancelled by the end buyer if any matter of fraud has been detected, and proven under an Affidavit. A bank would cancel such a credit if fraudulent events become apparent; therefore the term ‘irrevocable’ in itself is not 100% assured. The end buyer must think very carefully before making such claims because false claims of fraud may lead to a more serious criminal charges being laid against the end buyer and or the PCT for perjury. In effect a DLC cannot be collected upon unless the time consuming event of clean ‘presentation’ takes place. FTNX has created and provides a ‘PPIC Certificate’ to its end buyer after the contract is signed, and the DLC is accepted. The PPIC provides evidence that supply is genuinely ascertained and instantly verifiable. Since first delivery is still 30 days away or more; this one act will raise suspicion if the verification process fails, which in itself could cause the DLC to be canceled sooner rather than later.This PPIC issuance to date is a service only available with FTNX. In general the DLC is simply a useless instrument to the seller unable to be used in any way, or collected upon by anyone who has not secured supply (PCT) long before the DLC was issued.The opposite is true of a SLC.
GURANTEERING PAYMENT
The terms ‘honour’ here is very specific. A bank is not ‘guaranteeing’ payment which is in itself an ‘unconditional’ payment aspect. A bank will ‘honour’ payment if the conditions of the DLC are met. This is why a SLC should not be used to pay for goods because an SLC is an ‘unconditional’ instrument. A bank may not get involved matters of the sales contract because under globally acceptable UCP rules, banks deal in ‘finance’ not contracts. FTNX via it educational business caused a huge rise in interest to both Incoterms delivery rules and UCP Letters of Credit to occur. In one article the ICC stated that there was a huge explosion in the interest of Incoterms in 2010, the year our formal publication was launched world wide. FTNX has insisted on the use of UCP DLC rules ( from UCP 400) and the use of Incoterms, for most of its 30 years of trading period, after learning about such rules after taking intentional trade studies at local college. There was indeed a huge void about such rules until 2010 with the release of our unique International trade publication world wide; in our effort to teach the many ill informed ‘intermediaries’ exporters, importers, bankers.etc.etc..and all traders worldwide about such rules.
FTNX ACCEPTABLE PAYMENTS
Below defines in order of preference the kind of credit FTNX accepts. All offers lead with the best lowest price and the first payment aspect, as this is the easiest and the least problematic aspect. If the first offer is rejected, to favour the issuance of another offer, because the first DLC was the matter in contention, the price will rise , and added terms and conditions will apply. All adherring banks around the world will not readily accept to advise or issue a DLC as their guarded stand is “ let us have a look at the DLC first.” To reduce such matters pertaining to the ‘non acceptance of the DLC’ the procedural trading aspect provided by FTNX must be observed. Furthermore, a top 100 ranked bank of the world issuing a UCP endorsed DLC does not need to confirm its credit. The smaller bank issuing a credit will need to confirm its credit by another bank in where if the confirming bank now act for the disclosed smaller bank. If a DLC is opened as revolving, the terms ‘Bank issued non cumulative revolving’ is the term of reference which becomes apparent. A DLC can also be opened as ‘Pre Advised’ and not operational. Partial payments are not allowed. Trans-shipments are not allowed, adding further to matters of security.
- ITDLC: Irrevocable and transferable DLC as issued by a top 100 ranked bank of the world) The transfer fee made for the account of the end buyer. If the buyer does not accept to pay for the transfer fee, the buyer (PCT) may pay for such in where a TIDLC is still advised; or the buyer may insist on a confirmed but not transferable DLC instead, which will reject the first offer made for a second ‘different’ offer.
- ITCDLC: Irrevocable Transferable and Confirmed DLC in where Confirmation fee and transfer fee is for the account of the buyer. A small bank having a larger bank issuing the kind of credit. If the small or confirming bank has a corresponding bank in the country of the supplier , the corresponding fee is also paid by the end buyer.
- IDLC : As issued by a top 100 world ranked bank is acceptable ‘as is’ by a PCT , if the Supplier is accepting an In-house DLC from the PCT.
- CDLC : A Confirmed credit is acceptable on the same basis as the IDLC.
- PRE ADVISED DLC : Any DLC can apply to be issued as a Pre Advised UCP DLC if the issuing bank allows the use of a PA DLC.The end buyer needs to check with its back long before the contract is signed if a UCP endorsed PA DLC is available as banks under UCP rules have discretion on this matter. A P.A DLC is cheaper and quicker to initially open and has conditions that must be applied before it becomes active: I.e: the Seller shall provide evidence of the supplier.etc.etc. Once the information sought is correctly served to the end buyers bank as stated in the contract, the credit is make active and fully functioning. A PA DLC has all the irrevocable aspect of any other DLC so long as a pre-condition is met.
- A DLC may apply eUCP where all delivery documents only need to be presented electronically with no airmail hardcopies copies required.
- NEGOTIATION CREDIT: If indicated on a ‘DLC’ as issued by a top 100 leading bank of the world means that the supplier is able to discount the pending payment value of the DLC to its bankers and receive money ‘today,’ instead of waiting for the collection process to clear. A Bill of Exchange could also be written by the supplier on the same basis ( which FTNX does not handle.) Deferred DLC’s could also be negotiated upon for early release of funds.
- A SLC is always advised after the DLC has been accepted by the supplier first in where Performance Guarantee (P.G) as sought from the supplier or when the supplier has taken ‘extra shipments’ of a wanted product that can be purchased quickly is offered. Even matters of rebates and commission payment can be served by a SLC serving UCP or ISBP Rules.
- DEFERRED DLC: At D.P or D.A DLC could be considered by FTNX clients (Buyers) conducting business with us for a second time. The DLC is advised but not collectible until a later date once all documents are cleanly presented. i.e: 60 days after documents have been accepted (I.e: D/A 60 Days ) The buyer pays interest to FTNX for this kind of DLC, in where the buyer is able to sell goods and realise funds to cover i.e; a Bank loan or factor, supporting the D/A issued DLC, thus the end buyer is simply making money by ‘using’ the money of its bank to do so.
IN SUMMARY
We hope the above insight serves to answer the many questions we have been asked about matters to do with the DLC. Assume there is much more to know. This is why we insist that all end buyers and suppliers first read our website intently before approaching us; it saves parties to a deal a lot of angst, effort and wasted time for everyone concerned. Our procedures are formidable as they are strict, legally defined and universally acceptable. We don’t take short cuts and we simply cannot accept demands often made by our clients, because our concerns and interests are aligned with that of our clients as well. Safe and secure dealings. This is what FTNX ‘deals in’ as well, in the new emerging industry of the Professional Commodity Trader that has taken FTN Exporting 30 years to develop into a mainstream practice. “These deals are difficult to enact upon at the best of times. Discipline and best practices is the bedfellow to safe dealings–and success.”
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