Collaborate on Billing Statement Sample Letter for Export with Ease Using airSlate SignNow

Billing statement sample letter for Export

greetings everybody this is Dan Gardner from trade facilitators incorporated and I'm showing 10:30 a.m. West Coast time so we're going to get underway with this week's complimentary webinar entitled letters of credit and import and export perspective as always a couple of housekeeping items we have quite a few people online actually I was I was surprised at the reception because letters of credit have been around for quite some time but remain very relevant in the world of international trade but with that number of people we have to keep the mic muted and you can write in your questions and we'll answer them as we go and also if you have questions there's a an email at the end if you have questions after the fact you can send them and we'll try to answer them also as is the case with every webinar that we do we offer a complimentary PDF copy your only job is to write to an email address that is also provided at the end of the webinar and we will gladly send it to you at no obligation as I mentioned a moment ago letters of credit are an important subject they've actually been around as a payment mechanism because that's what we're talking about here a payment mechanism between international sellers and buyers that has been around literally for 500 years going back to the earliest days of organised trade in Europe into the Americas etc etc they remain relevant and we're going to look at them from both an import and export perspective they're applicable to whether you're an importer and exporter and even a 3pl or a freight forwarder that might be online because freight forwarders have a role to play in the execution or what's referred to as the negotiation of letters of credit as well we'll talk more about that later but that has mainly to do with the fact that the freight forwarder oftentimes not always but oftentimes cuts the transport document a bill of lading an air waybill etc that is likely to be required as part of a letter credit documentation package alright let's let's get down to it here quick disclaimer for those of you have been online before you know that we're not lawyers and we have to tell you that so this isn't legal advice it's probably the fastest slide we'll have today pretty basic agenda we'll provide a definition of letters of credit or LCS as they're called we'll quickly quickly go through the types of letters of credit that are available but we'll focus on one in particular but there are different types of LCS and then we're going to stop and slow things down maybe a little bit but go over bank terminology and definitions banks are always going to be involved in a letter of credit there's no way around it it's just that the very nature of an LC while not the most exciting part of the presentation if you don't understand the terminology what's a beneficiary who's the issuing bank what does negotiation really mean what does performance mean it just it just doesn't make any sense to talk about the subject without providing a foundation if you will for terminology and definitions and we have some good visuals that help to layout the banking process the buyer-seller process etc we have an actual example of a letter of credit we'll be showing so it won't be all doom and gloom from the boredom perspective it'll be some good stuff that helps to bring the story to life we'll get into potential clauses to occlude in an LC as you either a buyer or a seller of goods negotiate the terms of payment within the context of a letter of credit and then the documents that might be called for in a letter of credit quick intro to TFI trade facilitators that's the company that I founded some many years ago here in Los Angeles we do supply chain consulting and training basically we're next to the LA Long Beach port complex and a town called Palos Verdes anything to do with international transportation the technology side the process side the physical movement of goods side we help importers and exporters to design integrated logistics programs as a part of that we provide advisory services for US Customs and Border Protection and partner government agencies we are licensed customs brokers here we do a lot of consulting for digital startups focused on logistics and supply chain and needless to say this these webinar being a reflection of this part of our business we do a lot of training on topic specific to global trade and last bullet point last but not least we are the number one producer of online material for universities trade associations and private entities in the United States specific to virtually any topic related to global trade so that's enough on TFI let's get down to business here as we said and I notice we had a couple of people come in a couple of minutes late if you have questions type them in we're on a muted mic we'll get to them if you want to copy the presentation just write in to an email address we provide at the end of the presentation and we will send it to you let us accredit defined I mentioned already that LCS as a payment mechanism this is about payment terms between an international seller and a buyer Elsie's have been around for five hundred years literally going back to trade in Europe as I had mentioned between companies and entities that didn't know one another when transit times were weeks and weeks and weeks on end this is where letters of credit were originally founded so an LLC it's a financial instrument it's a payment mechanism just like you might if you're an exporter give a customer terms 30 days 60 days 90 days or you're an importer and your vendor overseas ask for 30% upfront and then 30% when a BL gets cut a letter of credit is just another payment term a little more complicated from a detailed perspective from a documentation perspective but definitely it's a payment instrument a financial instrument and it's used by buyers and sellers we emphasize quite a few times throughout this presentation that letters of credit are equally applicable to importers and exporters it's just a matter of what side of the transaction that you're on the principles are the same that concepts are the same the details are the same and the overlying overarching theme of today's presentation whether you're an importer or an exporter or a freight forwarder working with importers and importers and exporters under LCS know what you're getting yourself into make sure that what you commit within a letter of credit you can execute upon and then make sure everybody in the organization understands precisely what it is you're doing second bullet next to cash in advance a documentary credit which is just another name for a letter of credit is the most secure way to get paid on an international sale we'll see why in just a moment to clarify in our sub bullet here you'll hear lots of different terminology in today's webinar that essentially are synonymous they all mean the same thing but it's just confusing when this terminology gets used without having a clear understanding of what it means let's say that documentary credit and a letter of credit or an LC it's all the same thing it is a synonymous term it's no coincidence you see here that the official term for an LC a documentary credit look at this word here document everything as it relates to the details of a letter credit are associated with the documents that define a specific transaction a bill of lading a commercial invoice a packing list a certificate of origin it's all about the documentation more on that in a second by its very definition and I mentioned this briefly a moment ago use of a letter of credit requires the involvement of the international banking system there is absolutely positively no way around that if you're going to engage in an LC as either the seller or the buyer there's going to be at least two banks involved your bank and the bank of your customer overseas if you're an exporter or your vendor overseas if you're an importer there could be more than two banks involved for the most part you want to avoid that type of situation we'll explain why in upcoming slides but you can't talk about a letter of credit without knowing that the international banking system is involved let's move on why is the international banking system involved think of it this way first bullet point essentially a letter of credit is used to replace the credit worthiness or lack thereof of an international buyer with that of a bank well what what does that mean let's look at it from an exporter perspective we could even look at it from an importer perspective but let's say you're an exporter of agricultural products from the Central Valley here up in northern central in Northern California and you have a new customer pick pick a country randomly South Africa as an example you don't know that customer you've not done business with them before you don't know if they're creditworthy or not you don't even know they exist as a company you have to do your due diligence what's what the banking system calls kyc not KFC kyc know your customer but a letter of credit can be used to mitigate the risk of not getting paid by that customer be they in South Africa or Malaysia or Brazil or Canada or Mexico it doesn't it doesn't matter you are asking the banking system to stand in for the creditworthiness of the overseas customer and use that banking system to make sure you get paid same applies as an importer if you have a new vendor let's say you're looking to stop sourcing or seek new sourcing opportunities outside of China and you go to someplace like Malaysia you might have a vendor that says to you I will sell to you all day long as long as it's on a letter of credit that vendor that seller overseas is asking the banking system to stand in as a go-between to mitigate the risk of not getting paid that's what a letter of credit does basically let's get into some more detail on that subject a bank first sub bullet point undertakes to pay the seller and the seller could be you that agricultural exporter in the Central Valley here in California or the vendor overseas that we just spoke of but a bank undertakes to pay the seller based on performance here's a term that has a very specific meaning within the world of banking and documentation performance has to do with the clarification of a definition because sometimes people think that a letter of credit the bank is going to garrett is guaranteed to pay me that that's not the case at all a letter of credit is not a guarantee of payment but rather a promise of payment based on performance of certain responsibilities performance in that sense takes us to the third bullet point the true meaning of performance under an LC is related to documentation that's why it's called a documentary credit as we'll see in just a minute banks don't interest themselves when they're involved in a letter of credit with the physical movement of goods they're only interested in the documentation that validates the physical movement of goods a bill of lading for an ocean freight shipment a commercial invoice a packing list we mentioned a couple of examples already we have a full list at the end whenever you think about a bank undertaking to pay based on performance it means that the seller no matter where they are the seller has to present certain documents to the bank in order to get paid under a letter credit what are those documents and what do those documents contain that is up to the process of negotiation that goes on between the seller and buyer long before a letter of credit is issued or long before goods move remember performance is about documentation what documentation the documentation you agreed to with your customer or your vendor overseas it's a negotiation process let me see if we have any questions just yeah it's probably a little early just one second yep we're good a little early for questions let's let's move on and we have some slides here so we're not going to dilly-dally continuing on with this conversation on the definition of letter of credit I like to use a principle and I always cite people when I borrow their their terminology or things that they made up but this one I came up with so I'm kind of proud of this actually documentation performance is driven by the seller the exporter basically they're timely presentation of complete consistent and correct documents yet another overarching theme for our webinar today is presenting all of the required documentation for a letter of credit in a complete consistent correct and timely fashion complete meaning that all of the docs that were agreed to be included for presentation for a letter of credit they're all there Bill of Lading commercial invoice back English a ticket of origin phytosanitary certificate etc consistent the content of those documents have to be consistent with one another meaning you can't say 50 pallets of almonds on a packing list and then show something different 50 whatever 2000 cartons on a commercial invoice the information has to be consistent amongst itself and consistent with what was agreed upon within the letter of credit and those Doc's have to be correct they have to be a specific and accurate reflection of the transaction itself the three C's of documentation second bullet this might sound counterintuitive when I started in letters of credit so many years ago in downtown Boston my home port it was certainly counterintuitive to me banks don't concern themselves with the physical movement of goods they're only interested in the documents because they're only interested in performance and performance is about the presentation of complete consistent and correct documentation to reiterate that is precisely why NLC is also known as a documentary credit to summarize the type of number of commercial and or transport docks meaning commercial invoices packing lists etc versus a bill of lading or an air waybill that's based on negotiation between the seller and the buyer a super important point to make whether you're an importer or an ex working under a letter of credit you have to deal with the terms of the LC as part of an overall sales agreement there's a big difference between a letter of credit and a sales contract letter of credit just deals with yak terms of payment sorry a sales contract deals with a bunch of different things we'll talk a little bit more about that in just a bit this is an important reiteration to make because you might ask yourself well what docks what do they contain whatever it is you agree to that's what they contain starting to wrap up our definition of letters of credit banks and I'm sure this will come as no surprise our for-profit institutions that they're not engaging in acts of altruism when they substitute their creditworthiness for that of an overseas buyer or seller banks charge for letters of credit that's something that you also have to have very clear with your bank that you work with be you an importer and exporter so you know how to budget for certain charges we'll talk about the names of some of those charges some slides down the path here for now just be aware that banks charge a series of fees for engaging in an LC transaction there there is no all tourism there is no benevolence from the banking system when it comes to LCS and most anything else which I'm sure you already know we already said we'll talk about them in just a minute a number of types of letters of credit that can be used the one we're going to talk the most about is the most common one it's called a confirmed irrevocable letter of credit we'll see that in just a moment the type of LC that is selected will determine the specific role of the banking system in completing payment here's some important support documentation that you need to know about when it comes to LCS all the rules when it comes to letters of credit it's actually published by the International Chamber of Commerce which is the same outfit the same organization out of Paris France that publishes the Incoterms that ICC International Chamber of Commerce when it comes to LC transactions and if you're an importer and exporter a freight for order that deals in letters of credit you should at least have an online version of this I'll give you a tip you can pay for this through the ICC and I have no affiliation with the International Chamber of Commerce if you look hard enough and if you google cleverly enough you can find a PDF copy for four zip four for free that's what I did online but one that you want it's called the Uniform customs and practice for documentary credits it's called the UCP 600 that's the most recent version it's important that you have that as part of your international trade library all right okay let's get into the different types of letters of credit I want to go through this fairly quickly because we're going to focus on that confirmed irrevocable letter of credit the purpose of this section of the webinar is just a broaden your frame of reference to know that there are different Elsie's out there as such we're going to go through this fairly quickly first off an irrevocable letter of credit and the only reason why I bring this up is because way back in the day there used to be what was called a revocable letter of credit which meant that either party between seller and buyer as well as any of the banks involved could change amend or cancel a letter of credit without telling anyone as you might imagine that kind of defeats the purpose of a letter of credit so the only type of LC and this is implicit as well as explicit is an irrevocable letter of credit important for you to know nobody can change anything or in or create what's called an amendment that's a term we'll see in a bit but an amendment is a change to a letter of credit before the letter of credit is executed upon will see more on that in a bit but no one can change anything or amend there's that term is very important without the agreement of the issuing bank the confirming bank and the beneficiary you'll note here you're starting to see some terminology that perhaps you're not familiar with don't worry just yet we're going to go through all of the terminology as we noted in our agenda basically the issuing bank that's the buyers bank the confirming bank is the sellers bank and the beneficiary as is the terms meaning in a insurance environment the beneficiary is the seller if you're an exporter if you're that almond exporter up in the Central Valley and you're selling to a company under an LC in South Africa you are the beneficiary once again we'll see that terminology in a minute if it starts to pile up a little bit and this is why I made that comment that it can get confusing pretty quickly second bullet second definition an unconfirmed letter of credit this is where things start to get interesting and really defines the involvement of not only the buyers bank but the sellers bank as well an unconfirmed as the name would intuitively signify only carries the obligation of the issuing bank I put that in the buyers bank to honor all drawings a drawing is just when you present the LC and you want to get paid basically and we we have a visual a graphic of this if a bank confirms a letter of credit that is typically the sellers bank in the in the export country as the name would indicate a confirmed letter of credit is an undertaking by that US bank to affect payment based on what performance the presentation of documents if a bank in the US doesn't confirm that and you have to make that determination before a transaction takes place it won't be confirmed obviously they're just going to tell you that a letter of credit has been opened on your behalf we'll see more of that a lot more of that actually in just a few minutes but as we see in our sub-bullet the sellers bank only advises that an LC has been opened on their behalf it's not an undertaking to pay by the US bank as an exporter it's simply an advice they will they will facilitate the transaction they will get the funds from the issuing bank the buyers bank overseas but they're not undertaking to pay they being that US your bank as an exporter in the US all right some of these subsequent definitions will help to clarify that point because it can get a little murky I'll be the first two to admit that a confirmed letter of credit and this is the highest grade a confirmed irrevocable letter of credit in terms of mitigating risk that's a letter of credit with a commitment of payment in addition to that of the buyers bank let's continue with our agricultural export example we have a company up in the Central Valley we sell almonds overseas we have our bank that we work with and it's really important to have a good relationship with a bank whether you're an importer or an exporter and our policy is that we like to sell under confirmed as we'll see in a moment irrevocable letter of credit that means that the funds don't come originally from the buyers bank that issuing bank but if we present our documentation in a complete consistent incorrect fashion within the timeframes allowed the bank in the u.s. is going to pay and then they're going to collect from the bank overseas that's a good example of how we said earlier that the banks are substituting themselves for the creditworthiness of the customer to achieve the highest level of risk mitigation from a payment perspective we as the exporter want to confirm the irrevocable letter of credit of course the your bank in the u.s. is going to charge you to do that but for that extra piece of mind it might be worth charge let's look at some of these sub points before we before we move on payment of course it's always the case under letter credit is based on performance and we now know that performance is about the complete consistent correct and timely presentation of the documents that we agreed to with our customer overseas or our vendor overseas the confirmation will normally come in the beneficiary's country as we said a moment ago the beneficiary is you as the exporter in our almond exporting example so that bank the confirming bank ideally is going to be your bank the bank that you work with doesn't have to be this way but a bank that will advise you that a letter of credit has been open on your behalf will also confirm the letter of credit if that's what you stipulate you have to stipulate that and that's what we'll see in our example coming up and of course I just said this the advising bank can also be the confirming bank let's take a deep breath here and look and see what we have for questions typical opening and processing for a documentary credit is still around 600 bucks the short answer would be yes depends on if you want a confirmation there's going to be an advising fee I can tell by the question that you already know that's the advising fee a confirming fee since someone brought up the thing about fees here's what you really need to look out for amendment fees and discrepancy fees we're jumping a little bit ahead here but it's a good question as a segue into this conversation because the bank charges can really really pile up an amendment is a change to a letter of credit before it is executed before it's presented to a bank for payment what's an amendment we want to change the quantity of the sale instead of 10 tons of almonds we can only ship 8 we want to change the incoterm in the letter of credit we want to change the address of the buyer overseas once a letter of credit is issued but hasn't been acted upon any changes requiring an amendment and because it's implicitly an irrevocable letter of credit everybody has to agree the banks are going to charge you to do that that's an amendment charge an amendment fee of equal if not greater importance is what for referred to as a discrepancy fee we already said a couple of times and this is why I was so emphatic that your Elsi documentation your commercial invoice your packing lists the bill of lading et cetera has to be prepared with all the information pursuant to whatever the letter of credit says right down to the to the letter of the product description as an example anything in the documentation that is inconsistent or incorrect with the letter of credit it's called a discrepancy and there's a fee for that too I was going to wait a bit to jump in on that one but since it was such a good question to bring it up we decided to do that I've seen letters of credit for $25,000 that weren't handled very well meaning the value of the LC the value of the sale was $25,000 with bank fees legitimate bank fees advising fee confirming fee etc etc plus amendments plus discrepancies of two thousand bucks think about that a sale for $25,000 of almonds and we have two grand in bank fees 1500 of which never should have happened if we handled it right in the first place that's what you need to be looking out for with letters of credit and that's actually how freight forwarders can help you be you an exporter definitely as an exporter but potentially as an importer as well because the and this is where I learned about LCS because I was a freight forwarder working with companies that export it under a letter of credit think about it they prepare the air waybill they prepare the bill of lading they have to make sure that what they prepare is consistent completing correct to the terms of the LC and if they're a good freight forwarder they'll double check your documentation as well the exporters documentation make sure everything's good they'll prepare a site draft for you which is basically a bill of exchange a check written payable to yourself as the exporter and present that information to the bank I first learned about letters of credit when I was a young executive just starting out at my home port of Boston where I worked downtown on State Street doing letters of cred in a small office and we had that small office downtown because I'm dating myself here you had to walk the documentation to the counters of the bank and this is where Bay Bank was and State Street Bank so it's just convenient to have our office down there because we did all the documentation double-checked the exporters documentation prepared it all up and took it to the bank on their behalf and part of our job was to make sure we minimize the amount of discrepancies that our export customer suffering bit of a sidebar but relevant given the conversation let's move on here's the big one the most commonly used LC a confirmed irrevocable letter of credit that means that nothing can be changed unless all the parties agree buyer seller the banks that are involved and it's confirmed by a bank in the exporters country if it's an import transaction we out of the buyer here in the United States a vendor overseas is the one who's going to ask for the confirmation from their bank in our example as the almond exporter we're the beneficiary we're the ones who are saying yeah we know it cost a little bit extra but we like that additional peace of mind and we want to have the LC confirmed by our bank which in addition to that peace of mind by the way if we do everything correctly three C's of documentation will get paid sooner because we don't have to wait for the issuing bank overseas in South Africa in our example to send the money to the bank my bank in the US and then they send it to me it might be only a couple of days given given the electronic formats used these days but I've seen letters of credit for a couple million bucks where two or three days where you get paid sooner means a lot we're interested for our example and confirmed irrevocable letter of credit let's run through some of these other ones just to make you aware of them standby letter of credit as the name would indicate you can have a situation where you're an importer that your vendor overseas let's say you found a new vendor in Malaysia and they're saying well we'll give you credit 30 days 60 days 90 days but we want to stay by letter credit that's kind of off to the side we won't use it unless you don't pay us it's there on standby it's a good tool to use I've seen them have used them myself you can give terms or get terms as a buyer but the seller still has the peace of mind of a standby letter credit a revolving letter of credit you see this quite a bit in the AG business agricultural exports where people are selling in large amounts oftentimes to the same customer over an extended period of time essentially an Levolving letter of credit is automatically restored to its full amount let's say an LC was for a million bucks and during a harvest season we made six or seven or eight shipments all for different amounts of money drawing down on that letter of credit well when that million bucks is out it automatically gets restored it's called a revolving LC a back-to-back letter of credit is actually by definition a transaction that involves two LC s you see this fairly frequently when there's a middle person involved let's say there was a broker involved in that export example of almonds to South Africa where that middle person will take out an LC we'll get an LC from the buyer in South Africa and then use that letter of credit as collateral to go to a bank and open an LC on behalf of the actual grower in the Central Valley we should probably pick a city or a town in the Central Valley instead of saying the Central Valley all the time let's go with Modesto up in the Central Valley that's a back-to-back l/c here's one I included I have to confess I've never seen this once in my career but it's out there as a definition it's called a Red Claws letter credit and it is an LC that allows a bank to pay the seller in advance of presenting documents I don't I don't know why that would happen to be honest because it defeats the purpose of a letter credit but it's called a Red Claws LC and that a transferable LC allows the beneficiary to act as a middleman and transfer his or her rights to another party you have to decide be you a buyer or seller what type of LC you're going to use the most common one is a confirmed irrevocable letter of credit that's the one we're using for our example okay we've suffered through our definitions and such let's get down to some some visuals and start to explain at a high level as we see here what the LC process how that LC process works just checking questions here's their recording yes there is a recording you can write in we'll send you the link yeah please send me the presentation yeah as we said now for the third time people are welcome to a copy of the presentation you can write in at the end of the event but here's the deal because I know who's online if I see somebody I just thought of this by the way and I can see how who's online how long they stayed did they drop off what questions they wrote in the whole nine yards if someone drops off and then asks for the presentation I'm contemplating not sending it to them because perfect attendance matters it certainly mattered when I was in school I'll decide on that later let's stick to the stick to the game plan here this is a high-level letter of credit process you'll note in the middle says a sales contract we mentioned this briefly I'll say it again for effect there's a big difference between a sales contract and a letter of credit a sales contract is just that all of the terms associated with a sale a letter of credit is the payment term component of a sales contract an LC should be baked into the overall agreement between the buyer and the seller the seller being the exporter for all intents and purposes the buyer being the importer here's what happens long before an LC gets issued the seller and the buyer are going back and forth about quantity ease and prize and Incoterms and is there insurance any variety of things once they make that determination and within that sales contract agree that a letter of credit is going to be used what type of letter of credit is going to be used what the details of the LC are what documents are required the buyer goes to their bank in their country will continue to use our Modesto almond exporter the company in South Africa is going to go to their bank which is referred to as the issuing bank and do what fill out a letter of credit application these days and let's bear this in mind from this point forward everything we're talking about can be done online everything way back when and this is why I worked in downtown Boston in the banking district everything was manual and I'm talking way back when so the buyer our buyer in South Africa in Johannesburg would have to go to their bank and fill out an application pursuant to the terms already agreed upon between the buyer and the seller the issuing bank and it used to be via telex and and I'm almost embarrassed to admit that I actually used a telex the only place you'll find a telex these days is at the Smithsonian in Washington DC but the banks communicate with one another after the buyer makes out the application it's approved by their bank the issuing bank what's the issuing bank do send a copy now all electronically all online to what is hopefully our bank up in the First National Bank of Modesto that we do business with depending on the type of letter of credit it is our bank is either just going to tell us that an LCD has been opened on our behalf advise us or if it's a confirmed letter of credit they're going to say hey this LC has been open on your behalf and pursuant to your wishes and what you negotiated with your buyer we're going to confirm that letter of credit and if you present your documents in a timely complete consistent incorrect fashion pursuant to the terms of the LC we'll pay you first and then we'll get the money from the issuing bank that's what a confirmation does that's really how it works we have a more detailed visual of the documentation flow in just a bit we just wanted to present the high-level piece for now okay let's move on some key terminology and definitions we're going to run through this quickly you have to study this if you're not familiar with letters of credit and you want it to be a part of your skill set you're going to have to go back and study this stuff and it takes time because it gets confusing because these synonymous terms for essentially the same party are the same activity this is part of the problem with letters of credit I'll give you the first example the applicant that's the buyer think about other names for an overseas buyer you have the applicant you have the con tiny you have the importer the importer of record they're all the same party for the most part it just gets confusing same goes for beneficiary we'll talk about that in a second the applicant is the buyer or the party who requests a letter of credit to be issued at the risk of going backwards after these guys over here the beneficiary just think of it this way who's going to benefit from the letter credit meaning who's going to get the money the seller the exporter it's also Bank time think about the terminology of an exporter here in the United States the US principal party and interest the shipper the seller the beneficiary it can get really confusing the beneficiary is the party that's going to benefit receive payment from the letter of credit the issuing bank fairly intuitive that's the buyers bank basically that issues the letter of credit on behalf of who the beneficiary we talked a little bit about this already an advising bank is simply a bank that advises the beneficiary the seller but a letter of credit has been opened on their behalf as you'll see in our example it's not an undertaking to pay and that advice letter as it's called that the advising bank will send must explicitly state that the bank is acting in an advisory capacity with no engagement to pay that's the difference between an advising and a confirming bank which can be the same bank in fact if you're the exporter you want it to be the same bank because here's the general rule on letters of credit the more banks involved the more fees involved ideally you want to keep it to your bank and your vendor or your customers bank overseas that advice we have an example of it will show in a minute is a written communication from a bank to a beneficiary the seller advising that an LC has been open on their behalf as we said the confirming bank and I will well I won't apologize for going through this level of detail because as I said earlier if you don't understand this terminology be you an importer and exporter forward or bank insurance company and we have all of four of the above on line today you're just going to get confused and you won't be able to create any value to be quite frank about it you have to know this terminologies it's just that simple it's like a vocabulary test in English class basically but you have to know it the confirming bank is normally in the country of the seller and normally the sellers bank ideally it's the bank that undertakes to pay contingent upon presentation of stipulated documents also known as performance it will be explicitly stated in the letter an advice letter that now becomes a confirmation that the bank is undertaking to pay based on that performance the confirmation is a written communication to the beneficiary from a bank that states the bank's undertaking to pay contingent upon performance a banks written confirmation as we will see in our example is included in the advice letter I see a question here are u.s. banks for on us banks still dispatching hardcopy physical Docs to the corresponding Bank overseas or have they finally gone electronic the answer is they have finally gone electronic but just like customs when you do an electronic entry if you're an importer in the United States they reserve the right to ask for documentation so they can do that but it's it's all online good good question to ask I think we're good on questions for now all right the negotiating Bank here's a term that gets really confusing because when we in business think about negotiation we think about just that a back and forth between the seller and buyer about the terms to a sales contract and that's a reasonable assumption to make but in the world of letters of credit that's not what it means at all the negotiating bank or a negotiation as we'll see in a moment the negotiation bank is the bank that examines the documents to look for discrepancies so they can charge you more whether to honor or reject the presentation that's oftentimes the confirming bank it should if there's a confirmed letter of credit it should be it has to be the confirming bank so negotiation will skip over reimbursing for a second is the act of a bank examining documents or compliance with the terms of the LC the reimbursing bank is most often the issuing bank the original source of the letter of credit that they make the funds available to the negotiating bank in the case of a confirmed letter of credit our export example of our almond people up in Modesto we present the docs to the bank everything's good they pay us pursuant to their confirmation commitment and then they go back to the set the buyers bank in South Africa and collect the money as we used to say back in Massachusetts the chase is on but its bank to bank transaction so it's very very commonplace okay we already said these two so we can wrap things up and move on an amendment is a mutually approved change addition or deletion to the terms on LLC after its original issuance but before it gets acted upon before it gets presented to the bank for negotiation you make any amendments to an LC 50 a hundred bucks you have to negotiate that with your bank if you're the exporter a certain a discrepancy is any error omission or inconsistency associated with the documents stipulated by an LC and the last two this is how you get paid really and this is electronic also but way back in the day what used to be called a bill of exchange think of a check and vision a check in your mind right now but if you're the exporter up in Modesto it's a check made payable to yourself when your documents get presented to the bank either physically like I used to do with the counters of the bank back in Boston or electronically that documentation package needs a cite draft and it's just a check made payable to you for the amount of the letter of credit and that's what I used to do in Boston in fact that broad when I was preparing for this webinar brought back so many good memories because I do the LCS all morning make sure the docs were right make sure the bill of lading was right pursuant to the letter of credit do the site draft and then go over right before lunch present to the various banks you go to three four banks depending on who your customers were in the course of an hour or so and then here's the good part would walk a block over to Fanueil Hall which if anyone's been to Boston especially in the summertime it's just everyone goes to lunch and hang out and what-have-you and I would oftentimes spend spend more of time over at Fanueil Hall than I did going from bank to bank but that's that's a story for a different day every documentation pack even has to have a cite draft or a time Draft which is the exact same thing but it stipulates that instead of being able to collect right away at site as the term is used in the case of a site draft we're saying to our customer yeah it's a letter of credit there's a draft involved but because we agreed to this I won't get paid for 30 60 or 90 days essentially terms with the backing of a letter of credit that's another thing you need to decide as far as an either a buyer or a seller Goods most Elsie's are on a site draft because people want to get paid right away but you can certainly use a time draft big difference between the two all right let's look at a letter of credit I made this as big as possible look it looks it's pretty sizable I'm font challenged myself so I'm sensitive to those two those things I'm just looking at questions here okay we're good all right we're going to spend a couple of minutes on this because it's a summary of everything we talked about this is an export letter of credit as the title indicates but once again all of the principles all of the techniques all of the requirements are applicable to you as an importer or to you as an exporter it's just a matter of what side of the transaction that you're on we chose for time limitation purposes do an export letter of credit for a company going to Poland what we have on the right is a boiled down version of an L see what we have on the on the left hand side is the advice / confirmation from the bank in the US let's see who we're dealing with here and you'll start to see the terminology that we painstakingly went through come to life and you'll be saying oh I'm glad he did that because otherwise I'd be really confused and it wouldn't be your fault who do we have here this is a fictitious bank first bank of the east it's in Atlanta and their swift number this is their ID number within the banking system and I always screw up this acronym but is the system for the worldwide international financial transaction something like that it's a communication standard used in the banking system so banks know that when someone reaches out to them originally by telex way back when that this is a legit bank and it's not some kind of a scam that's their Swiss number the system for world one that's going to bug me now someone looked that up please and then type it into me so I don't lose my mind and get this active while or in here the the international system for worldwide international financial transactions I think it doesn't matter but for someone it's going to bug me so someone type that in please what else do we have the bank is providing an advice number it's just a reference number the date and with letters of credit to the extent that you can as well as any type of documentation related to international trade you want to spell out a month or at least the three letters this is 15 July xx I just left that so the I don't have to change the year every time I do this presentation we have an amount in u.s. dollars for one hundred one thousand five hundred here's where we start to see our terminology the beneficiary is the exporter in the US made up name telecom essentials in Atlanta who's the applicant the buyer overseas Europe comm equipment at an address in Warsaw moving on bearing in mind that this is a an advice / confirmation from the sellers bank in Atlanta we meaning the bank have been requested to advise to you the following letter of credit as issued from the first Bank of Poland liquid lefse Boulevard at Warsaw who are these characters the applicants Bank so the two banks here will be communicating with one another sending money to one another and this is the seller this is the buyer there's a credit number again a reference number every letter of credit has an expiration date the first thing you have to look at is it consistent with the expiration date that we agreed to is part of our negotiation spelled out please be guided by its terms meaning the LC and by the following credit is available by negotiation of your original draft at site this is a site draft for a hundred percent of the invoice value drawn on us evidence shipment of and this is the product description that has to prepare up here verbatim on every document that is called for in the letter of credit no matter what your system says when it prints out a commercial in it could be a completely different description this is what you agreed to on the LC this is what it has to say 20 climate resistant enclosures for telecommunication equipment these are the big things that you might see at a street corner at an intersection where Verizon or AT&T or whomever has these big giant plastic enclosures on the telecom equipment they have on the street that's what we're talking about here that's the description you need to use we have an expiration date of the LC itself we have a latest ship date of the 20th of August let's say of 2020 all banking charges outside of Poland are for the beneficiaries account that means amendments and discrepancies and anything else that's quite important here's where it gets juicy at the request of our correspondent meaning the bank in the US the bank in Poland sorry we confirm this credit and also engage with you - that all drafts drawn under in compliance with the terms performance as it's called will be duly honored by us who's us the company in Atlanta so telecom essentials they do everything right pursuant to the LC they're going to get their hundred one thousand five hundred a lot quicker because it's a confirmed letter of credit okay let's move over to the side the actual body of the LC you'll see at the top message types 700 issue of documentary credit this is a template used by the international banking system whereby the terms of a letter credit will change from transaction to transaction but the layout is going to be the same FLD stands for field and these are the various numbers don't ask me why they're not sequential I've tried to find out that answer for the better part of my adult life haven't been able to but any letter of credit if you look at field 27 the sequence of the total that just means one of one page this is a boil down LC they can be longer but for illustrative purposes I made it shorter form of DC yet another source of confusion and Logistics world you see the term DC you're thinking distribution center at least I would doesn't mean that here it means documentary credit which as we saw in our definitions is synonymous term with a letter of credit it's irrevocable so we know it's irrevocable and confirmed because they said so over here here's that DC number the documentary credit number the date of issue 15 July applicable rules UCP latest version expiration date October 5th we saw that over here as well all the information about the applicant the buyer all the information about the beneficiary every document that gets issued for this transaction regardless of what our system generated commercial invoices and packing lists look like have to read exactly like this or you're going to hit as the exporter with a discrepancy fee whatever's in here has to be exactly the same on the documentation complete consistent correct and timely what's the amount one hundred and one thousand five hundred thirty-nine a field percentage credit amount T el L stands for tolerance that means and you have to negotiate this by the way two percent that means that when you present your site draft the amount could be plus or minus that one hundred one thousand five hundred because maybe there was a transportation charge that you weren't aware of you want to give yourself a little bit of a tolerance good best practice there it's available with the first Bank of Poland we know that partial shipments allowed transshipment allowed that gives flexibility to the seller if you're an importer depending on where you're buying from you might not want to agree to that and these are negotiable partial shipment means you get half your stuff and then they'll ship the rest later as a buyer you don't necessarily want that transshipment means that your goods don't go directly from wherever they're going from wherever they're originating from to where they're going an ocean container might get taken off a vessel in Singapore and put on a feeder vessel going to Malaysia these are negotiable you have to decide what's best for you this is an air freight shipment the departure shipment is Atlanta charge airport warsaw latest ship date the air waybill has to be dated on or before August 20th or that's a discrepancy here's the description of the goods that have to appear identically on all of your documents including the air waybill and the incoterm 20 climate resistant enclosures for telecom equipment cpt Warsaw Airport air freight this isn't an Incoterms webinar but I look at this and I see CPT Warsaw Airport what that tells me is that the price of the air freight from Atlanta to Warsaw is included in this one hundred one thousand five hundred dollars that's exactly what that means if that if they're the if the exporter didn't intend to mean that then they have a problem they need to get an amendment and they'll be charged for that as well here's your docks requirement original and two copies of the commercial invoice one original of the air waybill two copies marked Freight prepaid original the packing lists why is this like this because that's what was agreed to they could put in a certificate of origin they could ask for a pre-shipment inspection they being the buyer overseas this is what was agreed to and then finally payment at site docks presented within 21 days of air waybill date this is a good solid example albeit fictitious of a letter of credit along with its advice and confirmation letter this is real I just changed the names around to be honest with you this is a pretty good example they can be more complicated obviously but would be here for way too long let me see if we have any questions hmm all right we're good let's move on here's a good visual a little bit more details and I know we're getting to 11:26 but as always for people who have attended before I usually run over five to ten minutes I hope you can stick around for the crescendo ending that we have for you this is an export letter of credit documentation and information flow applicable to an import transaction again it's just a matter of what side of that transaction you're we have the buyer in South Africa we have the seller in Modesto and I know these plants are looking a little a lot like polluters but we're going to have to we're going to have to live with that we're going to start on the outside in blue and it's numbered as you can see one two three four and then we're going to come back on the inside five six seven we're assuming that the terms the overall terms of a sales contract between the exporter and Modesto and the buyer in Jay Berg have been completed and a letter of credit was the agreed-upon payment term what happens from there now all electronically our customer and Jay Berg does what they go to their bank they go online and fill out an LC application pursuant to the terms that were agreed upon ahead of time that's the issuing bank the issuing bank electronically by using that Swift capability the system for worldwide interbank I got it system for worldwide interbank financial transactions I'm so relieved they're going to send that to our bank up in Modesto or in the case of our Atlanta example the bank in Atlanta the advising negotiating confirming bank ideally is all the same Bank when you have too many banks involved too many cooks in the kitchen it gets confusing and the charges start to mount up best practice as an exporter you want the same bank to do to advise confirm and negotiate URL see it's your bank that's what you want to do that the interbank communication gets sent electronically and then it's sent electronically on our account basically online with our banks so we see the LC we as the seller received a letter credit we the first thing you have to do is it consistent with what was agreed upon from the get-go if it is we ship the goods remember banks don't care about goods movement this is a freight forwarding thing they're going to do the Bill of Lading etc pursuant to the letter of credit this is separate issue here's what happens good start moving the seller has a commercial invoice a packing list a certificate of origin a phytosanitary certificate the Bill of Lading why all those documents because that's what they agreed to and it's not unusual to have a phytosanitary certificate or a fumigation certificate as part of an agricultural export the seller gets debate the BL the original bill of lading from the forwarder puts it together with their documentation and does what sends it to the bank electronically as we said freight forwarders provide this service and I'm biased because I did this and I saw the value in it the forwarder is very likely going to prepare the bill of lading or the air waybill they can make sure it's right pursuant to the LC and they can make sure that your documentation is right as well they're providing an additional service they're going to charge you for that but it's good it's it's worth looking into the docks get sent to the bank electronically if it's a confirmed letter of credit the bank is going to negotiate mean check meaning check the documents for compliance with the terms of the LC complete consistent and correct if they are they're going to affect payment under a cite draft and then the chase is on with the issuing bank the issuing bank pays the confirming bank and the buyer pays the issuing bank that is how a letter of credit works in a nutshell so pretty decent slide there as I said we're going to run over a couple minutes and no one's dropped so thank you for sticking around let's let's run through this is five or six slides of any consequence here what do you need to what do you need to include in your letter of credit whether you're an importer or an exporter what are the clauses in the letter of credit itself that you need to check the Box on let us accredit a comprised of a series of requirement clauses in the LC that as we said are agreed to in advance sometimes banks and even countries can stipulate certain inclusions like a pre-shipment inspection that's a separate consideration but it's certainly the possibility exists to summarize what we've been saying all along the requirements and a letter of credit have to be reflection of the original agreement between the u.s. exporter and the overseas customer or the u.s. importer and the overseas vendor the terms of the LC have to be negotiated between the seller and the buyer prior to completing the application with the issuing bank if you're an exporter you don't want your customer going to the bank or going online and filling out a blank application willy nilly because they're going to check every box that's in their favor you have to make sure that it's agreed to ahead of time otherwise it's just going to delay things and take more time do your homework here are some of the clauses let's run through these quickly we're almost finished what kind of LC is it confirmed irrevocable we like those name of the issuing advising and confirming bank of course the two banks that we saw in our example full address applicant and beneficiary details full address description of the goods that are going to be used on every single document that is presented to the bank quantity and unit of measure 2,000 cartons of 50 pounds of piece of almonds as an example how much is the credit for in our example for the Warsaw shipment it was a hundred one thousand five hundred what's the currency USD we saw that you want to be explicit about that two percentage of variance allowed we saw that it was two percent doesn't have to be could be one could be one could be higher what's the payment mechanism is it a site or a time Draft tying things back into my favorite subjects and all of international trade you have to stipulate your Incoterms 2020 rules version here's the most important part what are you going to agree to in terms of the documents that have to be presented for customs clearance purposes which is a separate deal from what we're talking about the bare minimum pursuant to the World Customs organization is a bill of lading or an air waybill a commercial invoice and a packing list so that should be your bare minimum for a letter reddit it depends on the transaction in agricultural exports you'll see stuff like phytosanitary certificate certificates of origin etc it depends you have to negotiate that you may or may not want to designate a freight forwarder that's not required as a freight forwarder they like that because they know they're going to handle the freight what's your mode of transport air freight ocean freight and house instructions on how to prepare the bill of lading or railway bill trans shipments allowed partial shipments year so know if you're the exporter you want those to be yes if you're the importer you typically want those to be know just as general guidance what you laid a ship date what's your last ship date for presentation the bank upon which drafts are to be drawn where do the documents have to be presented is it at a downtown Bank on State Street in Boston or someplace up in Modesto who pays the bank charges what's the expiration date of the LC and you always want to say that the LC is subject to UCP 600 11:35 will be done by 1140 in fact there's three slides to go so again thank you for sticking around him and we only lost one person so I'm feeling good about myself potential documentation requirements this is how we're going to wrap things up because a documentary credit is about the documents you have to agree with your overseas customer or your overseas vendor what those documents are bearing in mind that depending on the country of origin what the bank wants to see they could they can stipulate documents as well pre-shipment inspection things of this nature so let's let's wrap it up here the documents required we know this for a letter credit depend on the negotiations between the seller and the buyer we already said the government could have their requirements a bank may also put theirs but the vast majority it's between you and your customer or vendor so here's some potential docs the first one a pro forma invoice if you were on last week the subject of a pro forma invoice came up and how they can be used a pro forma and a letter of credit environment is like a quote to an overseas customer our client for the almonds in South Africa needs a pro-forma invoice to go to their bank and prove that there's an actual transaction we said last week a pro-forma is an invoice that isn't a bill they can go they being the buyer in South Africa to the bank and say hey I have a legit purchase I want to make I want to buy some almonds in Modesto California here's the shipper in Modesto here's all the terms I'm going to use this as the foundation to apply for my letter of credit commercial invoice consular invoice especially if you're shipping if you're exporting to the Middle East packing list almost finished pre-shipment inspection and Sherin cert we have a bunch of insurance people online if this in our example the incoterm was CTP t if it was CIF or CIP insurance would be required by the seller on behalf of the buyer and that insurance certificate would have to read for example the description of the products exactly what appeared on the letter of credit certificate of origin maybe phytosanitary we talked about hazmat we haven't mentioned that but that would be important folders cargo receipt which as the name would indicate is proof that a forwarder received the cargo and will be subsequently providing an air waybill or bill of lading dr. EC same thing well actually it's not dock receipt for containers being tendered to an ocean terminal air waybill ocean bill of lading certificate of vessel eligibility the original LC that would be very helpful time draft or a site draft see if we have any hold on a second all we have a question hold on this is the last slide by the way let me see what the question is can we use the contract date number as reference to the goods listed on it or we need to list all the items of the goods in the LC outstanding question there&#