Documentary credit for import-export transactions | |
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Import-export companies, traders, agents and representatives engaged in the import-export business often conclude sale and purchase contracts for large amounts.
The contracts in question frequently involve such substantial amounts that buyers are obliged to provide their suppliers with a bank guarantee, as they do not always have the financial resources needed for such large transactions.
In some cases, measures taken by the authorities in one of the countries make it impossible for the buyer and supplier to trade together directly. Then they have to choose an intermediary who is not affected by the restrictions in question.
The various financial options available for this type of transactions are listed below.
Transferable documentary credit
The transferable documentary credit enables the beneficiary (the intermediary) to pass on to a third party (second beneficiary) the benefit of the undertaking given by the issuing bank.
He can so offer guarantees to his suppliers without having to obtain a credit facility from his bank beforehand.
In order for the beneficiary of a credit to be able to transfer it to a second beneficiary the issuing bank must have expressly authorized such a transfer in the conditions governing the credit, and the bank required to make the transfer must agree to do so.
By applying for a transferable documentary credit, the buyer agrees to the payment, acceptance or negotiation of bills being domiciled with the second beneficiary's bank, until the expiry date of the credit, unless expressly stipulated otherwise in the credit conditions.
In the transfer instructions the intermediary can reduce the amount of the credit and the unit price(s) indicated in the credit. These amendments are intended to offer the intermediary a safety margin to allow for any eventuality.
Back-to-back credit
And even if the exporter is the beneficiary of a transferable documentary credit, it is not always possible to transfer the credit for various reasons:
* the goods must be shipped from a location other than the location specified in the original credit
* the currency unit is different
* the conditions of the deal are incompatible
* owing to lack of time, it is no longer possible to have the original credit amended.
In such cases, the beneficiary of the original credit can ask his bank to issue another documentary credit in favour of his supplier. This is known as a "back-to-back credit".
Assignment of proceeds
In this situation the intermediary can simply ask his bank to issue a letter stating that funds are held for collection by the supplier.
This entails no undertaking on the part of the bank and payment will obviously only be effected in favour of the supplier:
* when the documents in accordance with the conditions of the credit have been received, if this has been required by the intermediary;
* when payment has been effectively made under the documentary credit;
* on condition that no attachment order has been served on the intermediary and that the intermediary is not insolvent.
Documentary credit payable in advance (Red clause )
With advance payment,
* the beneficiary receives an amount equal to the value of his export, or a certain percentage of it,
* he presents documents which comply with the conditions of the credit to the advising bank,
* the documents are then delivered free of payment or against payment of the balance outstanding.
Advance payment, in full or in part, is often effected against a simple receipt, in some cases together with a refund undertaking on the part of the seller in the event of the documentary credit not being used or with a bank guarantee.
Adjustments often have to be made in the accounts owing to differences between the real cost of the transaction at the time it is effected and the amount initially paid.
The « red clause »
A well known type of documentary credit with advance payment is the so-called "red clause". The beneficiary is usually an agent of the buyer who instructed him to collect goods abroad.
This clause enables the beneficiary of the credit to obtain funds prior to loading in the goods, on other words prior to being able to provide the shipping documents.
As this advance is effectively granted by the buyer, the issuing bank will debit the buyer's account as soon as the beneficiary has taken up the advance.
This beneficiary undertakes to repay the amount advanced at the latest on the date the credit expires, if he has been unable to fulfil his instructions within the specified time limit.
In France and French-speaking African countries the "red clause" documentary credit is generally known as a "crédit documentaire réalisable en deux temps".
Revolving documentary credit
A revolving documentary credit is any type of documentary credit of which the initial amount is:
* automatically renewed each time it is used ("automatically revolving credit"),
* renewed only at the end of a specific period ("periodically revolving").
Revolving credits are very flexible. Details vary depending on the buyer's and seller's requirements and arrangements.
