What is a Letter Of Credit? Letters of Credit (LC) are an integral part of international business.

A LC is a bank's promise to pay a seller on behalf of a buyer, providing the seller meets the terms and conditions stated in the credit. Banks act as intermediaries and have no actual contact with the goods bought and sold. The LC serves as a guarantee that the buyer will receive the merchandise specified and that the seller will be paid in a timely manner. Each LC transaction generally involves four parties: the two parties to the transaction (buyer and seller) and the bank for each of these parties. The LC transaction occurs between two parties at a time: buyer and seller, buyer and issuing bank (which issues the LC on behalf of the buyer), issuing bank and advising bank (which authenticates the credit and manages the LC process on behalf of the seller), advising bank and seller. All LCs contain details of the payment undertaking given by the bank (issuing bank) on behalf of the buyer to pay a seller a given amount of money within a specific timeframe and at a specified place. The LC also outlines the terms and conditions of the transaction. How Letters of Credit Are Used: To protect against seller risk - payments are executed only after the required documentation is presented to a bank to show compliance with the buyers terms. To protect against buyer risk - If the buyer's creditworthiness is unknown, then the seller has the security of the bank's payment undertaking. To protect against country risk - The buyer may be willing and able to pay, but economic or political conditions in the buyer's country may prevent or delay payment. To protect against these risks, a confirmed letter of credit will be necessary. A bank in the seller's country will (for a fee) add its own payment undertaking to that of the issuing bank. LCs are also used as part of exchange control or import control regimes operating in the buyer's country. In such cases the use of a LC is mandatory, even if not required by the seller for security reasons.

The Letter of Credit Process

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Participants in LC Process Buyer Issuing Bank Advising Bank Seller (Beneficiary)

9 Steps in the Letter of Credit Process I. II. III. IV. V. VI. VII. VIII. IX. Buyer and seller agree to terms including means of transport, period of credit offered (if any), and latest date of shipment acceptable. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer's credit standing, and may require cash cover and/or reduction of other lending limits. Issuing bank issues LC, sending it to the Advising bank by airmail or electronic means such as telex or SWIFT. Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary). Seller should now check that LC matches commercial agreement and that all its terms and conditions can be satisfied. Seller ships the goods, then assembles the documents called for in the LC (invoice, transport document, etc.). The Advising bank checks the documents against the LC. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank. The Issuing bank now checks the documents itself. If they are in order, it reimburses the seller's bank immediately. The Issuing bank debits the buyer and releases the documents (including transport document), so the buyer can claim the goods from the carrier.

accounts receivable
If a company has receivables, this means it has made a sale but has yet to collect the money from the purchaser. Most companies operate by allowing some portion of their sales to be on credit. These type of sales are usually made to frequent or special customers who are invoiced periodically, and allows them to avoid the hassle of physically making payments as each transaction occurs. In other words, this is when a customer gives a company an IOU for goods or services already received or rendered. Accounts receivable are not limited to businesses - individuals have them as well. People get receivables from their employers in the form of a monthly or bi-weekly paycheck. They are legally owed this money for services (work) already provided. When a company owes debts to its suppliers or other parties, these are known as accounts payable Read more: http://www.investopedia.com/terms/a/accountsreceivable.asp#ixzz2D5ov8fE4

Factoring

Forfeiting

Forfeiting is a mechanism of financing exports. By discounting export receivables Evidenced by bills of exchange or promissory notes Without recourse to the seller (viz. exporter) Carrying medium to long term maturities On a fixed rate basis (discount) Upto 100 percent of the contract value. The word `forfeit is derived from the French word `a forfeit which means the surrender of rights. Simply put, Forfeiting is the non-recourse discounting of export receivables. In a forfeiting transaction, the exporter surrenders, without recourse to him, his rights to claim for payment on goods delivered to an importer, in return for immediate cash payment from a forfeiter. As a result, an exporter in India can convert a credit sale into a cash sale, with no recourse to the exporter or his banker. Concept of forfeiting: 1. What exports are eligible for forfeiting? All exports of capital goods and other goods made on medium to long term credit are eligible to be financed through forfeiting. 2. How does forfeiting work? Receivables under a deferred payment contract for export of goods, evidenced by bills of exchange or promissory notes, can be forfaited. Bills of exchange or promissory notes, backed by co-acceptance from a bank (which would generally be the buyers bank), are endorsed by the exporter, without recourse, in favour of the forfeiting agency in exchange for discounted cash proceeds. The co-accepting bank must be acceptable to the forfeiting agency.

Understand the forfeiting process. The exporter can allow a financial institution to buy the paper for the transaction , including promissory notes or sales invoices. The importers bank will typically provide the guarantee for payments. The exporter forfeits all rights to future payment associated with the transaction and the clearing house recovers the goods if the terms of the notes are not met. 2

Research the possibility of using forfeiting when dealing with unstable political environments. Credit and currency issues may be more problematic with different clients and by using forfeiting you can ensure payments without risk.

3 Take advantage of avoiding the standard 5 years export finance requirement for capital goods. The forfeiter can qualify a price which will be based on a market index and a margin. 4
Consider locking the profit margin with a fixed price. This is common for goods that will ship six months out, for example, and will allow you to move the product and gather the payment ahead of time.

Read more: How to Use Forfeiting for Export Finance | eHow.com http://www.ehow.com/how_2156071_use-forfeiting-exportfinance.html#ixzz2D5stMXCg

Forfaiting
In international trade, the selling of an exporter's receivables for a particular transaction. It is similar to factoring except in scope. While a company sells all of its accounts receivable in factoring, an exporter only sells one receivable for one, perhaps high risk, transaction. In forfaiting, the buyer is known as a forfaiter, and assumes all the risks associated with collecting the receivables. Generally, the exporter forfaits the receivable at a discount. This improves cash flow but reduces income.

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