Collections: Documents against acceptance (D/A)

Under the documents against acceptance (D/A) the buyer does not have to pay immediately. The buyer is given a credit period. He only pays on the maturity date of the accepted bill of exchange, which may be 30 days, 60 days, 90 days later or even longer. This method offers greater flexibility to the buyer in his cash flow and liquidity management as by the time he is required to pay, he should be able to sell the goods and secure payment from his debtors. Under this method, the seller is required to ship the goods first to the buyer. Upon shipment, the seller will obtain all the necessary documents like Bill of Exchange, Invoice, Bill of Lading (or other transport documents), Insurance Policy, Certificate of Origin and etc. He is also need to complete a collection order (furnished by his bank) with the appropriate instruction. The documents then will be presented to his banker (Remitting bank) where the documents will be checked to ensure they tally with the collection order. These documents will be air couriered to the buyers bank (Collecting bank). Upon receipt of the said documents, the collecting bank will present the Bill of Exchange to the buyer for acceptance. Acceptance means the buyer has to endorse on the back of the Bill of Exchange with a company seal. Upon acceptance, the Bill of Exchange will be returned to the collecting bank for safe keeping and the rest of the documents are delivered to the buyer to take possession of the goods. The collecting bank will notify the remitting bank of the acceptance as well as the maturity date. On maturity, the collecting bank shall debit the buyers account and remit the proceeds via MT202 to the remitting bank. What if the buyer fails to pay on maturity? In the first place, can the buyer refuse to pay under documents against acceptance? This is in fact the biggest risk faced by the seller under this method of payment. When the buyer refused to pay, the collecting bank will not pay the remitting bank which means that the seller will not receive his payment. In this case, the seller has to resolve the problem with the buyer. The remitting bank and the collecting bank are only acting as an agent and cannot enforce any legal avenue to obtain payment from the

buyer. Collections are not governed by the UCP but by another set of rules known as Uniform Rules for Collections (URC). Transferable Letter of Credit Letters of credit can be considered as an important payment method in international trade for various reasons. As an example, they can not only reduce the risks of the parties of the transaction to acceptable limits, but also they have a flexible structure which makes them suitable for applying to different scenarios successfully. Transferable letter of credit is a sort of a documentary credit which can be used in situations where middlemen are playing a certain role. Usually middlemen (first beneficiary) do not have enough capital establishment to buy the goods from their sources (second beneficiary) before they re-sell them to their final customers (applicant). If the final buyer finds it valuable working with a middleman for a definite foreign trade transaction, he can let the middleman benefit from his credibility by supplying him a transferable letter of credit. The middleman than have the part or all of the transferable letter of credit transferred to his supplier who has gained considerable payment assurance to ship the goods. The supplier can acquire its payment portion in exchange for the complying documents stated in the letter of credit. The middleman is entitled to substitute its own invoice for the one of the supplier and acquire the difference as his profit in transferable letter of credit mechanism. Important Points of Consideration: Transferable letters of credit should be issued in an irrevocable form. A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it expressly states that the letter of credit is "transferable". A bank is not obligated to transfer a credit. A transferable letter of credit can be transferred to more than one second beneficiary as long as credit allows partial shipments. The terms and conditions of the original credit must be indicated exactly in the transferred credit. However, in order to keep the workability of the transferable letter of credit below figures can be reduced or curtailed.

letter of credit amount any unit price of the merchandise (if stated) the expiry date the presentation period or

The latest shipment date or given period for shipment.

The first beneficiary may demand from the transferring bank to substitute his name for that of the applicant. However, if a document other than invoice required in the transferable credit must be issued in a way to show the applicant's name, in such a case that requirement must be indicated in the transferred credit. Transferred credit cannot be transferred once again to any third beneficiary according to the request of the second beneficiary. Standby Letter of Credit The standby letter of credit serves a different function than the commercial letter of credit. The commercial letter of credit is the primary payment mechanism for a transaction. The standby letter of credit serves as a secondary payment mechanism. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiary. The parties involved with the transaction do not expect that the letter of credit will ever be drawn upon. The standby letter of credit assures the beneficiary of the performance of the customer's obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of invoices, with evidence that the customer has not performed its obligation. The bank is obligated to make payment if the documents presented comply with the terms of the letter of credit. Standby letters of credit are issued by banks to stand behind monetary obligations, to insure the refund of advance payment, to support performance and bid obligations, and to insure the completion of a sales contract. The credit has an expiration date. The standby letter of credit is often used to guarantee performance or to strengthen the credit worthiness of a customer. In the above example, the letter of credit is issued by the bank and held by the supplier. The customer is provided open account terms. If payments are made in accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller pursues the customer for payment directly. If the customer is unable to pay, the seller presents a draft and copies of invoices to the bank for payment. The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these provisions, the bank is given until the close of the third banking day after receipt of the documents to honor the draft.

Transfer versus Assignment An assignment of letter of credit proceeds is an assignment (or transfer) of future debt payable under a letter of credit from the beneficiary to another person (ie, the assignee). It enables the assignee, instead of the beneficiary, to receive payment under the letter of credit. An assignment of proceeds does not convey a right to draw or to perform under the letter of credit; the drawing must be made by the named beneficiary, although the right to receive the proceeds is vested in the assignee. In contrast, when a letter of credit is transferred to the transferee, the right to draw or to perform under the letter of credit is also transferred. The transfer of a letter of credit allows a second beneficiary (ie, the transferee) to present documents pursuant to the letter of credit and so be paid. Thus, the role of an assignee under an assignment is relatively passive because, as far as letter of credit payment is concerned, an assignee must wait until the letter of credit proceeds emerge, whereas a transferee can take an active role to draw on the letter of credit.