Ecuador Q&A Forum

Answer #2

Apparently, there may be some confusion here. Letters of Credit (Tarjetas de Credito) are normally used in international commerce (although they exist in local commerce, too, but on a vastly reduced scale), usually providing mutual benefits and protections to the issuer and the recipient.
A Letter of Credit (LC) is based upon assets to back it. These assets are provided by the issuer.
Nearly all LCs are timed: they have a definite time of life. Goods purchased via LC are to be provided via pre-agreed transportation method (also contained in the LC) within a defined time frame, ranging from days to months.Should the time granted in the LC be exceeded, the paying institution (usually a bank) is still obligated to pay, but the time in which to pay then can be nearly unlimited – sometimes, years. There is no time recourse for an “expired” LC.
The entire conduct of the transaction is contained in the LC. It is important to note, that unless agreed otherwise via written and signed contract, the recipient is under no obligation to accept the terms of the LC, and is legally empowered to reject the LC. Usually, this is not a problem, as all terms should be agreed between the parties prior to issuance.
I have dealt via LC in hundreds of business transactions.
In all instances, my company was the recipient.
Probably, the most important aspect of the LC is that it is not just an LC; it should be a “confirmed” LC. This guarantees that a local (your country) financial institution (normally a bank) undertakes to guarantee payment, and to do so promptly, of the LC, insofar as all terms contained in the LC are in compliance. Without this “local confirmation”, the LC is paid by the issuing (and usually foreign) financial institution.
There is a gross misconception relative to “F.O.B.” – Free On Board pricing. The term originated when goods were delivered by ships, and payment of the LC, if FOB, did not occur until the goods were physically aboard the vessel. No payment to the shipper was due until then. In some cases, payment was not due until the ship departed the dock. (Imagine an unpredicted strike immobilizing a ship’s departure for weeks or months – this happened to me, ONCE). Many merchants today believe that “FOB” means that payment is due when the goods leave the recipient’s premises. Not true. The best phrase is “Ex-Works”; this signifies that payment is due immediately upon goods leaving the recipient’s premises. Ex-Works also transfers responsibility for anything ensuing, clearing the recipient of obligations.
To be paid, the normal practice is that the LC is “paid upon presentation of documents” to the confirming institution. I always insist that the documents are “Inland Bill(s) of Lading”. Normally, this is simply the trucker’s receipt that the goods have been picked up from the factory (as an example). Payment is therefore due immediately upon submission of the Bill of Lading and any other agreed documentation (rare).
Also, I have always had the provision inserted that the “Inland Freight Charges” (the delivery of the goods to the dock/ship/airline/bus, etc) are strictly for the account of the issuer, as are all other charges attached to the LC.
As stated above, all LC terms should be mutually agreed in writing, signed by the appointed official of each Party, prior to issuance.
While the LC may seem complicated to the novice, in actuality it is a very streamlined and straightforward method of conducting business, as long as the steps aforementioned are followed (especially the “Confirmed LC” reference.
There is another form of LC known as a “Red Letter LC”. Said LC operates very much the same, but the difference is that it permits the LC to be broken into smaller parts, and is used to guarantee payment to others (usually component suppliers). In essence, the Red Letter LC becomes the base LC, and assets contained can be used as above.
I have always rejected Red Letter LCs, as they tend to expose costs to the buyer, empowering them in negative ways; it shows also financial weakness.
Any questions: email – iodinium@gmail.com.
Megalodon

Answered By: megalodon [42 ]