Saturday, August 05, 2006

Index Of Articles

Index Of Articles

What is a Letter of Credit?

The Stages of the Letter of Credit

How Courts View the Cases Relating To Letter of Credit

Reasons Why Letters of Credit Fail

Get To Know The Trade Terms!

UCP 600 To Arrive Soon!

Here are some samples of the drafting group's current thinking

Get Familiar With Some Common Shipping Terms

Some More Shipping Terms!

Instructions Every Exporter Should Give To The Buyer Before Issuing LC


Sample Bill of Exchange

Forfaiting Explained

What is Structured Commodity Finance?

Structured Commodity Financing - Partnerships Required

Beware of the LC Scam

LC Scam - Part 2

LCs versus Forfaiting - Indian Context- Part 1


Forfaiting - Indian Context - Part 2

Forfaiting and Letter of Credit

What is eUCP?

eUCP - Answers to FAQ - Part 1

ISP vs UCP

Sample Letter Of Credit Instructions


Standby LC - 10 Things Exporter Should Consider

eUCP - Answers to FAQ - Part 2

Most Common Discreepancies in LC - How To Avoid Them

Sample Shippers’ Indemnities

Basics Of Export Documentation


eUCP - Answers to FAQ - Part 3



LC - A Document Examination Checklist

Factoring and Invoice Discounting


Is Factoring Meant For Me?

eUCP - Answers to FAQ - Part 4

Factoring - A Solution For Small or Start-up Businesses

Factoring vs Invoice Discounting


Cash Flow Crunch? Try Factoring!

eUCP - Answers to FAQ - Final - Part 5

Forfaiting In India

Forfaiting Is About Eliminating Risks




Forfaiting Is About Eliminating Risks

Characteristics of Forfaiting

100% financing without recourse to the seller of the obligation.
  • Importer's obligation is normally supported by a local bank guarantee or aval.
  • The debt is typically evidenced by Letter of credit, Bills of Exchange, Promissory Notes. Credit periods can range from 90 days to 10 years
  • Amounts financed to be upwards of USD 2,50,000/-
  • Contract in any of the world's major convertible currencies can be financed.
  • Finance to be either on a fixed (market norm) or floating rate basis

Risk Elimination
Elimination of the following Risks associated with cross border transactions.


  • Commercial Risk - The risk of non-payment by a non-sovereign or private sector buyer or borrower in his home currency arising from insolvency.
  • Political Risk - The risk of the borrower country government actions, which prevent or delay the repayment of export credits.
  • Transfer Risk - The risk of an inability to convert local currency into the currency in which debt is denominated.
  • Interest Risk - The risk of interest rate fluctuations during the credit period of the transaction.
  • Exchange Risk - The risk of exchange rate fluctuations.
Products Suitable
  • High Value Exports
  • Heavy Machinery / Capital Goods
  • Consumer Durable
  • Vehicles
  • Bulk Commodities
  • Consultancy and Construction Contracts
  • Low Value but repetitive business
  • Drugs & Pharmaceuticals
  • Dyes and Chemicals
  • Textiles / Leather
  • Granites

Forfaiting In India

Origins of Forfaiting

Forfaiting evolved in the 1960s and was originally used to finance exports from countries in Western Europe to East European countries. With the growth in global trade, the product is now widely used to finance trade with all geographic areas, and has also been extended from its traditional role of post-shipment finance to provide pre-export finance, structured trade finance, project finance and even working capital.

In order to remain competitive, exporters are often faced with having to allow their importing partners longer period of payment. Such difficulties expose the exporter to a number of risks which can assume substantial proportions, depending on the country of the importer and the period allowed for payment. On top of typical commercial risks, such as insolvency of the importer, unwillingness or inability to pay, exporters have to consider the difficulties in appraising the monetary, economic and political risks inherent in the importer's country. The requirements placed on the financial institutions by exporters seeking solutions to the ever-growing complexities of international financing have led to an increased demand for Forfaiting.

The term "a forfait" in French means, "relinquish a right". Here, it refers to the exporter relinquishing his right to a receivable due at a future date in exchange for immediate cash payment, at an agreed discount, passing all risks and responsibilities for collecting the debt to the forfaiter.

What is Forfaitng ?

Forfaiting is the discounting of international trade receivable on a 100% "without recourse" basis. It is a form of suppliers credit involving the sale or purchase of receivables falling due at some future date. The exporter is, of course, responsible for the validity of his order and execution thereof, but once documentation has been delivered and accepted and discounting is done, there is absolutely no recourse to the Exporter, with the exception of an underlying fraudulent transaction. Forfaiting effectively transforms a credit sale into a cash sale.

Forfaiting transforms the supplier's credit granted to the importer into cash transaction for the exporter protecting him completely from all the risks associated with selling overseas on credit.

Traditionally forfaiting is fixed interest rate and medium term (3-5 years) financing. It can however, be structured on a floating rate interest basis as well as for longer periods up to 10 years or for shorter periods down to 90 days. Forfaiting is generally suitable for high value exports like heavy machinery, capital goods, consumer durable, vehicles, bulk commodities, consultancy and construction contracts and project exports.

Forfaiting in India - Regulatory Aspects

Forfaiting as an export financing option in India has been approved by the Reserve Bank of India vide its circular A.D. (G.P. Series) No. 3 dated February 13, 1992. The Forfaiting facility is to be provided by an international forfaiting agency through an Authorised Dealer (see RBI Circular No. 42 A. D. (M.A.) series dated October 27, 1997).

Forfaiting proceeds, on a without recourse basis, are to be received in India as soon as possible after shipment but definitely within the 180 day period specified by RBI for all exports. A Forfaiting transaction is to be routed through an Authorised Dealer, who apart from handling documentation will also provide Customs Certification for GR Form purposes.

Cash Flow Crunch? Try Factoring!

Is your cash flow like a yo-yo – one minute it’s up the next it is down?

Take an ordinary small to medium sized business with growing turnover – orders are up and the business has the opportunity to increase profitability. But still one thing holds it back – its CASH FLOW.

Look at a typical monthly cycle of this business:

In the first week of the month several of its major customers settle their account. The business is able to pay some of its suppliers and the overdraft is within the limit set by their bankers. The yo-yo is up.

In the second week they receive a large order which will require the purchase of additional raw materials from a supplier who will need to be paid up front to keep the account within its credit limit. Unfortunately the bank overdraft limit has been reached and therefore the materials required cannot be purchased and therefore the order has to be turned down. The yo-yo is down.

In the third week a concerted effort is made to collect money in on overdue accounts in order to provide sufficient funds to pay monthly wages at the end of the month. The yo-yo is up.

The final week of the months sees the wages paid taking the overdraft back towards its limit with quarterly VAT due at the end of the month. This payment will have to be delayed to the first week of the following month when payments from customers settling end-of-month accounts are received. The yo-yo is down.

And so it goes on until eventually the yo-yo does not come back up.

So what is the solution? Three possible answers come to mind.

1) Put more of your own money
into the business if you have any. A second mortgage on your home perhaps.

2) Ask an outside investor
to put in the money – but this could mean parting with some of the equity of the business – future profits would have to be shared.

3) Borrow more money from the bank
– but the bank will want more security before they will increase funding – have you got any to give?

But there is a fourth solution - Factoring.

Factoring releases cash tied-up in the sales ledger. Therefore as the business expands so does the funding available thus beating the cash flow yo-yo affect.

What is main source of day-to-day cash into the business (in a lot of instances the only source)? The answer is the sales ledger. Where an enterprise sells business to business this is normally done on credit terms.

Therefore you’ve made the sale, created a profit but you don’t yet have the cash. And it is this that creates the yo-yo affect on the cash flow needs of the business. With factoring the cash is available as you need it rather than when your customers choose to pay you thus allowing you to control your cash flow needs.

Factoring vs Invoice Discounting

Explains how Invoice Discounting differs from Factoring

Invoice Discounting can be described as the provision of finance against the security of receivables and in this respect is similar to factoring. The major differences is that the facility is confidential i.e. the customer is unaware of the facility and the supplier is responsible for the sales ledger administration.

Invoice discounting can only be provided where goods or services are supplied business to business on credit terms. Bad debt protection may be included in the facility if required.

The criteria for obtaining an invoice discounting facility is higher than for factoring and the service provider will be influenced by the following:
a) The quality and quantity of customers with particular attention to the spread. Ideally no one customer’s balance outstanding should be more than 20% of the total debts outstanding.
b) The supplier should be able to demonstrate good credit control procedures with debts being collected in a timely manner.
c) A good sales ledger system should be in place preferably computerised and kept up-to-date.
d) The business should be able to demonstrate that it is trading profitably and has a tangible net worth. Audited accounts may be required as evidence of the financial strength of the business.

The major features of an invoice discounting facility are outlined below:
a) The supplier is responsible for the continued maintenance of the sales ledger and the collection of sums due for payment.
b) The supplier’s customers are unaware of the invoice discounting facility.
c) The service provider will open a trust account at a nominated bank in the name of the supplier. All remittances collected by the supplier must be paid into this account.
d) The supplier will send regular notifications of invoices to the service provider together with supporting documentation as agreed with the service provider.
e) Credit Notes should be advised in the same manner.
f) The service provider will make available to the supplier an initial payment against invoices at an agreed percentage which can be up to 85% of the value of the invoices including VAT.
g) The remaining percentage will be paid to the supplier when the customer has made its payment which should be cleared through the nominated trust account.
h) The service provider will send the supplier monthly statements which will include a sales ledger control account.
i) The supplier will be required to provide a detailed sales ledger analysis at each month-end which must include a reconciliation to the service provider’s sales ledger control account. An age analysis will be required by the service provider.
j) The service provider will normally unapprove any debts older than 90 or 120 days from invoice dependent on the terms of the invoice discounting agreement between the supplier and the service provider.
k) The service provider will require to undertake regular audits of the suppliers accounting records primarily the sales ledger normally on a quarterly basis.

Please note definition of terminology used in this article as follows:
The Supplier – refers to the business providing goods or services business to business on credit terms.
The Customer – refers to recipient of the goods or services provided by the Supplier.
The Service Provider – refers to the financial organisation offering an Invoice Discounting facility to the Supplier.

Factoring - A Solution For Small or Start-up Businesses

Factoring - the benefits for a small or startup business

When starting a new business it is important that sufficient capital is provided initially to enable the enterprise to successfully establish itself. This capital could be in the form of money provided by the prime movers be it a sole trader, partnership or share capital in respect of a limited company. Additionally a bank loan or overdraft may supplement this capital and leasing may be used to purchase certain fixed assets. A mortgage can be taken out for the purchase of any property requirements. Further capital can be found by approaching a venture capitalist or business angel or perhaps friends and family. However this tends to dilute the prime movers interest in the business resulting in a smaller share of future profits.

All the above will contribute finance for the establishing of a business in order that it can initiate its trading activity. Hopefully if it has got its sums right it will have sufficient working capital to successfully go forward. In working capital we mean adequate cash flow to pay wages to staff and make purchases from suppliers enabling the production and selling of goods or services. If it sells direct to the public i.e. as in a shop, the cash flow will come in the form of cash paid immediately by its customers for those goods or services.

However if it is trading business to business it has another problem cash flow wise. It is normal practice in the UK to offer credit terms to your customers ranging from 7 days say for employment agencies to 90 days in the printing industry. The result is that when a sale is made the cash is not immediately available for the payment of wages and suppliers. Therefore the business will need to have raised an additional amount of capital in its initial stage to fund this or seek further funding so that it can continue to trade. Also it is normal for a young business to be seeking rapid growth in its initial stages of development to establish itself in its marketplace but when offering credit terms to its customers it will need more and more working capital to finance these sales. This is almost certainly to be further exacerbated by customers not paying on time – the terms say are 30 days but the customer takes 60 to pay. For a small business this can be a huge headache as prompt settlement of debt is vital to the development of the business and often the prime movers find themselves more and more drawn into chasing up outstanding invoices when their time should be better spent running other areas of the business.

The enterprise has a stark choice now – does it stand still in order to work at the level its working capital can support or look for further funding so as to grow the business. It is often vital for small businesses to continue to grow to achieve their profitability targets. Stay at the same level and risk making a loss or grow the business and risk a cash flow shortage by over trading. Further loans could be sought from a bank but these are normally finite and therefore as growth continues further funding is needed. Banks often require security i.e. personal guarantees to increase an overdraft or approve further loans and also seek evidence of trading results such as management accounts. Also there is still the problem as credit sales continue to grow of getting the customers to pay on time – in fact as turnover grows so does this problem. More and more time needs to be spent on chasing up overdue accounts and if you don’t chase there’s a good chance you won’t get paid. Is there a better solution?

The answer is YES there is – FACTORING

Factoring could well be the answer as unlike other sources of finance it is expressed as a percentage normally providing up to 85% of the value of each invoice initially with the rest paid when the customer pays. This means it is flexible in the sense that as the business grows so the funding from factoring grows providing adequate working capital to pay wages and suppliers in a timely manner allowing the business to continue to grow without the fear of over trading.

What about the burden of the ever increasing and time consuming need to chase customers for overdue payments. Is there a better solution?

The answer is YES there is – FACTORING

Factoring not only provides finance against the sales ledger but also has a service element attached to it where the factor will take over the administration of the sales ledger on behalf of your business so relieving the prime movers from the onerous task of chasing up customers for payment and therefore allowing them to do what they do best – running their business. For a business to be successful you do not want your prime mover bogged down in administration – you use accountants to collate financial records, solicitors to look after legal matters, etc. so why not use a factoring company to outsource your credit control. They will maintain the sales ledger on your behalf sending out regular customer statements setting out when invoices are due for payment and following-up on any invoice not paid on time. By offering a professional collection and credit control service cash can be collected in a more timely manner thus improving your cash flow and reducing pressure on your working capital demands.

They can also advise on the credit worthiness of both your existing and new customers. In order to minimise bad debts potential customers should always be checked out for credit worthiness however this is still no guarantee that they won’t go bust and leave you with a bad debt. This leads to another potential problem to a small business looking for rapid growth – as it offers more credit to more customers so increases its bad debt risk. One bad debt can turn a profitable business into a loss making business and create a major cash flow headache. Is there a better solution?

The answer is YES there is – FACTORING

Factoring also offers bad debt protection if it is required. Providing the business operates within the limits set by the factoring company they can receive 100% protection against bad debts. This is a major comfort to any small business looking for expansion and it is surprising that most enterprises do not take up this part of service offered by factoring companies.

To sum up there are major benefits to a small business in factoring when looking for finance to grow the business both in the finance it provides and the support it offers providing a sales ledger administration service and bad debt protection.

Is Factoring Meant For Me?

Your Business
Is your business growing? Do you need additional working capital to finance that growth? Then factoring could be the answer providing funds of up to 85% against the value of your trade debtors. Factoring is only available against trade debts.

Your Product
Not everybody’s product/services are suitable to factoring; the most suitable being the simplest or more straightforward type of product/service which can easily be shown to have been provided for example by a signed delivery note or timesheet. However factoring companies vary in the types of businesses they will factor.

Your Debtors
These should be trade debtors where goods/services have been provided under credit terms normally not exceeding 90 days. A factor will look at the quality and spread of the debtors before making an offer of a factoring facility. Equally important is your bad debt record, the ageing of the sales ledger and the overall collection performance.

Your Paper Trail
Factoring companies will be interested in your paper trail from the taking of an order to the delivery/provision of goods/services stipulated in that order. It is important that your record keeping is well maintained and that they can be easily followed through to the issue of an invoice and updating of the sales ledger.

Your Cashflow Requirements
Essentially you are looking at factoring specifically to improve your cash flow. Factoring can do this in two ways:

a) By providing cash in advance of your customer paying by offering an initial payment of up to 85% against invoices as they are issued by you.
b) By outsourcing the management of the sales ledger to the factor and thereby allowing them to improve your collection performance and reduce your debt turn.

Your Credit Control Requirements
In a fast expanding busy company there is not always time to implement and control good credit control procedures. So by outsourcing this to a the factoring company could make good business sense as the factor can provide you with a disciplined and regulated credit control procedure to the benefit of you and your business. Consideration should be given to how much you as the prime mover are spending in the chasing of slow-paying customers when your time could be better utilised growing your business.

Your Bad Debt Risk
Another facility offered by factoring companies is bad debt protection whereby they will give credit limits to your customers and should that customers business fail the factor will take the bad debt up to the limit set. This is referred to as non-recourse factoring.

To Sum Up

What are the main benefits to your business of factoring?

1) The provision of finance for growth.
2) The ability by you to take funding from the factor of the agreed initial payment percentage as and when you require the money.
3) Improved cash flow by releasing working capital to your business.
4) An opportunity to outsource the administration of your sales ledger including the chasing up of overdue accounts.
5) Improved credit control.
6) Bad Debt protection.
7) Improved working capital allows you to agree better terms with your suppliers.

Friday, August 04, 2006

Factoring and Invoice Discounting

A Brief Description of Factoring

Factoring can be described as the provision of or the making available of finance against the security of trade debts. Additionally factoring provides a sales ledger and credit control service with if required bad debt protection.

Factoring is only suitable to companies who are trading business to business and who offer goods or services on credit terms. By providing upto 85% finance against invoices factoring can bridge the gap between the raising of an invoice and getting that invoice paid. Therefore it can be of tremendous benefit to an expanding business in providing sufficient working capital to meets its cashflow requirements.

More and more factoring is seen as an alternative to the traditional bank overdraft with the added benefit in that it does not need to be constantly reviewed as set limits are breached as can happen with an overdraft. Instead it is expressed as a percentage of the value of outstanding invoices – so as more invoices are raised more funding can be made available to the business.

How does it Work?

As an invoice is raised it is assigned to the factoring company. The original is sent to the customer in the normal way and a copy is sent to the factoring company as notification. On acceptance of the invoice the factor will make available an agreed percentage of the value of the invoice, which can be taken as and when required. Depending on the type of arrangement entered into the factor would then be responsible for entering the invoice into a customer account within the factor’s sales ledger, sending periodical statements of account to the customer and collecting payment for that invoice as if falls due for payment. As the initial payment is at an agreed percentage (not normally more than 85% of the value of the invoice) the remaining sum will become due to your business either when your customer pays the factor or at an agreed maturity date.

Types of Factoring Facility
a) Confidential Invoice Discounting
This is the provision of finance against the security of trade debts of upto 85% of the value of the sales ledger. With this facility the customer is unaware of the arrangement as no disclosure is made and you continue to have the responsibility of collecting payments on behalf of the factor and paying these monies into the factor’s bank account.

b) Disclosed Invoice Discounting
Sometimes referred to as ‘Agency Factoring’, operates as above but with notification of the arrangement being made to the debtor by way of an assignment clause printed on the invoice. As this gives the factor greater security than a) above there is more flexibility to the factor in deciding the level of funding it can provide.

c) Recourse Factoring
As b) above but with the factor responsible for the administration of the sales ledger and the chasing of overdue accounts for payment. This is the most common form of factoring arrangements and by outsourcing this function it can free-up valuable management time allowing the prime movers to concentrate on the development of their business. The word ‘recourse’ means that if the customer fails to pay the invoice after a set period of time the factor will require any funding provided against that invoice to be repaid by its client – normally recovered from later invoices.

d) Non-Recourse Factoring
As c) above but with the factor also providing bad debt protection. This is normally based on limits set by the factor per customer dependent on the credit worthiness of that customer.

e) Maturity Factoring
Maturity factoring works on the basis of the factor guaranteeing to make full payment of an invoice after a set number of days from the date of the invoice regardless of whether the customer has paid or not. The main benefit of this type of facility is in cashflow planning, as you will know exactly when you are going to be paid.

f) International Factoring
Some factoring companies offer an international facility for the collection of debts abroad. They will make use of an associated factoring company based in the respective country of your customers who will be responsible for the collection of payment which they will remit back to the UK based factor.

Effectiveness of Factoring - How can it Help Your Business?

The most effective use of factoring is as a source of finance in a time of expansion by releasing working capital tied-up in trade debtors. Not only does it do this by providing cash in advance of the customer paying it can also ensure that debts are paid in a timely manner which will also improve your cashflow.

The other major benefit is that it can release valuable management time in administering of the sales ledger allowing prime movers to concentrate on the development and growth of their business.

Costs

There are two main costs in factoring which are briefly explained below:

Administration Charge - this is a factoring fee for the administration of the sales ledger and is expressed as a percentage of the invoice value. This varies depending on the workload to the factor but is normally between 0.5% and 1.5%.

Discount Charge - this is the cost of money advanced against the sales ledger and works like Interest in that it is charged as a percentage above Bank Base Rate and is normally no more expensive than an overdraft facility.

Thursday, August 03, 2006

Basics Of Export Documentation

The basics of export documentation include but are not limited to a commercial invoice, packing list, certificate of origin, shipper's letter of instructions, shipper's export declaration, and ocean bill of lading or air waybill.

Depending upon the ultimate destination, further documentation may be required in order to fulfill the terms of sale as well as to adhere to the particular customs regulations of a given nation.

Generally speaking, nations of both Latin America and the Middle East may not be as lenient as European or Pacific Rim nations when assessing compliance with their individual documentation requirements, assessments that could result in customs penalties and fines, temporary seizure of goods, or the forfeiture of goods.

Absolute adherence to export documentation requirements need not be viewed as simply the task of complying with the country's and foreign customs regulations. On the contrary, documentary compliance is an important task when completing any export transaction and in some cases can help to avoid any negative financial repercussions associated with errors in documentation.

In most cases, a freight forwarder, airline, or steamship line will prepare the air waybill or ocean bill of lading on behalf of an exporter. Both of these documents are essential to their respective mode of transportation; each clearly defines the terms and conditions of the export transaction and should also be consistent with any and all additional information provided on the remaining export documents. The waybill and the bill of lading each confirm receipt of the cargo to be shipped, contain a description of the cargo, and set forth the contract of carriage between the owner/shipper and the carrier.

Commercial Invoice

Obviously, a seller issues a commercial invoice to a buyer in an export transaction. Along with an ocean bill of lading or an air waybill, the commercial invoice needs to present the principal information of the export transaction and includes the following:

  • Name of the seller of the goods (shipper/exporter)
  • Name of the buyer of the goods (consignee/importer)
  • Commercial value in U.S. dollars (unit price/total value)
  • General description of the goods
  • Date of the transaction
  • Any applicable reference numbers (e.g., invoice numbers, purchase order numbers, letter or credit number, etc.)
  • Original signature (not required for every destination)
  • Diversion clause
  • Terms of sale
  • Terms of payment

Packing List

In addition to clearly identifying the seller and buyer of the goods (in accordance with the commercial invoice), the packing list, prepared by the seller/shipper, should also clearly indicate the specifics of each package. As with other export documents, the information on a packing list must be consistent with each export document presented to U.S. Customs. Any discrepancies between a packing list and an air waybill or ocean bill of lading regarding the exact number of packages and weight will generally result in customs clearance delays at destination. A basic packing list contains the following information:

  • Name of the seller of the goods
  • Name of the buyer of the goods
  • Date of the transaction
  • Any applicable reference numbers
  • The quantity and type of packages shipped (e.g., cardboard cartons, wooden crates, skids, etc.)
  • The net weight and gross weight of each package
  • The dimensions of each package

Certificate of Origin

A certificate of origin is not required for every destination, although it is should be considered an important export document for several reasons. Some nations may require a certificate of origin to compile statistical trade data, while other nations may use a certificate of origin for financial reasons (e.g., to assess the eligibility of goods for preferential duty rates or duty-free importation).
Most nations use and accept many formats of a certificate of origin provided they contain the necessary information. However, some nations, Israel in particular, will only accept one distinct type of certificate or origin. A standard certificate of origin, prepared by the shipper or the forwarder, contains the following information:

  • Name of the seller of the goods
  • Name of the buyer of the goods
  • General description of the goods
  • Date of the transaction
  • Any applicable reference numbers
  • Original signature
  • Diversion clause
  • Named origin of goods
  • In many cases, the certificate of origin will need to be notarized by a local chamber of commerce

Shippers Letter of Instruction/Shippers Export Declaration

A shipper's letter of instructions (SLI) is used to clarify the exporter's intended transportation and payment terms to the respective freight forwarder, airline, or steamship line.

A shipper's export declaration (SED) is required for export from the United States, and it provides necessary export information to several U.S. government agencies. The U.S. principal party of interest (USPPI) must complete the SED. The USPPI is defined as the exporter for export control purposes. However, there are instances in which a foreign party may act as the principal party of interest (PPI), in which case it is necessary for the U.S. exporter is to provide a foreign power of attorney. The SED must also clearly identify the ultimate end user of the export shipment. Generally, when the value of each exported commodity (Schedule B number) is less than $2,500 and is not licensable, an export declaration is not submitted to U.S. Customs; however, U.S. Customs must be notified of this exemption on the bill of lading or air waybill. (An SED is not required for most shipments to most countries if the value of each commodity/Schedule B number is less than $2,500. Nevertheless, an SED is required for shipments to certain countries and for shipments subject to export licenses regardless of value. See the resource list for more information.)

Although the SLI and SED are available separately, they are now commonly merged into one document. Also, a signature on the SED (or the merged SLI and SED) acts as a one-time limited power of attorney for any involved third parties such as freight forwarders. The SLI and SED generally contain the following information:

  • Name of the USPPI or foreign PPI
  • Name of the ultimate consignee of the goods
  • Intermediate consignee, if applicable
  • General description of the goods
  • Date of exportation
  • Any applicable reference numbers
  • Original signature by a duly authorized officer or employee of the USPPI
  • Diversion clause
  • U.S. state of origin
  • Mode of transportation
  • Port of loading and unloading
  • Temporary import number and or import entry number, if applicable
  • Request for insurance coverage (or denial)
  • Return or abandon instructions should a consignment be undeliverable
  • Country of ultimate destination
  • Schedule B number and value of each commodity tendered for export
  • Export license number or license exemption
  • Export Control Classification Number (ECCN), if applicable
  • Origin of production (domestic, foreign, or items produced for the Foreign Military Sales program)

Export documentation may vary on a shipment-by-shipment basis; as such, clear instructions should be obtained for each export transaction. Financial documents, such as a sight draft or a letter of credit, may stipulate that additional export documents be provided in order to fulfill the terms of a given contract.

Some destination countries may also require that their respective consulates in the United States legalize certain documents prior to export from the United States. Other documentation, such as inspection certification, export licensing, or an insurance certificate, may be required depending on the commodity, the destination, and/or the transaction. The importer of U.S. goods may be responsible for other documentation (e.g., an import license) that affects the export shipment.
A freight forwarder or any other third-party transportation company assisting an exporter can provide specific documentation requirements on a shipment-by-shipment basis.

Sample Shippers’ Indemnities

Shippers’ indemnities should be addressed to the bank to which you are presenting documents and follow one of the following formats:
BLANKET INDEMNITY
A blanket indemnity should be on company letterhead, signed by an authorized signatory, and should read as follows:

In consideration of your honoring/negotiating our drawings presented to you under any and all letters of credit issued in our favor notwithstanding any discrepancies which might exist therein, we hereby agree to pay you on demand the amount of each such drawing (with interest at the per annum rate of __% from demand until paid in full) and to indemnify and hold you harmless for any other losses, costs, and expenses (including, without limitation, reasonable attorneys’ fees and court costs) incurred in connection therewith or the enforcement hereof, in the event that the documents included in the drawing are refused by the issuing bank or the issuing bank fails, for any reason, to pay a drawing honored or negotiated by you. This agreement does not preclude any other rights you might have against us by reason of such drawings.
TRANSACTIONAL INDEMNITY
A transactional indemnity should appear on the company’s transmittal cover letter or be on separate company letterhead, signed by an authorized signatory, and read as follows:

Re: Our reference ___________________ dated ___________________________ for (amount) drawn under letter of credit number _________________ issued by ________________________, Bank reference ______________________.

In consideration of your honoring/negotiating the above described drawing under the cited letter of credit, notwithstanding the following: (list of discrepancies or the words “ any discrepancies which might exist therein”)

we hereby agree to pay you on demand the amount of such drawing (with interest at the per annum rate of __% from demand until paid in full) and to indemnify and hold you harmless for any other losses, costs, and expenses (including, without limitation, reasonable attorneys’ fees and court costs) incurred in connection therewith or the enforcement hereof, in the event that the documents included in the drawing are refused by the issuing bank or the issuing bank fails, for any reason, to pay the drawing. This agreement does not preclude any other rights you might have against us by reason of such drawings.

LC - A Document Examination Checklist

The Draft: Check that...
  • the Draft bears the correct Letter of Credit reference number, the signature and/or the name of the Drawer corresponds with thename of the Beneficiary,
  • the tenor is in accordance with the Letter of Credit,
  • the payee is the bank documents are being presented to or the Beneficiary,
  • if the payee is the Beneficiary, it is duly endorsed and bears no restrictions or conditions in the endorsement (e.g., “without recourse”),
  • the amounts in figures and words correspond and the currency is that in which the L/C is issued,
  • it is drawn on the Drawee specified in the L/C,
  • the amount drawn does not exceed the balance available in the Letter of Credit,
  • the values of the draft and the invoice correspond,
  • it has a current date—specifically, the shipment date if the Letter of Credit calls for the maturity of the Draft to be based on the bill of lading date,
  • any apparent alterations have been properly stamped and/or initialed,
  • it contains any necessary clauses required by the Letter of Credit.

The Invoice: Check that...
  • the correct number of original(s) and copy(ies) is presented,
  • it is issued by the Beneficiary named by the Letter of Credit and, if an address is shown, it is the same address as that indicated in the L/C,
  • the Applicant (the buyer) is indicated as the invoiced party, and, if an address is shown, it is the same address as that indicated in the L/C,
  • the description of the goods is in exact accordance with the merchandise description in, and includes the shipping terms indicated in, the Letter of Credit, and no extra goods are included, no additional detrimental description of the goods appears that may question their condition or value (e.g., “re-conditioned”), any other information supplied in the invoice, such as marks, numbers, transportation information, packaging, weight, freight charges or other related insurance and transport charges etc., is consistent with that in the other documents,
  • the currency of the invoice is the same as that in the Letter of Credit,
  • the invoice amount is at least the amount of the Draft,
  • if partial shipments are prohibited, the invoice covers the complete shipment as required by the L/C or is within the 5% tolerance allowed by the UCP,
  • if required by the Letter of Credit, the invoice is signed, notarized, legalized, certified, etc.

Transport Documents: Check that...
  • the full set of originals issued is presented, unless otherwise allowed by the Letter of Credit (for air waybills, the original Shipper’s Copy constitutes the “full set”),
  • it clearly indicates who the carrier is,
  • it clearly indicates the name and capacity of the signer (e.g., “ABC Co. as carrier” or “XYZ Co. as agent for ABC Co., the carrier”),
  • if an “ocean” or “port-to-port” bill of lading is required, it clearly indicates that the goods are on board a named vessel at a named port on a given date,
  • the place of receipt/origination/taking in charge, port of loading, port of discharge, place of delivery/destination, etc. are as specified in the L/C,
  • it is not a “charter party” transport document, unless authorized in the L/C,
  • the name of the consignee is as stipulated in the Letter of Credit,
  • if the transport document requires endorsement, it is appropriately endorsed,
  • there are no clauses on the transport document that may render it “unclean” (See UCP 500 sub-Article 32(a)), the description of the goods is not inconsistent with the description of the goods as stated in the invoice, and that the marks and numbers as well as other specifications, if any, are identical to those appearing on the other documents, any apparent alterations have been properly stamped and/or initialed,
  • the name and address, if any, of the notify party are as stipulated in the Letter of Credit,
  • the indication of “freight prepaid” or “freight collect,” as required by the terms of the Letter of Credit, appears on it and is consistent with the shipping terms shown in the invoice, all other conditions stipulated in the appropriate transport articles of UCP 500 are complied with.

The Insurance Document: Check that...
  • the policy/certificate/declaration/cover note, as required by the Letter of Credit, is presented,
  • the full set of the insurance document issued (all signed originals) is presented,
  • if specified in the L/C, the correct number of original(s) and copy(ies) is presented,
  • it is issued and signed by the insurance company or underwriter or their agents, or countersigned by the assured if so required by the insurance document itself,
  • the date of issuance or date from which cover is effective is no later than the date of loading on board or dispatch or taking in charge of the goods, as the case may be,
  • if the assured named is other than the Confirming Bank, Issuing Bank or buyer, it bears the appropriate endorsement,
  • it is issued in the same currency as the Letter of Credit, unless otherwise allowed in the Letter of Credit,
  • the insured value of the goods is as required by the Letter of Credit or as defined in UCP 500 sub-Article 34(f),
  • the goods description is not inconsistent with and relates to that of the invoice, the marks and numbers, etc. are identical to those of the transport document and all other information appearing on the document is consistent with that of the other documents,
  • it covers the specified risks as stated in the Letter of Credit and that the risks are clearly defined,
  • it covers the merchandise from the port of loading or place of taking in charge to port of discharge or place of delivery designated in the L/C, any apparent alterations have been properly stamped and/or initialed.

Most Common Discrepancies in LC - How To Avoid Them

A large portion of the discrepancies found in letter of credit documents occur with a great deal of frequency. Three common problems can be avoided if the exporter carefully checks the following before shipping:

1. The credit amount is sufficient to cover the shipment (particularly if the shipping terms are CIF or CIP).
2. Documents will be available and can be presented before the expiry date of the credit.

3. The latest shipment date
(if there is one) specified in the letter of credit can be met. After shipping, documents must be properly prepared and presented on a timely basis.

The most common discrepancies encountered by banks examining documents under letters of credit represent errors or misunderstandings in how to prepare documents.

They include the following:

1. Documents are inconsistent with each other.*

2. Documents were presented more than 21 days after the date of shipment (or other presentation period specified in the L/C).*

3. Full set of bills of lading was not presented or other required documents are missing.

4. Draft is drawn incorrectly or for the wrong amount.

5. Draft is not signed or not endorsed.

6. Invoice does not describe merchandise in exact accordance with the letter of credit. Note: If the letter of credit describes merchandise in a foreign language, then the exporter must describe the merchandise in that language in the invoice; translations are not acceptable.

7. Invoice does not show the same shipping terms as specified in the L/C.

8. Invoice includes charges inconsistent with the shipping terms in the L/C.

9. Invoice is not made out in the name of the applicant shown in the L/C.

10. Insurance coverage is insufficient or does not include the risks specified by the L/C.

11. Insurance certificate or policy is not endorsed.

12. Insurance certificate is dated later than the shipment date.

13.Bill of lading is not clean (defective condition of goods or packaging indicated).

14.Bill of lading does not clearly indicate the name and capacity of the signer and who the carrier is (must be signed “ABC Co. as carrier” or “XYZ Co. as agent for ABC Co., the carrier”).*

15.Bill of lading is not consigned correctly or is not endorsed (if endorsement is required).

16.Multimodal bill of lading was presented when L/C calls for port-toport, or simply “ocean,” bill of lading. (Acceptable if “on board” notation includes the name of the vessel and the port of loading.)*

17.Multimodal bill of lading was presented when shipping terms are FOB (i.e., port to port) and does not indicate inland freight has been prepaid or otherwise fails to meet requirements for port-to-port shipment.

18.Bill of lading is not marked “freight prepaid” or “freight collect” as required under the credit or in agreement with the invoice and shipping terms.

19.Not all documents show license numbers, letter of credit numbers, or other identification required in the credit.

20.Documents are not signed in accordance with L/C terms (any document called a “certificate” must be signed).

Discrepancies like these can generally be avoided by reviewing the terms and conditions of the letter of credit and preparing documents that follow the instructions found there. (Click here for A Document Examination Checklist).

Keep in mind that banks deal only in documents and have no business getting involved in the underlying contract between the exporter and the buyer. The bank’s reimbursement from the buyer depends on the documents complying.