• IOE Home
• Trade Portal
• Contact

You are here >

  Printer Friendly

The exporter may be able to arrange finance against confirmed orders from undoubted buyers in stable countries by means of bankers’ acceptances.

The general principles are as follows:

• The exporter must satisfy the bank that he has orders from acceptable buyers in stable countries. (For example, a buyer may be a member of an internationally recognised trade association. Such associations are likely to impose penalties on members who default on contracts.)

• Upon receiving satisfactory responses to enquiries about buyers and the trade, the mainstream bank may agree to provide finance.

The procedures are as follows:

• The bank will agree a limit for bankers' acceptances related to the outstanding invoices. This may be an agreed percentage of the total invoice value, say 75 per cent.

• Stipulations in the facility letter will cover interest and charges, and will indicate clearly that the facility is with recourse to the exporter.

• Upon completion of arrangements (including any legal documentation) the exporter will be able to draw a term bill of exchange on the bank, and the bank will accept.

• The bills must be for amounts over a minimum value to be acceptable for trading in the London discount market, and the face of the bill may need to be annotated to indicate that it has been drawn to cover receivables.

• The accepted bill could be discounted by the drawee bank itself, with discounted proceeds being credited to the exporter's account.

•  In the alternative, the accepted bill may be given to the exporter so that he can discount it himself in the market.

The advantage to the exporter may well be that such outstanding bills are shown in the balance sheet as bills payable (rather than loans or overdrafts), so that the total bank borrowing may be shown at correspondingly lower levels.

On maturity of the bill, the exporter's account (which by then should have been credited with the receivables from the buyer) would be debited.

Confirming Houses/Export Houses

General principles are that:

•  Confirming houses may:

1. guarantee payment by the buyer, or

2. undertake to pay the exporter on behalf of the buyer.

•  Confirming houses act as agents for the buyer

•  There is little contact between the exporter and the buyer

•  The exporter runs no overseas credit risk.

Operational procedures are designed to suit individual requirements.

Problems that compromise payment

If – after he has despatched the goods to his customer and presented the required documents to the bank authorised to honour the Credit – the exporter still does not get paid, he has a problem. He does not have his money, and his goods are beyond his control – either in transit to the buyer’s country or lying on the quayside or at some other place of discharge.

What may make the exporter’s problem worse is the fact that he may himself have contributed to the disaster. For this reason, the exporter must have some idea of the factors governing what makes documents acceptable and unacceptable and what roles banks play in handling documentary Credits.

Back to contents

Banks and their role

The primary responsibilities of the banks and parties involved in a documentary Credit operation are shown below.

Exporter and Buyer Discuss and agree the terms and conditions of the sales contract.

Applicant for Credit [ i.e. Buyer]

Applies to his bank (the Issuing Bank) to establish a Credit, in terms of the sales contract, in the exporter's favour. Agrees to the Issuing Bank's terms and conditions for establishing the Credit. Undertakes to pay the Issuing Bank in respect of stipulated documents and compliance with the terms and conditions of the Credit.

Issuing Bank Sets up the Credit in line with the applicant's [buyer's] instructions.

Undertakes to the beneficiary [exporter] that payment will be made on presentation of the stipulated documents and compliance with
the terms and conditions of the Credit.

Examines documents presented under the Credit. Pays (either directly or through a nominated bank) in respect of documents that conform with the requirements of the Credit. Rejects documents that do not conform with the requirements of the Credit.

Advising Bank as Advising Bank only

Checks the authenticity of the Credit.  Advises the Credit to the exporter – stressing that, in advising the Credit, the bank undertakes no obligation.  If also the exporter's bank, and at the exporter's request  Checks that the terms and conditions of the Credit are capable of being complied with, and advise whether the Issuing Bank and the  country it is in are undoubted and stable. Gives the exporter informal guidance in matters connected with the Credit including documentation.

Beneficiary of Credit [exporter]

Checks the terms and conditions of the Credit against the agreed sales contract; seeks his bank's advice; gets clarification from the buyer and makes sure all necessary amendments to the Credit are received before he ships.

Ships goods in accordance with the sales contract and in compliance with the terms and conditions of the Credit. Presents documents stipulated in the Credit to the appropriate bank  (Nominated, Advising, Confirming).

Nominated Bank i.e. a bank that does not confirm the Credit

May also be Advising Bank.  Checks authenticity of Credit. Is authorised to act as requested by the Issuing Bank. Whilst giving no undertaking of its own, agrees to be the bank through which the Issuing Bank's liability under the Credit may be fulfilled. Checks the documents that the beneficiary presents under the Credit.

If the documents accord with the Credit, honours the Issuing Bank's liability under the Credit, with recourse.

Confirming Bank i.e. a Nominated Bank that does confirm the Credit

May also be Advising Bank.  Checks authenticity of Credit. Is requested to act by the Issuing Bank. Gives its own undertakings (in addition to those of the Issuing Bank) in respect of the Credit. Checks the validity of documents that the beneficiary presents under
the Credit. If the documents accord with the Credit, honours the obligation under the Credit without recourse.

The exporter’s main point of contact is the Advising Bank (usually his own bank). The Advising Bank has a duty to check the apparent authenticity of the Credit sent to the exporter. In normal course of business, the Advising Bank may also check the Credit to see that it is workable, at least to the extent that compliance with the Credit terms is not outside the exporter’s control. The exporter should work closely with the Advising Bank, since it is one of his most important contacts and a source of advice and assistance at every stage.

In collaboration with