Tuesday, August 22, 2006

Short Review: The Seven Sisters

Short Review of, "The Seven Sisters: The Great Oil Companies and the World They Made" by Anthony Sampson, Hodder and Stoughton, 1975, ISBN 0 340 19427 8
This book came into my hands quite by fluke while pawing through the stacks at The Odd Book.
http://www3.ns.sympatico.ca/theoddbook/ It came out of there at a price of $2.oo which was a rare find considering the usual prices there are somewhat higher.
The book details lots of interesting historical accounts of the global oil-catting industry. http://www.h-net.org/~business/bhcweb/publications/BEHprint/v024n1/p0135-p0146.pdf#search=%22oilmen%20making%20love%20%22
However having followed a Harvard educated Ph.D. candidate through the streets and narrows of Baku in 2001 I did feel that Sampson has missed some of the marks that led to the explosive growth attributed to Shell Oil Company and the Noble brothers. His book suggests few instances of completely non-Russian influenced dealings on the Caspian Sea which would preclude the two known take-overs nationalisations of the fields under the Russian yolk according to local experts. Thus no periods of non-governmental control over either production, process, or profits are noted in The Seven Sisters. However Baku natives will tell the stories, and the local barons and catters who emerged as millionaires from the murky oil soaked mires are well remembered, as are their vast architectural legacies all produced during a brief period of wild-west inspired independence prior to and between the world wars.
A few bio-fuel enthusiasts thought this title so important that they have published Chapters 8-14 in their entirety. http://journeytoforever.org/biofuel_library/sevensisters/7sistersToC.html
Wikipedia also includes some ready reference. http://en.wikipedia.org/wiki/Seven_Sisters_(oil_companies)
It would be hoped readers might remind their government representatives of the day that alternatives to oil must be the priority of all business futures. http://journeytoforever.org/ Reading "The Seven Sisters" will surely relate that much of the current past century of conflict has revolved around oil and through the nations that:
  • possess it
  • process it
  • buy and sell it
  • exist merely on paper as border areas through which it is piped

Global business might prove the term innovation by doing without oil sooner rather than later. It is said business processes only ever change out of necessity. So the hope that it runs dry before humanity does is fairly wishful thinking but perhaps the only reality through which such monopolies will have had their day.

C is for Containers

Nicely illustrated container

All containers too- as long as they are plastic?
Worst case scenario- insurance nightmare.
Shit happens.
Good Insurance Process Illustration in English- Courtesy of The Chinese
Growing Chinese Logistics Provider (Seeks US Strategic Partnerships)

Shipment: Worst Case Scenarios

Shipment: Documentation Samples

Letter of Credit Diagrams

Getting Results From Credit and Collection Letters

Getting Results From Credit and Collection Letters

T HE AREA OF CREDIT AND COLLECTION IS a delicate one in which all dealings require the gentle touch. Each letter you send should be designed for a specific function, and, regardless of what that function is, each letter should fulfill it with dignity. You will notice as you read the letters in this chapter that dignity is never sacrificed for effect.

One of your most important needs in this area is a definite policy for extension of credit and for collection of overdue bills. You probably have already established such a policy, and it includes the practice of checking the ratings and references of your potential credit customers. This gives rise to the need for the credit investigation letter. After the results of this letter are in, you will need either a letter granting credit or one refusing credit. Another widely needed and used letter is one inviting charge accounts. Occasionally you may have to use a letter of suggestion that tells a customer to change his type of credit account to one better suited to his situation.

You will no doubt find that quite a few of your customers, business as well as individuals, have to be prodded into paying their bills. Some of them need but a gentle reminder; some must have several reminders; others won't pay until they receive an ultimatum. You will need collection letters for all these contingencies. When to send these letters is a matter of company policy. But as to the letters them­selves, those included in this chapter should cover most situations you will have confronting you. All you need do is turn to the page with the appropriate letter and use it exactly as is or adapt it to your particular need. The difficult work of writing the letter has already been done for you.


Credit Investigation Letter. With only minor adjustments you can use the same letter to investigate either the credit rating of an individual consumer or the financial standing of a company. When writing to an applicant for financial reports, use the paragraphs marked "to applicant."

General rules.

Don't waste time; come right to the point.

State what the information is you are looking for and why you need it. Make clear that you will keep such information confidential. Always enclose a self-addressed, stamped reply envelope.

Alternate phrases.

(a) Mr. _______, who resides at ___________________, has applied for a
credit account with our company and has given your name as a reference.

(To applicant) Please send us at your earliest convenience copies of your latest balance sheet and profit and loss statement. These reports will help us decide on the amount of credit we can extend to you.

We are in the process of gathering information about the financial respon­sibility of_______________ .

(b) If you would be kind enough to supply us with any information that will help
us evaluate Mr._____________ as a credit risk, both we and Mr._____________
would appreciate it. Information such as his standing in the community, his reputation for reliability, and his financial standing will be of utmost interest to us.

(To applicant) I'm sure you realize how helpful financial reports are for com­panies that work primarily on a credit basis. In your case, the terms you ask require a careful analysis of your financial standing before we can properly decide on the course of action suitable to both of us.
It is our understanding that they have an account with your bank. Would you please send us whatever information you have relative to their ability to enterinto a $________ transaction.

(c) (To applicant) Any information that you send us—and the fact that you seatus information—will, of course, be held confidential. We enclose a reply en­velope for your convenience.

Your financial reports will be held in the strictest confidence and used only to help us make our decision. We are enclosing a reply envelope for your use.

We appreciate your courtesy in supplying us with information, and will, off course, keep everything strictly confidential. We are enclosing a reply envelope for your convenience.
Adapted from: The Editorial Staff (1965) Director's and Officer's Complete Letter Book, Prentice Hall, N.J.

Writing Business Proposal Letters (Pre-Reading)

Writing Business Proposal Letters (Pre-Reading)

What is A Business Proposal?

A business plan is written to manage your company and raise capital, a business proposal is an unsolicited or solicited bid for business. There are two types of business proposal that can help you gain more business to grow your company.


1. Capital:
Main Entry: equity capital Function: noun : capital (as stock or surplus earnings) that is free of debt; especially : capital received for an interest in the ownership of a business

2. Bid:
transitive verb 3 a : OFFER -- (1) : to offer (a price) whether for payment or acceptance (2) : to make a bid of or in (a suit at cards)intransitive verb : to make a bid

3. Solicited:
transitive verb1 a : to make petition to : ENTREAT b : to approach with a request or plea 2 : to urge (as one's cause) strongly3 a : to entice or lure especially into evil b : to proposition (someone) especially as or in the character of a prostitute4 : to try to obtain by usually urgent requests or pleas intransitive verb1 : to make solicitation : IMPORTUNE2 of a prostitute : to offer to have sexual relations with someone for money

4. Unsolicited: Adj.
unsolicited - not requested; "an unsolicited nomination"
Synonyms: unsought

5. Proposal:
Function: noun1 : an act of putting forward or stating something for consideration 2 a : something proposed : SUGGESTION b : OFFER; specifically : an offer of marriage


1. Use the five vocabulary items to write five sample sentences relating to a business proposal context.

2. Complete the survey questionnaire and complete the TCI Export Quiz. What parts are difficult to understand?

Writing Business Proposals (Lecture)

What is a business proposal?

It is a letter which demonstrates that your company not only has a product or service for sale but also that your sales ability includes knowledge of potential customers, partners, market trends, and future categories or segments.

There are two kinds of business proposals:
  • Solicited proposals
  • Unsolicited proposals

Solicited Business Proposal:
A solicited business proposal is when a corporation or government is looking for a product or service to fulfill a project or complete a task. They allow companies to bid for the project. An open bid is placed on the market with other companies competing for an interview spot. The winning candidate is offered the project.

Unsolicited Business Proposal:
At some point, your small business may want to do business with a larger company or forge a joint venture.

A well-written business proposal can win the hearts and minds of your target audience. That is why it is a lot like a marriage. One must win the heart of the marriage partner as one win’s the bid.

If you need to write a business proposal to win a bid, you will need to know the key winning elements of a successful proposal. Make sure your proposal stands out in the stack of competitor proposals by including the following 5 elements:

5 Key Elements of Winning Business Proposals

· Solutions: After you have written a lead paragraph on the company's needs and problems, follow up with a solid presentation of how your business can provide solutions. The key here is to promise solutions you can deliver.

· Benefits: All winning business proposals, clearly outline for the company the benefits to be gained from doing business with you. If your small business can offer complete confidentiality and meet tight deadlines state it in your benefits section.

· Credibility: This is often the overlooked portion of a business proposal but all winning proposals glow with credibility. If you have worked with clients in the same field or have an award-winning business, then third-party endorsements will build credibility.

· Samples: A business proposal with samples and evidence of your ability to deliver is vital to gaining the winning bid. A small sample of your work can show your ability to do the job.

· Targeted: A winning business proposal is all about communication. Speak in a language spoken by your intended audience. If the proposal evaluators are from an engineering background or financial department use the appropriate jargon.

Ultimately, the best business proposal is none.
When your company is well-positioned and unique in the marketplace then it is only you who can meet the needs of the company requesting the bids.

In the end, you may not win all bids, but will win business that best matches your company to the prospective business. A win-win for all parties involved.

Opportunities and Pitfalls of Business Proposals

Be sure you know who you're dealing with. Always verify addresses and avoid doing business in countries that are known for fraud. If you can't identify a potential customer or the country of origin of an order, don't proceed with the deal.

Other characteristics of the potential customer's country are also important. How good is its communications infrastructure? How stable are its financial systems? What level of political risk does it represent? As in all export operations, due diligence is an essential precondition of success.

Market research is a key component of evaluating e-leads. The principles of market research are the same for e-business exporting as they are for traditional exporting.

Credit assessments are as important in e-business as anywhere else. Credit card fraud is on the rise, especially in certain parts of the world, so be careful when dealing with credit card purchases from these regions.


About.com (2006) “The Winning Elements of Business Proposals”,
[Accessed: August 13, 2006
Export Source (2006), “Checking E-Leads”
[Accessed: August 13, 2006]
Merriam-Webster Dictionary Online (2006)
http://www.webster-dictionary.org [Accessed: August 13, 2006]

Business Letter of Introduction

Business Letter of Introduction

A business letter of introduction may be delivered by the bearer in person, as such introductions are for business purposes only, and necessitate no social obligations. In style they should resemble other business letters; that is, they should be brief and to the point. Letters of introduction will be found very useful to travelers, or to persons who are about to change their place of residence.

There are two parts to writing a business letter of introduction, Introducing a person or company and Introducing a product, equipment or service. The following explains how to write both types of business letter of introduction.

Introducing a person or company

Introduce the person or company and give the reason(s) for the introduction. If possible, express the reasons in terms of the reader's interest.

In the business letter of introduction, give background information from your personal experience about the person, service, product, or company.

Indicate any referral action you've taken, but avoid obligating the reader. Make it easy for the reader to make contact.

Express appreciation for any courtesy shown to the person being introduced.

Introducing a product, equipment or service

Introduce the product, equipment or service immediately.

Explain how the new product, service, or equipment differs from whatever is already available: Is it less expensive? Easier to use? More accurate? Safer?

State exactly what its significance is.

Mention any exceptions to primary use or application. Who is ineligible to use this service, product, form, equipment? What are its limitations?

Make the item or service easy to investigate. Most readers approach anything new with a wait-and-see-what-everybody-else-thinks hesitancy. Consider offering a sample; an attached illustration; a “case study” explanation; a demonstration; a class; or readily available assistance by phone, visits, or display.

In memos, use the term “new” or its equivalent in the subject line to call immediate attention.

Business Letter of Introduction (Sample)
The following example is an example of a business letter of introduction.

Dear Miss Pretext,

I want to introduce you to Excuses Inc.. I have been doing business with them for quite some time. We have joint ventures concerning the fabrication of lies and excuses -all ventures that you, too, might be interested in pursuing.

Excuses Inc. is opening an office in your area. Mr. Deception will be in charge of that location. He is a good friend of ours and extremely knowledgeable about our industry.

To give you a better idea of Excuses Inc.’s activities, I’m enclosing a recently prepared brochure.

When Mr. Deception contacts you, I’ll appreciate any cooperation you can give him. I do think you’ll find several common business interests to pursue.


John Doe

[Accessed: August 15, 2006]
[Accessed: August 15, 2006]
[Accessed: August 15, 2006]

General Information Required From The Foreign Buyer For Credit Processing of Export Financing

General Information Required From The Foreign Buyer For Credit Processing of Export Financing:

1. Company name, address, telephone number, fax number, e-mail address, contact person, and the date and place of incorporation.

2. A description of the company business. Supply any company brochures, annual reports, or other literature describing the company.

3. A description of how the financed equipment or service will be used, as well as a cash flow projection regarding loan repayment from the utilization of the equipment or service being financed.

4. A brief history of the officers of the company to include names, titles, ownership percentage, time with company and day to day responsibilities.

Financial Data:

The last three years of balance sheets and income statements and the most recent interim statements if the last fiscal year ended more than nine months prior. If the financial data was not prepared by a Certified Public Accountant, the data should be signed and dated by a principal of the company. Certified financial statements are necessary for loan of $1,000,000 or more.

Banking History of Business Checking and Savings Account:

Include banking references on all of the company bank accounts. This must be presented on the bank's stationery and must include the bank's name, address, telephone number, fax number and contact person. Have the bank include the account number, opening date of the account, a year to date average balance and a current balance.
Commercial Bank Loans:

This must be presented on the bank's stationery and must include the bank's name, address, telephone number, fax number and contact person. Have the bank include the loan number, opening date of the loan, the original loan dollar amount, the terms, balance and a rating of how the loan has been paid. Include the information on all bank loan references.

Business Credit References:

Include three credit references from suppliers who extend you credit. This must be presented on the supplier's stationery and must include the supplier's name, address, telephone number, fax number and a contact person. Have the supplier include the account number, opening date of the account, the terms, credit limit, balance and a rating of how the account has been paid.

Equipment Description:

Provide information on the equipment to be financed. US supplier's company names(s), address, telephone and fax number, contact person, manufacturer's name and model number(s).
http://www.diamondcapital.com/Description___Benefits/Export_Financing_Solution_Page/Export_Financing_Page_2/Export_Financing_Page_3/Export_Financing_Page_4/export_financing_page_4.html [Accessed: August 13, 2006]

Letters of Credit Notes

Letters of Credit


A letter of credit is a bank payment arrangement where the bank undertakes to pay the letter of credit's beneficiary upon presentation of acceptable documents. In an export letter of credit transaction, the exporter and foreign buyer agree to exchange shipping and title documents for payment using a letter of credit. The foreign buyer then has its bank establish a letter of credit in favor of the exporter (based on the foreign buyer's established credit arrangement with its bank). This letter of credit is forwarded to the exporter's bank who advises the exporter that the letter of credit has been established, and its terms. The exporter ships the goods as per its contract with the foreign buyer and then presents the shipping and title documents to its own bank for payment.

Letter of credit payment terms account for a large portion of total Korean export sales, but use of letter of credit terms increases substantially when Korean firms sell to riskier, more distant markets. The popularity of letters of credit stems from the benefits that accrue to both exporters and foreign buyers. For exporters, letters of credit secure payment upon fulfillment of contractual obligations as bank credit risk has been substituted for buyer risk. The ability of foreign buyers to establish and comply with letters of credit is also an indication of their overall creditworthiness. For foreign buyers, letters of credit ensure that the seller will only be paid if the goods have been shipped as required and the stipulated documents presented to a bank intermediary. Letters of credit also offer a deferred payment financing option where the foreign buyer can be offered extended terms through the use of a term draft, which the Korean exporter can convert into "cash on delivery" terms by discounting at its bank.

Letters of credit are solidly entrenched in international trade and are processed, relatively consistently, by banks operating in different commercial and legal environments worldwide. Bank processing of letters of credit is governed by the Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No. 500 (UCP 500). This chapter describes the nature and mechanics, forms, special features, and management of letters of credit as determined by their commercial use, bank processing practices, and UCP 500 rules.

The nature of letters of credit sets out a working definition of letters of credit, the separation of letters of credit and commercial contracts, the letter of credit issuance process, and the information requirements for letter of credit applications.

Working definition of letter of credit

In accordance with the provisions of UCP 500, the terms "documentary credit" and "standby letter of credit" mean any arrangement where a bank, acting at the request of a customer, is to make payment to a third party (the "beneficiary"), or authorizes another bank to make such a payment. The letter of credit can also:

• be put in place by the bank acting on its own behalf;
• be made payable to the order of the beneficiary;
• require the bank to accept and pay bills of exchange (drafts) drawn bythe beneficiary; and
• require the negotiation of payment, or acceptance, against the presenta­tion of stipulated documents by the beneficiary.

Separation of letters of credit and commercial contracts

Letters of credit used to pay for the export sale are separate from the underlying commercial contract between the Korean exporter and the foreign buyer. This is a valuable feature in making the payment under the letter of credit secure as the foreign buyer cannot use a claim of non-performance under the commercial contract to stop payment to the exporter. This separation of commercial contract and letter of credit also means that the bank does not attempt to satisfy itself that the terms of the commercial contract have been fulfilled. Rather, the bank looks solely to the documentary requirements of the letter of credit and whether they have been perfectly satisfied when determining whether to make payment under the letter of credit. Normally, the bank cannot make payment under the letter of credit if the documents are not in order, even if the exporter has essentially satisfied the terms of the commercial contract. In this latter regard, the exporter's bank may be willing to advance funds under the letter of credit to the exporter against discrepant documents against the exporter's guarantee of reimbursement to the bank if the foreign buyer's bank is unwilling to reimburse the exporter's bank because of the discrepancies in the documents.

Letter of credit issuance process

The letter of credit issuance process involves four key parties: the foreign buyer, the foreign buyer's bank, the exporter's bank, and the exporter. Under UCP 500, these parties are called "the Applicant," the "Issuing Bank," the "Advising (or Letters of Credit Confirming) “Bank and the Beneficiary” Additional parties, the so-called "Nominated Paying/Negotiating/Accepting Bank" and the "Transferring Bank," may be added to the process. This can occur if: (1) the advising (or confirming) bank is located too far away from the exporter to conveniently process the documents and effect payment, negotiation of documents, or accep­tance of the bill of exchange; or (2) a transferring bank is required to assist in the transferring of documents and payments between the advising (or confirm­ing) bank and the issuing bank. However, the process is usually a bit simpler, as the advising bank may also be nominated to be the confirming and/or paying, accepting, or negotiating bank. Also, if the letter of credit is "freely negotiable" any bank is a nominated bank for purposes of processing the letter of credit. It is important to note that the advising or confirming bank processing the letter of credit with the exporter need not be the exporter's regular commercial bank.

The process begins as the exporter and foreign buyer negotiate the sales contract (1), which calls for payment by letter of credit against specified documents. The contract should include a description of the goods, the amount, the unit price, the time allowed for shipment and presentation of the documents, the currency, the method of payment, and the terms of delivery.

Procedure Used in a Letter of Credit
Advising/Confirming bank

The foreign buyer informs the issuing bank of its requirement for a letter of credit in favor of the exporter using the issuing bank's application for a letter of credit and agreement forms. These forms constitute the payment and reim­bursement contract between the foreign buyer and the issuing bank. The application (2) also serves as the foreign buyer's instruction to the issuing bank as to the terms and conditions of the letter of credit. These terms and conditions should ensure that the letter of credit's documentary requirements track, as closely as practically possible, the exporter's obligations under the commercial contract in terms of mode and timing of shipment, insurance coverage, invoice and certification requirements, etc. Before issuing the letter of credit, the issuing bank will require the foreign buyer to meet its credit requirements for the establishment of the letter of credit. This is because the issuing bank must pay the letter of credit regardless of whether the foreign buyer is able to reimburse it at the time of payment.

The issuing bank then sends the letter of credit (3) to the advising bank, which checks the apparent authenticity of the letter of credit. The advising bank then advises (4) the exporter of its receipt of the letter of credit, and the documentary requirements of the letter of credit. Upon receiving the letter of credit, the exporter checks out the credit's terms and documentary requirements to ensure that it is sufficient to meet the foreign buyer's payment obligations and that the required documents can be supplied in the time allowed. If the credit is insufficient in amount, or calls for documents that the exporter will not be able to supply before the credit's expiry, the exporter must have the foreign buyer instruct its bank to amend the letter of credit.
If the letter of credit is acceptable, the exporter ships the merchandise (5) to the foreign buyer. Payment is processed under the letter of credit upon presentation by the exporter of the required documents (6) to the advising bank. The advising bank then examines the documents to ensure that they appear, on their face, to meet the terms and conditions of the letter of credit. If the documents are in order, the advising bank (if nominated to pay/negotiate the letter of credit, and prepared to do so) informs the issuing bank and arranges for payment (7) to the exporter upon the receipt of funds from the issuing bank. (If the bank receiving the documents from the exporter was a "confirming bank," payment would be made to the exporter upon the confirming bank's determina­tion that the documents were in order.) The issuing bank receives the documents (8) from the negotiating/paying bank, checks them for compliance with the credit, and then sends payment (9) to the advising bank. The issuing bank then presents the documents (10) to the foreign buyer to be reimbursed for its payments (11) under the letter of credit. The foreign buyer takes the shipping and title documents provided to claim the goods upon their arrival.

Information requirements of a letter of credit

The applicant must provide certain information to the issuing bank for incorpo­ration in the letter of credit. The application for a letter of credit should include:

1. The full and correct name and address of the beneficiary (the Koreanexporter);
2. The designated bank of the Korean exporter;
3. The amount of the credit and its currency code;
4. Whether the credit is revocable, irrevocable, or irrevocable with therequested confirmation of the nominated (Korean) bank;
5. Whether the credit is to be available by payment, deferred payment,acceptance, or negotiation;
6. The party on whom drafts are to be drawn, and the tenor (time period)of the drafts;
7. A brief description of the goods, including details of quantity and unitprice;
8. Details of the documents required, with the express indication of the typeof transport document required;
9. Where the goods are to be shipped from and the place of final destination,or the port of discharge;
10. Whether freight is to be prepaid or collect;
11. Whether transshipment is allowed;
12. Whether part shipments are allowed;
13. The last date for shipment;
14. The period of time after shipment allowed for the presentation of docu­ments;
15. The expiry date of the credit and the place for presentation of documents;
16. Whether the credit is to be a transferable credit;
17. How the credit is to be advised, i.e., by mail or by electronic communi­cation;
18. Additional conditions, if any, in documentary form; and
19. Who is responsible for paying bank charges outside those of the issuingbank.

Routine users of letters of credit can often remit their instructions regarding the establishment of a letter of credit to their bank by personal computer. As such, applicants can re-create repetitive letters of credit and make changes such as dates, amounts, and quantities without rewriting the entire letter of credit. This allows applicants to reduce letter of credit preparation time and increase the accuracy of applications.

Forms of Letters of Credit

Letters of credit vary in form, and accordingly provide greater and lesser amounts of payment security. In particular, letters of credit may be:
• irrevocable or revocable;
• restricted or (freely) negotiable;
• advised or confirmed; and
• available by sight payment, by deferred payment, by acceptance, or bynegotiation.

Irrevocable versus revocable

An irrevocable letter of credit may not be modified, amended, or cancelled without the expressed consent of the issuing bank, the confirming bank (if any), or the beneficiary. It constitutes a definitive engagement of the issuing bank to honour the letter of credit provided that the documentary and other conditions have been met. By contrast, a revocable letter of credit may be modified, amended, or cancelled by the applicant via the issuing bank without the beneficiary's consent, by giving notice to the banks involved at any time up to the payment of the letter of credit. Because a revocable letter of credit leaves the exporter exposed to the risk that the buyer may decide not to pay for the goods, revocable letters of credit are used primarily between affiliated compa­nies and not between unrelated companies. Under UCP 500, letters of credit are deemed to be irrevocable unless the letter of credit clearly states they are revocable.

Restricted versus negotiation

A restricted letter of credit limits the payment obligation of the issuing bank to the named paying bank. A negotiation letter of credit provides that the letter of credit may be negotiated by the nominated advising bank and that the issuing bank's engagement to pay will be extended to third parties negotiating the credit on behalf of the issuing bank. Unless specifically indicated otherwise, all letters of credit are negotiation letters of credit.

Advised versus confirmed

An advised (unconfirmed) letter of credit involves the advising bank informing the beneficiary that it is passing on the issuing bank's letter of credit without any engagement on its own part. The role of the advising bank is to take reasonable care to ensure that the credit appears to be authentic.2 Unless it has added its confirmation to the credit, the advising bank has no obligation to the beneficiary to pay, accept, or negotiate drawings. However, it may choose to assume the nominated role upon presentation of documents in order to pay the beneficiary. Negotiations under unconfirmed letters of credit are usually with recourse to the beneficiary.

Confirmation of the letter of credit involves the confirming bank taking on the same engagement as the issuing bank. As such, the confirming bank engages to pay the beneficiary upon the presentation of acceptable documents in com­pliance with the conditions of the letter of credit. This payment is without recourse to the beneficiary. Further, the confirming bank's engagement to pay

Fraudulent letters of credit are a well-known fact of life among bank personnel processing letters of credit. It is clearly prudent to ensure that letters of credit received by the exporter from unfamiliar foreign buyers are examined by bank personnel for authentication before any costs are incurred on the part of the exporter.

Letters of Credit
The beneficiary stands even if the issuing bank is unable to honor its commit­ment to reimburse the confirming bank. Exporters can use Korean bank confirmation of a foreign bank issued letter of credit to avoid the risk of non-performance by the foreign bank (whether due to the bank's own failure or country risks that prevent the bank from honouring its letter of credit). However, the request that a Korean bank add its confirmation to the issuing bank's letter of credit must come from the issuing bank (upon the instructions of the foreign buyer). A Korean bank cannot add its formal confirmation of a letter of credit — or secure its right to reimburse­ment from the issuing bank—without being asked to do so by the issuing bank.

However, it is occasionally possible for a Korean exporter to obtain a so-called "silent confirmation" whereby the Korean bank will agree to honour the letter of credit whether or not the issuing bank is able to honour its obligations. This silent confirmation is not a true confirmation per se, but rather a side agreement between the exporter and the Korean bank. It does not establish the rights of a confirming bank on the issuing bank. Silent confirma­tions tend to be used in circumstances where the issuing bank does not allow its letters of credit to be confirmed, but where the risks involved are such that the exporter needs the protection of a Korean bank confirmation. Where confir­mation of the letter of credit by a Korean bank is not possible, export credit insurance may be available to cover the risks of non-payment. This may be used in circumstances where the confirming bank does not have adequate country risk appetite for the foreign buyer's issuing bank.

Payment options

Letters of credit can be available by demand payment, sight payment, deferred payment or usance, acceptance, or negotiation. Both demand and sight pay­ments call for immediate value being given to the beneficiary upon satisfaction of the terms and conditions of the letter of credit. However, in The Republic of Korea, three days of grace are added to sight payments unless otherwise stated. Deferred payment calls for payment by the paying bank at a determinable future date without the presentation of a draft. Notably, the presentation of drafts is avoided in countries where there is a high stamp duty levied on the instrument. An acceptance credit calls for a nominated bank to accept drafts drawn on the confirming, issuing bank, or another drawee bank upon presentation of accept­able documents. Negotiation means the giving of value to the exporter for drafts and/or documents presented to the negotiating bank in compliance with the terms of the letter of credit. Negotiation with the issuing or confirming banks calls for payment, without recourse, to the drawers and/or bona fide holders of the draft.

Special Features of Letters of Credit

There are many special features of letters of credit that can be very useful to both Korean exporters and their foreign buyers. Such features include acceptance financing, partial shipments and red clause credits, transferable, assignable and back-to-back credits, standby credits, and revolving credits.

Acceptance financing

Letters of credit often call for the acceptance of term drafts by the advising, confirming, or issuing banks. In essence, term drafts provide the foreign buyer with financing for the period of time that the goods are held in the channels of trade (typically 30 to 180 days). These term drafts may be held until maturity by the exporter. If so, the exporter is providing, with the guarantee of the accepting bank, financing for the transaction. These drafts, called "bankers' acceptances," can also be discounted by the exporter at a bank and re-sold in the financial marketplace.

The discount rate for bankers' acceptances depends on the currency of the draft, perceived creditworthiness of the issuing bank, the term provided, the amount of the draft, and the issuing bank's country rating. As such, very competitive trade financing can be obtained from discounting bankers' accept­ances. The exporter can also arrange to receive the face value of the accepted draft by having the credit stipulate that "discount charges are for the account of the buyer." In this case, the buyer pays the trade financing charges directly instead of through a higher export sales price.

Working capital relief to the exporter

Partial shipments and drawings, installment shipments and drawings, and red clause credits are all means of providing working capital relief to the exporter through a letter of credit. In the case of partial shipments, the exporter can ship and receive payment for a portion of the total supply order covered by the letter of credit. This frees the working capital being held in that portion of the supply order that has already been completed and made ready for shipment. Under UCP 500, partial shipments and drawings are allowed under a letter of credit unless specifically stated otherwise.

Installment shipments and drawings provide for a large sales contract being paid through a single letter of credit to be divided into smaller portions for completion, shipment and payment. This allows the export sale to be broken into more manageable portions by the exporter, and so eases total pre-shipment financing requirements. However, if installment shipments and drawings within given periods are stipulated in the letter of credit and an installment and/or drawing for a given period is missed, the letter of credit may not be used for any subsequent shipments and drawings without amendment.

Red clause credits are letters of credit that contain a clause (often printed in red) authorizing the paying bank to make advances to the exporter with which to purchase the goods to be shipped under the letter of credit. These advances are deducted from the amount due to be paid when the documents called for are presented. If the exporter fails to ship the goods, or cannot do so before the expiry of the letter of credit, the issuing bank is required to reimburse the paying bank. The issuing bank then looks to the foreign buyer to recover its payments.

Transferable credits, assignment of proceeds, and back-to-back credits

Transferable credits, assignments of proceeds, and back-to-back credits are used by exporters to share the proceeds of their letter of credit with their supplier(s). Each of these credits has special features that govern its use. A transferable credit involves the first beneficiary (the exporter) assigning the right to perform, and receive payment, under the original letter of credit to a second beneficiary (a supplier). An assignment of proceeds involves the exporter assigning a portion of its proceeds under the letter of credit to a supplier, but not its right to perform. The back-to back credit involves the exporter using the original letter of credit as collateral for the issuance of a second letter of credit in favor of the supplier. This last facility is not usually encouraged by banks.

Transferable letters of credit

A letter of credit can be transferable only if it is expressly designated as "transferable" by the issuing bank on the instruction of the applicant (foreign buyer). The transfer is of the first beneficiary's rights under the letter of credit to one or more second beneficiaries. That is, the second beneficiary obtains the right to present drafts and documents and to make demand for payment. Consequently, the first beneficiary's transfer of a portion of the letter of credit to a second beneficiary can result in the foreign buyer receiving goods from an unknown supplier.
At the time of making a request for transfer, the first beneficiary must instruct the transferring bank whether to advise the secondary beneficiary(ies) of amendments to the letter of credit. Further, if the letter of credit is transferred to more than one second beneficiary, refusal of an amendment by one second beneficiary does not prevent another second beneficiary from accepting the amendment. The letter of credit will remain unamended for second benefici-ary(ies) who rejects the amendment.

A transferable credit can be transferred only once. Consequently, the letter of credit cannot be transferred from a second beneficiary to a third beneficiary. Transfer of the letter of credit to more than one second beneficiary (as referenced above) is allowed, provided partial shipments and drawings are allowed, with the aggregate of such transfers being considered as only one transfer. The retransfer of the letter of credit back to the first beneficiary from the second beneficiary (ies) is also allowed.

The credit can be transferred only on the terms and conditions specified in the original credit except for the amount of the credit, any unit price stated in the credit, the expiry date, the last date for presentation of documents, and the period of shipment. Each of these items can be reduced or shortened to allow the first beneficiary to substitute its own invoices and prices, and demand for payment up to the difference between the original credit and the aggregate of the demands made by the second beneficiaries. Charges in respect to the transfer of the credit to the second beneficiary (ies) are for the account of the first beneficiary unless otherwise stated.

Assignment of proceeds under letters of credit

The foreign buyer may refuse to make the letter of credit transferable to safeguard its interests against commercial non-performance by unknown sup­pliers. Even so, the exporter can still assign its proceeds under the letter of credit to its suppliers. This assignment serves as collateral for suppliers who wish to secure their claim to payment from the exporter for goods supplied to the exporter for sale to the foreign buyer. In this regard, assignment of the letter of credit refers to the assignment of proceeds and not the assignment of the right to present documents and be paid under the letter of credit.

Assignment of the exporter's proceeds under the letter of credit should be by an irrevocable written instruction to the paying bank. These instructions should oblige the exporter to present the documents and drafts required by the letter of credit. The paying bank should then advise the assignees (the exporter's suppliers) of the assignment and the paying bank's agreement to pay out the proceeds accordingly. However, the paying bank should also advise the suppli­ers that the assignment of proceeds under the letter of credit does not constitute an irrevocable undertaking of the paying bank to pay the suppliers for goods supplied to the exporter. This is because the exporter may not be able to meet all of the terms and conditions for payment under the letter of credit.

Back-to-back letters of credit

There are no letters of credit with a back-to-back clause, per se. Rather, the term back-to-back letters of credit involve an exporter (who is the beneficiary of a letter of credit established by a foreign buyer) using the first letter of credit as collateral for the issuance of a second letter of credit in favor of its supplier. Back-to-back credits are used when the first letter of credit cannot be transferred to the exporter's suppliers, or when an assignment of the exporter's proceeds under the first letter of credit is considered insufficient security of payment for the supplier(s).
Back-to-back letters of credit are somewhat problematic. There is no guarantee that, once the beneficiaries of the second letter of credit have pre­sented their documents and been paid, the exporter will also be able to meet all of the terms and conditions of the original letter of credit and be paid. If the exporter is unable to be paid under the first letter of credit, then the second issuing bank (which had relied on the exporter's assignment of its proceeds from the first letter of credit for reimbursement) will have to pursue its claim against the exporter for payment in other ways.

To minimize the likelihood of the exporter not being able to meet the terms and conditions of the first letter of credit, the second letter of credit should require that the suppliers produce the same documents (except the exporter's commercial invoice) as required by the first letter of credit, in sufficient time to enable the exporter to present them before the expiry of the first letter of credit.

Standby letters of credit

A standby letter of credit can be used to guarantee performance by the applicant (the exporter, in this case). As such, a standby letter of credit represents an obligation to the beneficiary (the foreign buyer, in this instance) on the part of the issuing bank to pay amounts owed by the exporter to the foreign buyer because of non-performance under the commercial contract.

Standby letters of credit are typically used as advance payment guarantees for down payments received by the exporter and as performance guarantees under commercial contracts. Usually simple demand - - without proof of non-performance by the exporter — is all that is required by the foreign buyer to receive payment under a standby letter of credit. As such, exporter protesta­tions that performance has been rendered cannot stop the payment of the letter of credit.

Standby letters of credit can also be used to protect the exporter from the buyer's non-payment of recurring shipments. Here, the exporter desires the extra payment security afforded by letter of credit terms, but the foreign buyer and exporter wish to minimize banking and administrative costs. To accomplish both goals, the exporter and the foreign buyer can agree to: (1) the shipment of goods on open account terms (where title is transferred immediately to the buyer and the buyer remits payment by cheque, draft, or bank transfer); and (2) the establishment of a standby letter of credit in favor of the exporter (which could be drawn down by simple demand if payment is not received within a specified period of time). As long as the letter of credit is never drawn down, banking costs are limited to the costs of establishing the single letter of credit without the incurrence of document checking, document discrepancy and credit amend­ment, and funds remittance costs.

Revolving letters of credit

Revolving letters of credit are, upon use, automatically renewed or reinstated without specific amendments to the letter of credit. These credits are particularly useful for continuing shipments of a particular nature by the exporter to the foreign buyer over a specified period of time. For instance, a revolving letter of credit can be established that provides for a payment to the exporter of up to $15,000 per month upon the presentation of specified documents for a period of six months. This letter of credit is effectively for a total sum of $90,000.

Revolving letters of credit can be irrevocable or revocable. They can also be "cumulative" or "non-cumulative." Cumulative letters of credit allow sums not drawn down in a particular period to be drawn down in subsequent periods. In non-cumulative letters of credit, sums not used in a particular period are no longer available.

Management of Letters of Credit

This section sets out key management issues on letters of credit, including advantages and disadvantages to their use, financial aspects of letters of credit and how to guard against inappropriate letter of credit terms and document errors.
Advantages and disadvantages of using letters of credit

There are several advantages and disadvantages to using letters of credit.

The advantages include the facilitation of export sales through the use of letters of credit, the worldwide legal standing of letter of credit payment obligations, and the expert bank examination of shipping and title documents, which takes place in letter of credit transactions.
In particular, letters of credit facilitate export sales by:
• providing an independent bank credit backing and a clear promise to pay;
• providing lower cost trade financing through banker's acceptances;
• increasing the value of the export transaction by reducing the level ofcredit risk; and
• transferring foreign bank and country risk through Korean bank con­firmations.

Enhanced legal protection for export payments is gained through the various laws and regulations that govern the use of letters of credit worldwide, as well as through UCP 500, which clearly establishes the rights and obligations of the international banks processing letters of credit. Finally, expert bank checking of the shipping and title documents used in letter of credit transactions gives comfort that the export transaction conforms to established documentary standards.

The disadvantages of letters of credit fall largely in the administrative and financing costs associated with letters of credit, the administrative rigidity of bank processing of the credits, limited bank engagements with respect to the documents provided and examined, and the separation of the buyer's payment obligation from the seller's contractual performance. More particularly, letters of credit are costly to implement given the bank services rendered in establishing the credit, examining documents, dealing with discrepancies and amending the credit, and transferring funds. Also, because the banks are bound by UCP 500 and the various national laws governing letters of credit, banks require rigid adherence to the rules—with the result that payments can be delayed for goods that may have been supplied if letter of credit requirements are not complied with. However, even when the banks examine the various documents, they take no responsibility for documents that are not authentic or that fail to safeguard the buyer's interests under the credit. Finally, because banks pay against documents and not commercial performance, it is not possible for buyers to withhold payment when the goods shipped are not of acceptable quality or other specifications. For this reason, buyers must ensure that the documents stipulated in the letter of credit protect their interests through inspection documents, etc.

Financial aspects of letters of credit

There are a number of financial aspects of letters of credit that should be considered by exporters contemplating letters of credit for their export transac­tion. The presentation of acceptable documents under the letter of credit does not necessarily guarantee the immediate receipt of good value funds. Advised credits can require up to five business days, or longer, before the funds are received by the bank for the credit of the exporter or the bank is authorized to pay. Where the exporter is able to negotiate payment under an advised letter of credit, this payment may be reduced to cover the interest charges while the funds are in transit. The payment might also be made with recourse to the exporter, to cover the advising bank's risk of non-reimbursement from the issuing bank under an unconfirmed letter of credit.

Establishing a letter of credit can also be relatively expensive. While charges vary by bank and the factors involved, letter of credit charges often include a document handling fee of about $200, an ad valorem charge of .1% to .3% of the letter of credit, fees to amend the letter of credit and handle document discrepancies, and various administrative costs. As a result, the minimum charge for a letter of credit is about $350 with the usual charge about $500. Clearly, these charges make using letters of credit for smaller transactions of, say, less than $10,000, prohibitively expensive. The level of costs involved with letters of credit also suggests explicitly building them into the price of the goods or services being exported or, alternatively, negotiating to have the foreign buyer pay the costs directly.

Guarding against inappropriate terms and document errors

Exporters considering the use of letters of credit should visit their commercial bank's international trade centre. Estimates of non-compliant documents range as high as 80% for novice exporters while experienced exporters can reduce documentation problems to almost zero. Overwhelmingly, bank officers dealing with letters of credit (and exporter complaints regarding non-payment of their letters of credit) would prefer to educate the exporter in the use of letters of credit and their choice of documents. In fact, receiving incorrect documentation is usually a "lose-lose" situation for the bank and its customer. Substantial periods of time must be spent seeking corrections to non-compliant documents or amendments to letters of credit to allow their use. Not surprisingly, it is difficult to establish bank-customer goodwill while the customer goes unpaid from non-compliant documents.

To help avoid non-compliant documentation, exporters should seek expert advice on the terms and conditions that should be included (or excluded) in sales contracts that call for payment by letter of credit. In particular, care should be taken to avoid documents and conditions that are outside of the control of the exporter (such as foreign inspections or customs clearance documents4). The exporter should also review the pro forma letter of credit documentary requirements with a bank documentation officer to ensure that the terms and conditions can be met. A knowledgeable freight forwarder can also assist in lessening the documentation risks of the letter of credit transaction.

Upon receipt of the advice of the letter of credit from the advising or confirming bank, the following details should be checked on each letter of credit:

1. Whether the names and addresses of the applicant and the beneficiary are complete and spelled correctly;
2. That the letter of credit is irrevocable;
3. Whether the credit is confirmed, if required;
4. Whether the amount and currency of the letter of credit is acceptable;
5. Whether the shipping and expiry dates are acceptable, and whether thetime period for presentation of the shipping documents is sufficient (it ispreferable if the place of expiry is The Republic of Korea);
6. Whether partial shipments or transshipments are allowed;
7. Whether the bill of lading requirements are acceptable;
8. Whether the ports of shipment and destinations are specified correctly;
9. Whether the description of goods to be shipped is correct;
10. Whether the required documents can be supplied;
11. Whether the specified quality of goods is correct, and sufficient toler­ances are allowed;
12. Whether the insurance specifications are acceptable in terms of amountsand risk covered; and
13. Whether the letter of credit is available in The Republic of Korea by payment, negotia­tion, or acceptance (preferable).

Dealing with non-compliant documents

When a review of the letter of credit reveals errors or calls for documents that cannot be furnished by the exporter, the exporter must request an amendment to the letter of credit. To do so, the exporter contacts the foreign buyer, advising of the need for an amendment to the letter of credit. The buyer so informs the issuing bank, which advises the advising (or confirming) bank of the amend­ment, which, in turn, advises the exporter of the amendment. The letter of credit is so amended when all parties have agreed to the proposed amendment.

Often, however, the exporter's inability to comply with the terms and conditions of the letter of credit becomes apparent only after the goods have been shipped and the documents produced and submitted to the bank for payment. For instance, the documents may be produced in error or shipment may have been delayed by bad weather beyond the last shipping date specified in the letter of credit. In such cases, the exporter can:

1. Attempt to have the documents corrected by the party producing them. Here it is necessary to have the documents ready for resubmission within the time requirements for the letter of credit.
2. If the documents cannot be corrected, have its bank request authorityfrom the issuing bank to negotiate the draft, despite the discrepancies.
3. Sign an indemnity with the paying bank whereby the exporter will repaythe bank for advances made under the letter of credit, if the issuing bankrefuses to accept the documents.
4. Send the documents to the issuing bank on an approval basis. Here thedocuments are to be delivered to the buyer only upon the buyer'sauthority to pay or accept drafts. Non-compliance under the letter ofcredit risks non-payment.

A closing note on letters of credit

Letters of credit are specialized international banking documents that provide a secure means of payment for international trade transactions. However, the rules governing the use of letters of credit are fairly rigid and the administrative costs relatively high. These factors call for the careful use of letters of credit.

Letters of credit also seem to be somewhat prone to fraudulent use. Numerous instances of bogus letters of credit, drawn on fictitious banks, have occurred. Likewise, the presentation of acceptable documents under a letter of credit does not guarantee the provision of acceptable goods. Clearly, it is important for the Korean exporter and the foreign buyer to know one another, and each party's capabilities, before entering into letter of credit arrangements.

Finally, the use of letters of credit ought to be considered in light of the firm's risk management policies and objectives. Indiscriminate use of letters of credit for small export transactions will likely lead to poor cost/benefit ratios. Smaller sales are likely better financed and risk managed using open account selling with the security of standby letters of credit, export credit insurance, or export receivables discounting.

Adapted from: Ross, D.G. (1998) Export Finance: A Guide for Canadian Managers, Carswell Thomas Professional Publishing.


Letter Of Credit


A letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay for goods or services. A bank or finance company issues a letter of credit on behalf of an importer or buyer, authorizing the exporter or seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met. The letter of credit acts like an insurance contract for both the buyer and seller and practically eliminates the credit risk for both parties, while at the same time reducing payment delays. A letter of credit provides the exporter or seller with the greatest degree of safety when extending credit. It is useful when the importer or buyer is not well known and when exchange restrictions exist or are possible.


Types of Letters of Credit. Banks may issue several types of letters of credits. It is best for importers and exporters to meet with their banking officer to determine which type of credit best suits their needs. The most common types of letters of credits are:

A revocable letter of credit allows for amendments, modifications and cancellation of the terms outlined in the letter of credit at any time and without the consent of the exporter or beneficiary. Because this places the exporter at risk, revocable letters of credit are not generally accepted.

An irrevocable letter of credit requires the consent of the issuing bank, the beneficiary and applicant before any amendment, modification or cancellation to the original terms can be made. This type of letter of credit is commonly used and preferred by the exporter or beneficiary because payment is always assured, provided the documents submitted comply with the terms of the letter of credit. Irrevocable letters of credit can be both confirmed and unconfirmed (See below).

An irrevocable letter of credit may also be transferable. With a transferable letter of credit, the exporter can transfer all or part of his rights to another party. Transferable letters of credit are often used when the exporter is the importer's agent or a middleman between supplier and importer, and not the actual supplier of merchandise. With a transferable letter of credit, the exporter uses the credit standing of the issuing bank and avoids having to borrow or use his own funds to buy goods from a supplier. Hence, it is a viable pre-export financing vehicle. Before transfer can be made, the exporter must contact, in writing, the bank handling the disbursement of funds - the transferring bank. Transferable letters of credit can only be transferred based on the terms and conditions specified in the original credit, with certain exceptions. Therefore, it may be difficult to achieve flexibility and confidentiality with this finance method.

The transferring bank, whether it has confirmed the letter of credit or not, is only obligated to effect the transfer to the extent and in the manner expressly specified in the letter of credit. Transferable letters of credit involve specific risks. When a bank opens a transferable letter of credit for a buyer, neither party can be certain of who will be the ultimate supplier. Both parties must rely upon the importer's assessment of the exporter's reputation and ability to perform. To reduce overall risk and prevent the shipment of substandard goods, an independent certificate of inspection can be required in the documentation.

For simplicity's sake, many banks prefer single transfer and discourage multiple transfers, but will do multiple transfers if conditions are right. Partial transfers can also be made to one or several suppliers if the terms of the original letter of credit allow for partial shipments. The processing of this type of letter of credit can become complicated and tricky, requiring logistics coordination and the highest level of precision. Incomplete and/or ambiguous information on the transferable letter of credit almost always leads to problems. Furthermore, the beneficiary of the transferable letter of credit must be available throughout the entire negotiation process to assist the transferring bank.

Other forms are unconfirmed, confirmed and back-to-back.

A confirmed letter of credit is when a second guarantee is added to the document by another bank. The advising bank, the branch or the correspondent through which the issuing bank routes the letter of credit, adds its undertaking and commitment to pay to the letter of credit. This confirmation means that the seller/beneficiary may also look to the credit worthiness of the confirming bank for payment assurance.

An unconfirmed letter of credit is when the document bears the guarantee of the issuing bank alone. The advising bank merely informs the exporter of the terms and conditions of the letter of credit, without adding its obligation to pay. The exporter assumes the payment risk of the issuing bank, which is typically located in a foreign country.

Back-to-Back Letters of Credit

Back-to-back letters of credit are two individual letters of credit that together offer an alternative to a transferable letter of credit. The back-to-back letter of credit allows exporters (sellers or middlemen) who do not qualify for unsecured bank credit to use a letter of credit as security for a second letter of credit in favor of a supplier. In other words, if a foreign buyer will issue a letter of credit to an exporter, certain banks and trade finance companies will issue independent letters of credit to the exporter's suppliers so that the required goods can be purchased. Even if the initial letter of credit is not successfully completed, the second remains valid, and the issuing bank is obligated to pay under its terms.

Although back-to-back letters of credit provide small and medium exporters virtually unlimited working capital to finance their sales and complete more export transactions, many banks are reluctant to take on this type of arrangement. Because back-to-back letters of credit involve two separate transactions, it is likely that several participating banks will be involved and the risk of confusion and dispute is high. To protect itself, a bank generally will require that the exporter present all relevant documents that are part of the first letter of credit before issuing the second letter of credit. The second document is worded to conform precisely to the original and dated to expire at some date prior to the first, ensuring that the seller has sufficient time to present documents within the time limits of the first.

Standby Letter of Credit

Unlike a commercial letter of credit, which is basically a payment mechanism, a standby letter of credit is a form of a bank guarantee. It may be used as necessary to cover nonpayment of a financial obligation. A standby letter of credit normally is intended to be drawn on only in the event of nonpayment. The standby letter of credit is issued by the bank and held by the seller, who in turn provides the customer open account terms. If payment is made according to the seller's terms, the letter of credit is never drawn on. However, if the customer is unable to pay, the seller presents a draft, and all other documents as required, to the bank for payment. The standby letter of credit typically expires within 12 months.

Cash Advance Against Letter of Credit

A cash advance against a letter of credit works like back-to-back letters of credit, with the exception that the bank or financing company will issue cash to the suppliers instead of another letter of credit.



The letter of credit is the safest, most secure and most convenient settlement method for international transactions. There are a number of advantages both for the seller/exporter and the buyer/importer.


•Assures the security of payment from an international bank once the terms of the letter of credit are met.

•Seller can determine when payment will be satisfied and ship the goods accordingly.

•Bank bears the responsibility of oversight.

•Seller does not have to open an account and grant payment terms to buyer. Credit risk is nearly eliminated. The risk of exchange control created with payment delays is greatly reduced.

•Provides seller easier access to financing once the letter of credit has been issued.

•Once the bank confirms the letter of credit, political and economic risk and questions regarding the buyer's ability to pay are eliminated. The confirming bank is obliged to pay, even if the buyer goes bankrupt, provided the terms of the letter of credit are met.


•Facilitates financing--for example, creating banker's acceptances.

•Buyer can confirm that the merchandise is shipped on or before the required date.

•It is safer to deal with bank than to prepay.

•Buyer may get better terms and prices.

•No cash is tied up in the process. Buyer does not have to pay cash up front to a foreign seller before receiving the documents of title to the goods purchased. This is particularly helpful when the buyer is unfamiliar with local suppliers and laws.

•Protects the buyer since the bank only pays when the supplier complies with the specific terms and conditions and produces the documents required by the buyer.

•The buyer can build safeguards into the letter of credit, including inspection of the goods and quality control, and set production and delivery times.
[Adapted from the internet]



Top Ten Shipment Pointers

1. Keep track of shipment in the pipe. Reserve space in ship or plane well on time. Reserve containers if necessary.

2. Send advance documents to import department to enable them to obtain import license.

3. Check the shipment does well to ensure price. Quota Number, Size & Col ratio, Quantity etc. are respected as per o/sheet.

4. Follow up with shipping company to ensure that they use fastest route, obtain B/L or AWB No. & inform buyer.

5. Ensure all required documents are presented in the bank by supplier in accordance with the L/C requirement.

6. Send copies of all shipment docks to buyer. Raise invoice for commission and keep account updated.

7. Packing materials check well in time that suppliers use appropriate sea/air packing materials in right size and quality.

8. Send weekly advice to import department cargo movement details shipment wise, number of cartons/GR. WT./Net Wt., value CBM, to arrange for insurance and import.

9. Survey the market for competitiveness. Cargo handling companies with efficient services, good network & attractive prices.

10. Subscribe for shipping magazine keep updated information of all facilities available in different ports & sailing/flight schedules of all carriers.

Discussion Questions

Fill in the blanks with the correct words.
reserve advance ensure docks appropriate subscribe

Shippers carefully pack and label cargo to ___________ it is safe for delivery.
Wearing sandals and short pants for a formal business meeting is not ___________.
You should ___________ a table in a busy restaurant.
_________ is a short way of meaning documents.
The President sends security police in ____________ of his visit.
I order a monthly news magazine which also means I ________ to it.

http://www.rngroupbd.net/logistics.html [Accessed: August 13, 2006]
http://www.intuitivetransport.com/Products/ITSQL/Shipments/ImportOcean/ArrivalNotice.htm [Accessed: August 13, 2006]

Shipping Process

When shipping a product overseas, the exporter must be aware of packing, labeling, documentation, and insurance requirements. It is important that exporters ensure that the merchandise is:
  • Packed correctly so that it arrives in good condition;
  • Labeled correctly to ensure that the goods are handled properly and arrive on time at the right place;
  • Documented correctly to meet all government requirements, as well as proper collection standards; and
  • Insured against damage, loss, pilferage and delay.

Discussion Questions
Have you ever ordered anything on the internet and had it delivered to your house?
What kind of packing materials were used? Make a list.
What is pilferage?

In groups of four study the arrival notice sample. Which words are new to you? Make a list. For example what does ETA mean, etc.? Prepare a hand-written arrival notice sample in class. Then prepare a typed copy for submission after checking with the instructor.

Freight Forwarders

An international freight forwarder is an agent for the exporter in moving cargo to an overseas destination. These agents are familiar with the import rules and regulations of foreign countries, the export regulations of the Korean government, the methods of shipping, and the documents related to foreign trade. Export freight forwarders are licensed by the International Air Transport Association (IATA) to handle air freight and the Federal Maritime Commission to handle ocean freight.

Freight forwarders assist exporters in preparing price quotations by advising on freight costs, port charges, consular fees, costs of special documentation, insurance costs, and their handling fees. They recommend the packing methods that will protect the merchandise during transit or can arrange to have the merchandise packed at the port or containerized. If the exporter prefers, freight forwarders can reserve the necessary space on a vessel, aircraft, train, or truck. The cost for their services is a legitimate export cost that should be included in the price charged to the customer.

Once the order is ready for shipment, freight forwarders should review all documents to ensure that everything is in order. This is of particular importance with letter of credit payment terms. They may also prepare the bill of lading and any special required documentation. After shipment, they can route the documents to the seller, the buyer, or to a paying bank. Freight forwarders can also make arrangements with customs brokers overseas to ensure that the goods comply with customs export documentation regulations.

A customs broker is an individual or company that is licensed to transact customs business on behalf of others. Customs business is limited to those activities involving transactions related to the entry and admissibility of merchandise; its classification and valuation; the payment of duties, taxes, or other charges assessed or collected; or the refund, rebate, or drawback thereof.

Discussion Questions

1. Do research in groups of four to find information about Korea’s top five largest freight forwarding companies. Prepare a short introduction to each company (annual turnover, major ports of operation, venture projects, etc.)

2. Type up your results in a formal paragraph style letter and submit after checking with the instructor.


Exporters should be aware of the demands that international shipping puts on packaged goods. Exporters should keep four potential problems in mind when designing an export shipping crate:

  • breakage
  • moisture
  • pilferage
  • excess weight.

Generally, cargo is carried in containers, but sometimes it is still shipped as break-bulk cargo. Besides the normal handling encountered in domestic transportation, a break-bulk shipment transported by ocean freight may be loaded aboard vessels in a net or by a sling, conveyor, or chute that puts an added strain on the package.

During the voyage, goods may be stacked on top of or come into violent contact with other goods. Overseas, handling facilities may be less sophisticated than locally and the cargo could be dragged, pushed, rolled, or dropped during unloading, while moving through customs, or in transit to the final destination.

Moisture is a constant concern because condensation may develop in the hold of a ship even if it is equipped with air conditioning and a dehumidifier. Another aspect of this problem is that cargo may also be unloaded in precipitation, or the foreign port may not have covered storage facilities. Theft and pilferage are added risks.

  • Pack in strong containers, adequately sealed and filled when possible.
  • To provide proper bracing in the container, regardless of size, make sure the weight is evenly distributed.
  • Goods should be palletized and when possible containerized.
  • Packages and packing filler should be made of moisture-resistant material.
  • To avoid pilferage, avoid writing contents or brand names on packages. Other safeguards include using straps, seals, and shrink wrapping.
  • Observe any product-specific hazardous materials packing requirements.

One popular method of shipment is to use containers obtained from carriers or private leasing companies. These containers vary in size, material, and construction and accommodate most cargo, but they are best suited for standard package sizes and shapes. Also, refrigerated and liquid bulk containers are usually readily available. Some containers are no more than semi-truck trailers lifted off their wheels, placed on a vessel at the port of export and then transferred to another set of wheels at the port of import.

Normally, air shipments require less heavy packing.

Discussion Questions

Fill in the blanks

condensation containers private leasing pilferage containerized palletized break-bulk sling chute net conveyor

1. A ________ is often used to manufacture cars and moves them along from one workstation to another in a straight line.
2. ______________ is like water in the air.
3. Renting for a period of days or months may be called ____________.
4. When you put your cargo on a wooden platform you have ___________ it.
5. A __________ is like a slide which moves cargo down the side of a ship.
6. When your cargo is swinging over the side of a ship on a crane it could be in a _______ or __________.
7. _______________ are made of reinforced steel and can be loaded like blocks.
When your cargo is in these large 20 or forty foot metal boxes it has been _________.
8. ______________ occurs when your cargo is stolen.
9. When your cargo is packed and unpacked piece by piece it is an example of __________.


Specific marking and labeling is used on export shipping cartons and containers to:

  • Meet shipping regulations;
  • Ensure proper handling;
  • Conceal the identity of the contents;
  • Help receivers identify shipments; and
  • Insure compliance with environmental and safety standards.

The overseas buyer usually specifies which export marks should appear on the cargo for easy identification by receivers. Pr oducts can require many markings for shipment. For example, exporters need to put the following markings on cartons to be shipped:

  1. Shipper's mark;
  2. Country of origin (R.O.K.);
  3. Weight marking (in pounds and in kilograms);
  4. Number of packages and size of cases (in inches and centimeters);
  5. Handling marks (international pictorial symbols);
  6. Cautionary markings, such as "This Side Up" or "Use No Hooks" (in English and in the language of the country of destination);
  7. Port of entry;
  8. Labels for hazardous materials (universal symbols adapted by the International Air
  9. Transport Association and the International Maritime Organization); and;
  10. Ingredients (if applicable, also included in the language of the destination country).

Packages should be clearly marked to prevent misunderstandings and delays in shipping. Letters are generally stenciled onto packages and containers in waterproof ink. Markings should appear on three faces of the container, preferably on the top and on the two ends or the two sides. Old markings must be completely removed from previously used packaging.

In addition to the port marks, the customer identification code, and an indication of origin, the marks should include the package number, gross and net weights, and dimensions. If more than one package is being shipped, the total number of packages in the shipment should be included in the markings. The exporter should also add any special handling instructions. It is a good idea to repeat these instructions in the language of the country of destination and use standard international shipping and handling symbols.

Customs regulations regarding freight labeling are strictly enforced. For example, many countries require that the country of origin be clearly labeled on each imported package. Most freight forwarders and export packing specialists can supply the necessary information regarding specific regulations.


Go online and find three labels for:

  • Hazardous materials
  • Cautionary markings
  • Handling markings

Cut and paste these then write a short description explaining their meaning. Submit.


Air freight shipments are handled by air waybills, which can never be made in negotiable form.

A bill of lading is a contract between the owner of the goods and the carrier (as with domestic shipments). For vessels, there are two types: a straight bill of lading which is nonnegotiable and a negotiable or shipper's order bill of lading. The latter can be bought, sold, or traded while the goods are in transit. The customer usually needs an original as proof of ownership to take possession of the goods (see Short Form Straight Bill of Lading and Liner Bill of Lading).

A commercial invoice is a bill for the goods from the seller to the buyer. These invoices are often used by governments to determine the true value of goods when assessing customs duties. Governments that use the commercial invoice to control imports will often specify its form, content, number of copies, language to be used, and other characteristics.

A consular invoice is a document that is required in some countries. It describes the shipment of goods and shows information such as the consignor, consignee, and value of the shipment. Certified by the consular official of the foreign country stationed here, it is used by the country's customs officials to verify the value, quantity, and nature of the shipment.

A certificate of origin is a document that is required in certain nations. It is a signed statement as to the origin of the export item. Certificate of origin are usually signed through a semiofficial organization, such as a local chamber of commerce. A certificate may still be required even if the commercial invoice contains the information.

A NAFTA certificate of origin is required for products traded among the NAFTA countries (Canada, the United States, and Mexico).

Inspection certification is required by some purchasers and countries in order to attest to the specifications of the goods shipped. This is usually performed by a third party and often obtained from independent testing organizations.

A dock receipt and a warehouse receipt are used to transfer accountability when the export item is moved by the domestic carrier to the port of embarkation and left with the ship line for export.

A destination control statement appears on the commercial invoice, and ocean or air waybill of lading to notify the carrier and all foreign parties that the item can be exported only to certain destinations.

A Shipper's Export Declaration(SED) is used to control exports and act as a source document for official U.S. export statistics. SEDs must be prepared for shipments through the U.S. Postal Service when the shipment is valued over $500. SEDs are required for shipments not using the U.S. Postal Service when the value of the commodities, classified under any single Schedule B number, is over $2,500. SEDs must be prepared, regardless of value, for all shipments requiring an export license or destined for countries restricted by the Export Administration Regulations. SEDs are prepared by the exporter or the exporter's agent and delivered to the exporting carrier (for example, the post office, airline, or vessel line). The exporting carrier will present the required number of copies to the R.O.K. Customs Service at the port of export . Often, the SED is prepared as a by-product of another document, the Shipper's Letter of Instructions.

An export license is a government document that authorizes the export of specific goods in specific quantities to a particular destination. This document may be required for most or all exports to some countries or for other countries only under special circumstances.

An export packing list is considerably more detailed and informative than a standard domestic packing list. It itemizes the material in each individual package and indicates the type of package, such as a box, crate, drum, or carton. It also shows the individual net, legal, tare, and gross weights and measurements for each package (in both U.S. and metric systems). Package markings should be shown along with the shipper's and buyer's references. The list is used by the shipper or forwarding agent to determine the total shipment weight and volume and whether the correct cargo is being shipped. In addition, U.S. and foreign customs officials may use the list to check the cargo.

An insurance certificate is used to assure the consignee that insurance will cover the loss of or damage to the cargo during transit.

Documentation must be precise because slight discrepancies or omissions may prevent merchandise from being exported, result in nonpayment, or even result in the seizure of the exporter's goods by U.S. or foreign government customs. Collection documents are subject to precise time limits and may not be honored by a bank if the time has expired. Most documentation is routine for freight forwarders and customs brokers, but the exporter is ultimately responsible for the accuracy of its documents.

The number and kind of documents the exporter must deal with varies depending on the destination of the shipment. Because each country has different import regulations, the exporter must be careful to provide all proper documentation.

Discussion Questions

1. In groups of four find examples of four Korean documents which serve the same purpose as the samples. Search online, at the library or in person at a government office. Note: One document for each student. Each must be different from the other. Then translate the document into English and type up the form using MS word or Hangul.

The handling of transportation is similar for domestic and export orders. Export marks are added to the standard information on a domestic bill of lading. These marks show the name of the exporting carrier and the latest allowed arrival date at the port of export. Instructions for the inland carrier to notify the international freight forwarder by telephone upon arrival should also be included.

Exporters may find it useful to consult with a freight forwarder when determining the method of international shipping. Since carriers are often used for large and bulky shipments, the exporter should reserve space on the carrier well before actual shipment date. This reservation is called the booking contract.

International shipments are increasingly made on a through bill of lading under a multimodal contract. The multimodal transit operator (frequently one of the transporters) takes charge of and responsibility for the entire movement from factory to final destination.

The cost of the shipment, the delivery schedule, and the accessibility to the shipped product by the foreign buyer are all factors to consider when determining the method of international shipping. Although air carriers can be more expensive, their cost may be offset by lower domestic shipping costs (for example, using a local airport instead of a coastal seaport) and quicker delivery times. These factors may give the exporter an edge over other competitors.
Before shipping, the firm should be sure to check with the foreign buyer about the destination of the goods. Buyers often want the goods to be shipped to a free-trade zone or a free port where they are exempt from import duties.

Discussion Questions

1. What does a freight forwarder do?
2. What is the purpose of a booking contract?
3. Give examples of multimodal companies in Korea.


Damaging weather conditions, rough handling by carriers, and other common hazards to cargo make insurance an important protection for Korean exporters. If the terms of sale make the exporter responsible for insurance, the exporter should either obtain its own policy or insure the cargo under a freight forwarder's policy for a fee. If the terms of sale make the foreign buyer responsible, the exporter should not assume (or even take the buyer's word) that adequate insurance has been obtained. If the buyer neglects to obtain adequate coverage, damage to the cargo may cause a major financial loss to the exporter.

Shipments by sea are covered by marine cargo insurance.

Air shipments may also be covered by marine cargo insurance or insurance may be purchased from the air carrier.

Export shipments are usually insured against loss, damage, and delay in transit by cargo insurance. Carrier liability is frequently limited by international agreements. Additionally, the coverage is substantially different from domestic coverage. Arrangements for insurance may be made by either the buyer or the seller, in accordance with the terms of sale. Exporters are advised to consult with international insurance carriers or freight forwarders for more information.

Although sellers and buyers can agree to different components, coverage is usually placed at 110 percent of the CIF (cost, insurance, freight) or CIP (carriage and insurance paid to) value.

Discussion Questions
1. Find a real sample of a cargo insurance policy. Print it and submit it.
2. Explain why cargo insurance is so important.


Finally, it is very important to consider the effects of tariffs, port handling fees, and taxes when determining your product's final cost as they can be high. Typically, the importer pays these charges. However, these costs will influence how much the buyer is willing to pay for your product.

Discussion Questions
Find the import tariffs on three goods classifications for bringing products into Korea. Type up your results and submit it.

http://www.unzco.com/basicguide/c10.html [Accessed: August 13, 2006]