Export Finance & Documentation

8/14/2019 Export Finance & Documentation

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EXPORT FINANCEEXPORT FINANCE&&

DOCUMENTATIONDOCUMENTATION


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EXPORT PRICINGEXPORT PRICING

IntroductionIntroduction

Export marketing in particular requiresExport marketing in particular requiresextremely careful pricing as generallyextremely careful pricing as generally

the orders are bigger and repeat buysthe orders are bigger and repeat buyswill not happen if the exporterwill not happen if the exporterovercharges the foreign buyer evenovercharges the foreign buyer evenonce.once.

Similarly under pricing will cost theSimilarly under pricing will cost theexporter .exporter .


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Pricing for export is different thanPricing for export is different than

domestic pricing. Additionaldomestic pricing. Additional

considerations needs to be given toconsiderations needs to be given tocost of modifying product or supportcost of modifying product or support

material for foreign market, thematerial for foreign market, the

logistics for getting the product tologistics for getting the product toforeign market, insuring the product,foreign market, insuring the product,

financing costs, transportation andfinancing costs, transportation and

other costs unique to exports such asother costs unique to exports such as

long distance communication costs long distance communication costs

and exchange rates etc.and exchange rates etc.


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Pricing products in foreign markets can bePricing products in foreign markets can be

a big challenge as prices suited in onea big challenge as prices suited in one

market may be disastrous in another.market may be disastrous in another.

As such an exporter must thoroughlyAs such an exporter must thoroughly

evaluate all variables that have a bearingevaluate all variables that have a bearing

on the price of the product offered in theon the price of the product offered in the

foreign target market.foreign target market.

It is also important that the exporterIt is also important that the exporter

obtains as much information as possibleobtains as much information as possibleon foreign market prices as part of hison foreign market prices as part of his

export market research.export market research.


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Factors Affecting Price of anyFactors Affecting Price of any

ProductProduct

PRICE

COMPETITION COSTS

CUSTOMER

EXPECTATION


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3.3. Customer ExpectationCustomer Expectation

Here one must take into account theHere one must take into account the

customer demand at various price levels.customer demand at various price levels.

Pricing is done for customer acceptancePricing is done for customer acceptance

and it should be an optimum price to suitand it should be an optimum price to suit

customer expectations.customer expectations.

In addition to above factors theIn addition to above factors the

Government Tax Policies,Government Tax Policies,

Transportation costs, DistributionTransportation costs, Distribution

costs, and miscellaneous other costscosts, and miscellaneous other costs

also need due consideration.also need due consideration.


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Pricing StrategiesPricing Strategies 1.1. Penetration Pricing StrategyPenetration Pricing Strategy

Penetration or low price strategy refers toPenetration or low price strategy refers tovolume policy. Products are priced low tovolume policy. Products are priced low togain speedy acceptance in the market.gain speedy acceptance in the market.

2.2. Skimming Pricing StrategySkimming Pricing Strategy Under the skimming pricing strategyUnder the skimming pricing strategyproducts are priced high where the productproducts are priced high where the productis an innovation, unique in market, set-upis an innovation, unique in market, set-upcosts are high and demand is relativelycosts are high and demand is relatively

inelastic.inelastic.

3.3. Holding Pricing StrategyHolding Pricing Strategy Market holding is a strategy intended toMarket holding is a strategy intended to

hold market share. Products are pricedhold market share. Products are pricedbased on what market can take.based on what market can take.


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Methods of Export PricingMethods of Export Pricing 11.. Cost Plus PricingCost Plus Pricing

This method is based on adding the desired markup onThis method is based on adding the desired markup oncosts including domestic costs and exporting costscosts including domestic costs and exporting costs(documentation expenses, freight charges, custom duties,(documentation expenses, freight charges, custom duties,and international sales and promotional costs) to arriveand international sales and promotional costs) to arriveat the price for export markets.at the price for export markets.

However domestic marketing and promotional costs areHowever domestic marketing and promotional costs arenot taken into account.not taken into account.

This method permits the exporter to maintain his desiredThis method permits the exporter to maintain his desiredprofit percentage to set a suitable export price. However,profit percentage to set a suitable export price. However,this price may or may not suit the foreign marketsthis price may or may not suit the foreign markets


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ExampleExample

Cost of producing a pair of shoe 120.00 (FC + VC)Cost of producing a pair of shoe 120.00 (FC + VC)

Domestic marketing cost includedDomestic marketing cost included

in price 15.00in price 15.00

Export related costs 20.00Export related costs 20.00

------------------------------------------------------------------------------------------------------------------------------------------------------

As such Cost of export will be 120-15+20=125.00As such Cost of export will be 120-15+20=125.00------------------------------------------------------------------------------------------------------------------------------------------------------

Mark up 20%Mark up 20%

Export price 125.00 + 25 = 150.00Export price 125.00 + 25 = 150.00


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While fixing markups following options are available :While fixing markups following options are available : High Price OptionHigh Price Option

This approach will use higher markups to produceThis approach will use higher markups to produce

big profits. It may work if a company is selling a newbig profits. It may work if a company is selling a newand unique product targeted at the upper end of theand unique product targeted at the upper end of themarket.market.

Moderate Price OptionModerate Price Option

This is a middle path focusing on a lower risk asThis is a middle path focusing on a lower risk ascompared to high or low price option. The emphasiscompared to high or low price option. The emphasisis on matching competition, building a marketis on matching competition, building a marketposition, and earning a reasonable profit margin.position, and earning a reasonable profit margin.

Low Price OptionLow Price Option This route is generally taken to impede theThis route is generally taken to impede the

competition to penetrate a market, suitable in casecompetition to penetrate a market, suitable in caseone is trying to reduce inventory and does not haveone is trying to reduce inventory and does not havea long term commitment. Such pricing will result ina long term commitment. Such pricing will result in

low profit margins.low profit margins.


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2.2. Marginal Cost PricingMarginal Cost Pricing

An improved version of cost plus method is calledAn improved version of cost plus method is called

marginal cost pricing. The fixed cost includingmarginal cost pricing. The fixed cost includingexpenses incurred on modifications to the productexpenses incurred on modifications to the productfor producing an additional unit for export isfor producing an additional unit for export isdetermined first. Variable costs are then added todetermined first. Variable costs are then added toarrive at realistic total costs for exports.arrive at realistic total costs for exports.

Such costs invariable include Packaging, ForeignSuch costs invariable include Packaging, ForeignMarket Research, Advertising & Marketing,Market Research, Advertising & Marketing,Exchange Conversion/Fluctuation Costs, ForeignExchange Conversion/Fluctuation Costs, ForeignAgent/Distributor Product Information & Training,Agent/Distributor Product Information & Training,After sales service costs etc.After sales service costs etc.

Margins are then applied to arrive at the exportMargins are then applied to arrive at the exportcost. This method is more realistic determinationcost. This method is more realistic determinationof cost of producing products for exports.of cost of producing products for exports.


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4.4. Market Pricing / Target PricingMarket Pricing / Target Pricing

Extensive competition and availability ofExtensive competition and availability of

variety of products have necessitatedvariety of products have necessitatedmarket pricing also known as targetmarket pricing also known as targetpricing. Here, the exporter has to workpricing. Here, the exporter has to workon a price that the customer is wiling toon a price that the customer is wiling topay and focus shifts on managing costspay and focus shifts on managing costs

as efficiently as possible.as efficiently as possible.

This has happened because the customerThis has happened because the customertoday is highly informed he knows mosttoday is highly informed he knows mostcosting and is ready to pay only whatcosting and is ready to pay only what

suits him.suits him.

The exporter needs to work backwardThe exporter needs to work backwardfrom the target price down to the costsfrom the target price down to the costs

and find margins for him by managing hisand find margins for him by managing hisoverheads and other costs better.overheads and other costs better.


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If the exporter cannot match 12.65If the exporter cannot match 12.65

with his margins, he must considerwith his margins, he must consider

either of the following :either of the following :

Refuse to export.Refuse to export.

Find an alternative supply source toFind an alternative supply source to

bring the costs down.bring the costs down.

Find ways to reduce costs by modifyingFind ways to reduce costs by modifying

the product or shortening the channelthe product or shortening the channel

of distribution.of distribution.


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Export Payment TermsExport Payment Terms

Refer to INCO TermsRefer to INCO Terms


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Methods of Payments forMethods of Payments for

Export TransactionsExport Transactions

While negotiating an export order itWhile negotiating an export order itis essential that the payment termsis essential that the payment termsare also discussed and finalized.are also discussed and finalized.These include methods or mode ofThese include methods or mode ofpayment, that is, how and when thepayment, that is, how and when the

payment will be made by the buyerpayment will be made by the buyerand received by the exporter.and received by the exporter.

Generally following methods areGenerally following methods are

available for exports :available for exports : Advance paymentAdvance payment Open AccountOpen Account Consignment SaleConsignment Sale Documents against Acceptance (D/A)Documents against Acceptance (D/A)

Documents against Payment (D/P)Documents against Payment (D/P) Letter of CreditLetter of Credit


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1.1.Advance PaymentAdvance Payment

It is the safest payment option where the importerIt is the safest payment option where the importersends the payment in advance to the exportersends the payment in advance to the exportereither through cheque or demand draft. This iseither through cheque or demand draft. This isnormally done after acceptance of the order by thenormally done after acceptance of the order by theexporter. The exporter is safe as he will ship theexporter. The exporter is safe as he will ship thegoods only at a later date. He also gets a readygoods only at a later date. He also gets a readysolution to his liquidity problem as he can use thesolution to his liquidity problem as he can use thefunds towards production of export order.funds towards production of export order.

This method, however, is not safe for the buyerThis method, however, is not safe for the buyerand therefore is not generally preferred.and therefore is not generally preferred.

This method is least expensive as no interest /This method is least expensive as no interest /

commission is required to be paid anywhere and itcommission is required to be paid anywhere and itis also the least complicated as it does not involveis also the least complicated as it does not involveany procedural formalities.any procedural formalities.


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2.2. Open AccountOpen Account

This is an arrangement between the buyer andThis is an arrangement between the buyer andexporter where goods are shipped without theexporter where goods are shipped without the

guarantee of payments. Both the parties agree on theguarantee of payments. Both the parties agree on thesales terms but no documentary evidence is created.sales terms but no documentary evidence is created.The odds are heavily loaded in favor of importer asThe odds are heavily loaded in favor of importer asthe payment will be released at a later date.the payment will be released at a later date.

The accounts between the exporter and buyer areThe accounts between the exporter and buyer are

settled periodically. Chances of default or delay insettled periodically. Chances of default or delay inpayments are very high under this system. Thepayments are very high under this system. Theexporter must deal with only trustworthy buyersexporter must deal with only trustworthy buyersunder this scheme.under this scheme.

This system suits the importer as he obtains deliveryThis system suits the importer as he obtains delivery

of goods without having to pay for them. He need notof goods without having to pay for them. He need notarrange any finances, thus saving on expenses, timearrange any finances, thus saving on expenses, timeand effort. For him it is totally convenient and troubleand effort. For him it is totally convenient and troublefree.free.

In most of the cases Open Account system is used byIn most of the cases Open Account system is used byfirms having dealings with each other for longfirms having dealings with each other for longperiods of time or between firms and theirperiods of time or between firms and theirassociates.


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3.3. Consignment SaleConsignment Sale

Under this method goods are shipped by theUnder this method goods are shipped by the

exporter but he transfers the ownership to theexporter but he transfers the ownership to theimporter only when the goods are actually sold. Thisimporter only when the goods are actually sold. Thismeans the entire risk here is borne by the exporter.means the entire risk here is borne by the exporter.If importer is unable to find an actual buyer, theIf importer is unable to find an actual buyer, theexporter is stuck with the unsold stock and heexporter is stuck with the unsold stock and hecannot claim the payment for the same from thecannot claim the payment for the same from the

importer.importer.

The exporters funds are blocked throughout thisThe exporters funds are blocked throughout thisperiod and he is responsible for additional expensesperiod and he is responsible for additional expensessuch as interest, warehousing costs, commissions,such as interest, warehousing costs, commissions,

insurance charges etc. this arrangement is full ofinsurance charges etc. this arrangement is full ofuncertainties as the exporter is not sure of theuncertainties as the exporter is not sure of theactual sale, timeframe and the price realization.actual sale, timeframe and the price realization.


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Consignment exports offer a chance ofConsignment exports offer a chance ofearning higher prices in markets abroad.earning higher prices in markets abroad.Ideally this system is suited to exportersIdeally this system is suited to exporterswho have their own affiliates abroad andwho have their own affiliates abroad andsizeable control over sales.sizeable control over sales.

The exporters using this method must alsoThe exporters using this method must alsobe financially sound to manage longerbe financially sound to manage longer

periods of uncertainty and bear additionalperiods of uncertainty and bear additionalexpenses.expenses.

An interesting example of this method inAn interesting example of this method inIndia is found in the area of agro exports.India is found in the area of agro exports.

Normally in trade of agro exports (exceptNormally in trade of agro exports (exceptonion, rice, and other cereals, mangoonion, rice, and other cereals, mangopulp), the importer never provides LC.pulp), the importer never provides LC.Such export is done on a consignmentSuch export is done on a consignmentbasis, and the payment as per actual salesbasis, and the payment as per actual sales

is made.is made.


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4.4. Documents Against Acceptance (D/A)Documents Against Acceptance (D/A)

This system is based on documents andThis system is based on documents and

thus falls under the category ofthus falls under the category of

Documentary Credit.Documentary Credit.

The exporter does not want to part withThe exporter does not want to part with

ownership of goods unless he is certainownership of goods unless he is certain

about the receipt of payment of the same.about the receipt of payment of the same. The importer on the other hand does notThe importer on the other hand does not

want to pay unless he is sure about thewant to pay unless he is sure about the

receipt of goods.receipt of goods.

Banks function as intermediates, providingBanks function as intermediates, providingassurance to both the parties on the othersassurance to both the parties on the others

behalf and use documents as a tool for thisbehalf and use documents as a tool for this

assurance.assurance.


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The arrangement seems fine as a The arrangement seems fine as a

concept. However, there is a great riskconcept. However, there is a great risk

for the exporter, as the bill may not befor the exporter, as the bill may not behonored by the buyer on presentation.honored by the buyer on presentation.

The buyer certainly is safe as he getsThe buyer certainly is safe as he gets

the delivery of shipment much beforethe delivery of shipment much beforethe due date for payment.the due date for payment.

The exporter will have to face a lot ofThe exporter will have to face a lot ofdifficulty and losses, in case the buyerdifficulty and losses, in case the buyer

does not honor his commitment.does not honor his commitment.


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5.5. Documents against payment (D/P)Documents against payment (D/P)

Like in D/A arrangement, here too theLike in D/A arrangement, here too thedocuments are sent to buyers bank with adocuments are sent to buyers bank with adraft (bill of exchange). However, this draft isdraft (bill of exchange). However, this draft isa sight draft and not a usance draft.a sight draft and not a usance draft.

This draft has to be paid immediately on sightThis draft has to be paid immediately on sightand only after the receipt of payment theand only after the receipt of payment theshipment title documents are released. Itshipment title documents are released. Itmeans that the importer gets possession ofmeans that the importer gets possession ofownership documents of the shipments onlyownership documents of the shipments only

after making payment for the same.after making payment for the same.

The exporter on the other hand, releasesThe exporter on the other hand, releasespossession of shipment title papers onlypossession of shipment title papers onlyagainst the receipt of payment. No credit isagainst the receipt of payment. No credit isinvolved here.involved here.


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Documents against Payment (D/P)Documents against Payment (D/P)

FlowFlow

Exporter / Drawer

Remitting Bank

Importer / Drawee

Sales Contract

1. Goods

3. Documents, Draft, CollectionOrder

5. Payment

2.Documents

Drafts,

Instruc

tions

6.Paym

ent

(Credit)

4a.Pay

ment

Collecting /

Presenting Bank

4b.Doc

uments


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6.6. Letter of CreditLetter of Credit

A letter of credit is a very popular form ofA letter of credit is a very popular form of

documentary credit. In fact majority ofdocumentary credit. In fact majority ofinternational business transactions use LCs.international business transactions use LCs.

The letter of credit is a letter established byThe letter of credit is a letter established byimporter through his bank to the benefit ofimporter through his bank to the benefit ofexporter promising payments of drafts drawnexporter promising payments of drafts drawn

against this letter if the exporter complies withagainst this letter if the exporter complies withthe specific conditions prescribed in the LC. Thethe specific conditions prescribed in the LC. Theconditions are usually the same as stipulated inconditions are usually the same as stipulated inthe purchase order or export contract.the purchase order or export contract.

As such LC acts as a substitution of importersAs such LC acts as a substitution of importers

promise to that of his bank's to the exporter topromise to that of his bank's to the exporter tohonor its commitment to pay for the export billshonor its commitment to pay for the export billsprovided all conditions are satisfied. In this wayprovided all conditions are satisfied. In this wayLC works as an independent contract betweenLC works as an independent contract betweenexporter (designated beneficiary) and theexporter (designated beneficiary) and the

issuing bank.issuing bank.


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More formally letter of credit can be definedMore formally letter of credit can be defined

as A binding document that a buyer canas A binding document that a buyer can

request from his bank in order to guaranteerequest from his bank in order to guarantee

that the payment for goods will bethat the payment for goods will betransferred to the seller. Basically, a letter oftransferred to the seller. Basically, a letter of

credit provides reassurance to the seller thatcredit provides reassurance to the seller that

he will receive the payment for the goods. Inhe will receive the payment for the goods. In

order for payment to occur, the seller has toorder for payment to occur, the seller has to

present the bank with necessary shippingpresent the bank with necessary shipping

documents confirming the delivery of goodsdocuments confirming the delivery of goods

within a given time frame. It is often used inwithin a given time frame. It is often used in

international trade to eliminate the risks suchinternational trade to eliminate the risks such

as unfamiliarity with the foreign country,as unfamiliarity with the foreign country,customs, or political instability.customs, or political instability.


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Letter of Credit (LC) FlowLetter of Credit (LC) Flow

US Importer in

New York

Citi Bank,

New York

Indian Exporter in

New Delhi

1. Purchase Order

5. Goods Shipment

3. LC Delivered7. LC, Drafts, Shipping

Documents Delivered

2.LCApp

lication

1

0.Shipp

ing

D

ocumentsForwa r

ded

4.LCNo

tification

6.LC,Draft,Shipp i

ng

Documents

9.Paym

ent

PNB, New Delhi,

India

8. Draft Accepted & Payment

(Funds) Remitted

11.LC

Paid

onMat u

rity


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Types of Letter of CreditTypes of Letter of Credit

1.1. Documentary and Clean LCDocumentary and Clean LC

A Documentary LC is one that requires theA Documentary LC is one that requires theexporter to submit certain documents likeexporter to submit certain documents like

commercial invoice, packing list, customscommercial invoice, packing list, customsinvoice, inspection certificate, certificate ofinvoice, inspection certificate, certificate oforigin etc, together with draft to issuingorigin etc, together with draft to issuingbank. Most of the LC used in export/importbank. Most of the LC used in export/importfall under this category.fall under this category.

A Clean LC on the other hand, is one thatA Clean LC on the other hand, is one thatdoes not require presentation of anydoes not require presentation of anydocuments. Clean LC are normally used fordocuments. Clean LC are normally used forbank guarantee.bank guarantee.


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2.2. Revocable & Irrevocable LCsRevocable & Irrevocable LCs

The term revocable and irrevocable refers to instructionsThe term revocable and irrevocable refers to instructionsreceived by the advising bank (exporters bank) from thereceived by the advising bank (exporters bank) from the

opening bank (importers bank).opening bank (importers bank). A LC is revocable when it is used only as a means ofA LC is revocable when it is used only as a means of

arranging payment and carries no guarantee. It can bearranging payment and carries no guarantee. It can bewithdrawn without any notice at any time up to thewithdrawn without any notice at any time up to thepresentation of drafts under LC for payment to thepresentation of drafts under LC for payment to theissuing bank. As such there is no protection for theissuing bank. As such there is no protection for the

exporter. For instance he could ship the goods, take theexporter. For instance he could ship the goods, take thedocuments to the advising bank and find that the bankdocuments to the advising bank and find that the bankwill not accept the documents and pay him because thewill not accept the documents and pay him because theletter of credit has been revoked.letter of credit has been revoked.

However the opening bank is responsible for anyHowever the opening bank is responsible for anyoperation on the revocable credit effected prior to theoperation on the revocable credit effected prior to the

receipt by the negotiating bank of any cancellation orreceipt by the negotiating bank of any cancellation ormodification advice.modification advice.

An Irrevocable LC, to the contrary, carries both aAn Irrevocable LC, to the contrary, carries both apayment arrangement and a guarantee of payment andpayment arrangement and a guarantee of payment and

therefore can not be revoked. Most internationaltherefore can not be revoked. Most internationaltransactions use irrevocable LCstransactions use irrevocable LCs

3 C fi d & fi d C


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3.3. Confirmed & Unconfirmed LCsConfirmed & Unconfirmed LCs

If an irrevocable LC is opened by a bank in buyers country, theIf an irrevocable LC is opened by a bank in buyers country, theseller may require the credit to be confirmed by a bank in his ownseller may require the credit to be confirmed by a bank in his owncountry as he may be unaware of the standing of opening bank, orcountry as he may be unaware of the standing of opening bank, ormay otherwise like to ask for additional protection of his interest.may otherwise like to ask for additional protection of his interest.

In such cases, the opening bank requests its correspondent (sayIn such cases, the opening bank requests its correspondent (saySBI in the LC flow chart) in the sellers country to add itsSBI in the LC flow chart) in the sellers country to add itsconfirmation which in effect means that the confirming bankconfirmation which in effect means that the confirming bankundertakes the liability to honor the sellers drafts under the credit.undertakes the liability to honor the sellers drafts under the credit.

It bears an unequivocal undertaking that drafts confirming to theIt bears an unequivocal undertaking that drafts confirming to theterms of credit will be honored notwithstanding any change in theterms of credit will be honored notwithstanding any change in theposition between the person or the bank opening the credit andposition between the person or the bank opening the credit andthe confirming the same.the confirming the same.

It ensures double protection to the seller since it alreadyIt ensures double protection to the seller since it alreadyirrevocable on the part of the opening bank and additionally on theirrevocable on the part of the opening bank and additionally on thepart of confirming bank in his own country.part of confirming bank in his own country.


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For better understanding let us go back to flowFor better understanding let us go back to flowchart of LC.chart of LC.

If the LC issued by Citi bank if confirmed by SBIsIf the LC issued by Citi bank if confirmed by SBIslocal branch in New Delhi, and if Citi bank doeslocal branch in New Delhi, and if Citi bank doesnot honor the LC, our Delhi exporter can alwaysnot honor the LC, our Delhi exporter can alwaysgo to SBIs confirming branch and claimgo to SBIs confirming branch and claimpayment.payment.

Under Unconfirmed LC this obligation i.e. theUnder Unconfirmed LC this obligation i.e. theobligation to make payment lies only on theobligation to make payment lies only on theissuing bank.issuing bank.

Most exporters usually insist on a ConfirmedMost exporters usually insist on a ConfirmedIrrevocable letter of credit. Under allIrrevocable letter of credit. Under allcircumstances they will receive payments forcircumstances they will receive payments fortheir goods, as long as they keep to thetheir goods, as long as they keep to theconditions specified in letter of credit.conditions specified in letter of credit.


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Special Letter of CreditSpecial Letter of Credit 1.1. Revolving LCRevolving LC

Such credit stipulates automatic restoration ofSuch credit stipulates automatic restoration of

the amount already drawn (under the credit)the amount already drawn (under the credit)

as soon as bills are paid, thus obviating theas soon as bills are paid, thus obviating the

necessity of opening a fresh credit for eachnecessity of opening a fresh credit for eachdispatch / shipment. Revolving credit can be ofdispatch / shipment. Revolving credit can be of

two types :two types : CumulativeCumulative cumulative revolving LCs will automatically cumulative revolving LCs will automatically

apply / add the unutilized amount during a given time andapply / add the unutilized amount during a given time and

the same will be carried over to the next period.the same will be carried over to the next period.

Non-cumulativeNon-cumulative non cumulative LCs will consider the non cumulative LCs will consider the

unutilized amount in a given time as lapsed and will notunutilized amount in a given time as lapsed and will not

add this to be carried over to the next period.add this to be carried over to the next period.

22 Transferable/Assignable/Transmissible LCTransferable/Assig

nable/Transmissible LC


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2.2.Transferable/Assignable/Transmissible LCTransferable/Assignable/Transmissible LC

Transferable LCs are those under which the beneficiaryTransferable LCs are those under which the beneficiaryis given the right to transfer the benefits availableis given the right to transfer the benefits availableunder LC to one or more secondary beneficiaries. Nounder LC to one or more secondary beneficiaries. NoLC can be transferred unless it specifically authorizesLC can be transferred unless it specifically authorizesthe beneficiary to do so. The LC itself has to contain athe beneficiary to do so. The LC itself has to contain atransferability clause.transferability clause.

Transferable LC has functional advantage. TheTransferable LC has functional advantage. Theexporter can use the LC transfer to enable his supplierexporter can use the LC transfer to enable his supplierto raise working capital on strength of the LC. Thisto raise working capital on strength of the LC. Thissaves him the entire process of arranging finance tosaves him the entire process of arranging finance topay his suppliers to buy goods for them. As such thispay his suppliers to buy goods for them. As such thisLC is very practical and convenient. The supplier canLC is very practical and convenient. The supplier canmake use of the credit worthiness of original buyer.make use of the credit worthiness of original buyer.


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Benefits of LC (Advantages)Benefits of LC (Advantages)To ExportersTo Exporters

LC minimizes the credit risk, provided the issuing bank isLC minimizes the credit risk, provided the issuing bank isreputed and carries a sound track record.reputed and carries a sound track record.

LC eliminates the risk of payment delays due to uncertainLC eliminates the risk of payment delays due to uncertainfactors like political instability.factors like political instability.

LC affords financing for exporter. All nationalized banks in IndiaLC affords financing for exporter. All nationalized banks in India

are more than willing to finance an exporter who has an exportare more than willing to finance an exporter who has an exportorder backed by LC from a reputed bank.order backed by LC from a reputed bank.

LC normally have a stabilizing effect on production by theLC normally have a stabilizing effect on production by theexporter as the exporter is bound to ship by a certain date asexporter as the exporter is bound to ship by a certain date asper the LC, failing which the order will stand cancelled.per the LC, failing which the order will stand cancelled.

LC minimizes uncertainty and provides a clear picture to theLC minimizes uncertainty and provides a clear picture to the

exporter regarding all requirements for payment.exporter regarding all requirements for payment.


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