Sample Letters / Business Terminology
Click below to download sample letters.
FINANCIAL INSTRUMENTS ACCEPTABLE TO MOST SUGAR SELLER / PRODUCERS
The Standby Letter Of Credit (SBLC) and its traditional use. By definition, a SBLC (Stand by Letter of Credit) is a document issued by a bank, guaranteeing payment on behalf of a client. This is used as a “payment of last resort” if the client fails to fulfill a contractual commitment with a third party. In all reality, the SBLC is just a piece of paper with a “value” backed by the good credit of the bank, allowing clients use a “conditional collateral” if needed.
The SBLC (Stand by Letter of Credit) is commonly used when two parties enter into a contract calling for one party to make payment in favor of the other. Traditionally with any Stand by Letter of Credit, the agreement is the SBLC will NOT be “drawn” unless the owner defaults on the contract. However, there are exceptions which we will explain shortly. If the beneficiary was to monetize the SBLC without prior agreement, the owner could dispute the contract in court.
The truth is, SBLC’s are commonly used in industrial or bulk commodity sales, serving as a “performance bond” of sorts. Despite what private placement brokers may claim, the SBLC is not used for leasing or investing very often. Just like we explained above, it’s MOSTLY used in bulk, wholesale, and logistical markets. Don’t waste your time “leasing” an SBLC, or having it “fresh cut” from the bank, it will never fund your project. The fact is, unless you are using it for credit enhancement or proof of temporary collateral, a “leased” SBLC will ALMOST ALWAYS be useless.
The Standby Letter Of Credit (SBLC) as payment instrument.
Every so often, someone will tell you that one cannot use the SBLC as payment instrument. This is incorrect.
However, if the SBCL is cash backed it can be used as payment instrument as long as this is clear and agreeable to both parties the SBLC can be used as full or partial payment instrument.
This is how it works:
The Bank Guarantee (BG)
A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
A bank guarantee might be used when a buyer orders goods from a seller and needs to issue a guarantee of payment to the seller. The bank guarantee would pay an agreed-upon sum to the seller in case the buyer is unable to make payment on time. Essentially, the bank guarantee acts as a safety measure for the party named as beneficiary in the transaction.
The Bank Guarantee as described above is a security instrument for the Seller. It can also be used as payment instrument. If the Buyer does not issue the last payment, the Seller will then cash the BG as payment after shipping the last shipment. This is usually agreed upon in the Sales and Purchase Agreement.
Performance Bond (PB)
Performance Bond is posted by the Seller as security for the Buyer that the Seller will deliver the purchased goods as agreed upon in the Sales and Purchase Agreement.
In the sugar industry, PB is only issued for multi shipment – multi- payment contract orders. The standard PG is in the value of 2% of each shipment. NO Performance Bond is posted for SPOT orders.
Performance Bond is generally issued in form of SBLC or BG. (Sellers choice.)
Types Of Letter Of Credit (DLC)
Although Documentary Letters Of Credit are rarely, if ever, accepted by Brazilian sugar Seller / Producers, we will include them here for informational purposes.
Revocable
This is an LC that can be cancelled or amended by the applicant or the Opening Bank without prior notice to the Exporter.
Irrevocable
With an irrevocable Letter of Credit the Issuing Bank gives its irrevocable undertaking to pay if all the terms of the LC are met. The Issuing Bank can only amend or cancel its undertaking if all parties to the LC consent to the change.
Confirmed
A Confirmed LC is one to which a second bank, usually in the Exporter's country and at the Exporter's request, adds its own commitment (confirmation) that payment will be made. Confirmation is generally used when there is perceived to be some risk that the bank issuing the Letter of Credit may not be able to fulfil its obligation to pay. This could be due to bank failure or instability in the country of the Issuing Bank.
Unconfirmed
If the LC is unconfirmed, the Advising Bank merely informs the Exporter of the terms and conditions of the LC without adding its own undertaking to pay or accept under the terms of the LC.
Transferable
A Transferable Letter of Credit is one that can be transferred from the first Beneficiary to one or more additional Beneficiaries by the Transferring Bank. It is normally used in situations where a supplier sells through an intermediary or 'middleman' to the ultimate Importer and is in a strong enough bargaining position to insist upon payment by Letter of Credit. By using a Transferable Letter of Credit, the intermediary is able to provide payment by LC to their supplier without the need for their own credit line with the transferring bank. An LC is only transferable if it is expressly stated to be so by the Issuing Bank.
Others
There are other less commonly used variations of Letter of Credit, for example Back-to-Back, Red Clause and Revolving. Your bank can advise you of the type of Letter of Credit best suited to meet your needs. More detailed information on other types of LC.
Special Types Of Letters Of Credit
Transferable
Transferable Letters of Credit are used when the Exporter is acting as an intermediary between the Importer and Exporter in a commercial transaction. In this instance, all of the rights and obligations of the LC are transferred from the intermediary to the ultimate supplier. The intermediary has no liability. The terms of the transferred LC must be the same as the original except for the amount, unit price, expiry date, latest presentation date and period of shipment. All of these may be reduced, or brought forward. The identities of the Importer and the ultimate supplier may need to be withheld from each other. Careful drafting of the original and transferred Letter of Credit is needed to ensure this occurs. (NB: Banks assume no liability or responsibility for any disclosure).
Back-to-Back
In this instance, two LCs are established completely independently of each other. The Importer establishes theirs in the Exporter's favor. The Exporter can then arrange a second LC in favor of the ultimate supplier of the goods or the supplier of raw materials. This type of LC should only become necessary where the underlying contracts are on terms which do not match or where a Transferable LC is unable to maintain secrecy on a particular aspect of the transaction. Due to the greater risk involved with this type of LC, they are rarely issued.
Revolving
If an Exporter makes regular shipments to a particular Importer under a long term supply contract, it may be beneficial for a series of shipments to be secured by a single documentary LC. A Revolving LC can achieve this by the LC being reinstated for the original amount after a given period, and allowing the value of the LC to be drawn each time a shipment of goods is undertaken. Be aware that as this is a continuing liability, it will have an impact on banking facilities.
Advance Payments (or Red Clause)
An LC that contains a clause, which authorizes the nominated bank to advance a portion of the value of the LC to the Exporter before shipping documents are presented. This enables the Exporter to purchase raw materials or to pay other costs before receiving the full payment, once conforming documents have been presented. Advances are made at the risk of the Importer. Drawings under an LC are made against a simple receipt from the Exporter that they will refund the amount if they do not ship the goods as required. The Importer's account is debited as soon as an advance has been made.
There are many more specialized financial instruments. We addressed here only the most commonly used instruments in the Brazilian sugar business.
Click below to download sample letters.
FINANCIAL INSTRUMENTS ACCEPTABLE TO MOST SUGAR SELLER / PRODUCERS
The Standby Letter Of Credit (SBLC) and its traditional use. By definition, a SBLC (Stand by Letter of Credit) is a document issued by a bank, guaranteeing payment on behalf of a client. This is used as a “payment of last resort” if the client fails to fulfill a contractual commitment with a third party. In all reality, the SBLC is just a piece of paper with a “value” backed by the good credit of the bank, allowing clients use a “conditional collateral” if needed.
The SBLC (Stand by Letter of Credit) is commonly used when two parties enter into a contract calling for one party to make payment in favor of the other. Traditionally with any Stand by Letter of Credit, the agreement is the SBLC will NOT be “drawn” unless the owner defaults on the contract. However, there are exceptions which we will explain shortly. If the beneficiary was to monetize the SBLC without prior agreement, the owner could dispute the contract in court.
The truth is, SBLC’s are commonly used in industrial or bulk commodity sales, serving as a “performance bond” of sorts. Despite what private placement brokers may claim, the SBLC is not used for leasing or investing very often. Just like we explained above, it’s MOSTLY used in bulk, wholesale, and logistical markets. Don’t waste your time “leasing” an SBLC, or having it “fresh cut” from the bank, it will never fund your project. The fact is, unless you are using it for credit enhancement or proof of temporary collateral, a “leased” SBLC will ALMOST ALWAYS be useless.
The Standby Letter Of Credit (SBLC) as payment instrument.
Every so often, someone will tell you that one cannot use the SBLC as payment instrument. This is incorrect.
However, if the SBCL is cash backed it can be used as payment instrument as long as this is clear and agreeable to both parties the SBLC can be used as full or partial payment instrument.
This is how it works:
- Let’s assume a Buyer wishes to purchase a commodity with one scheduled shipment each month.
- The Buyer issues a cash backed SBLC with the value of one month shipment.
- The Seller produces and ships the first shipment of product as agreed.
- The Buyer makes payment for the shipment as agreed in the contract. (Usually by MT103 after receipt of the shipping documents.)
- This process is repeated until the second-last shipment.
- After the last shipment is delivered, the Seller simply cashes the SBLC he was holding as security for payment of the last shipment.
The Bank Guarantee (BG)
A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
A bank guarantee might be used when a buyer orders goods from a seller and needs to issue a guarantee of payment to the seller. The bank guarantee would pay an agreed-upon sum to the seller in case the buyer is unable to make payment on time. Essentially, the bank guarantee acts as a safety measure for the party named as beneficiary in the transaction.
The Bank Guarantee as described above is a security instrument for the Seller. It can also be used as payment instrument. If the Buyer does not issue the last payment, the Seller will then cash the BG as payment after shipping the last shipment. This is usually agreed upon in the Sales and Purchase Agreement.
Performance Bond (PB)
Performance Bond is posted by the Seller as security for the Buyer that the Seller will deliver the purchased goods as agreed upon in the Sales and Purchase Agreement.
In the sugar industry, PB is only issued for multi shipment – multi- payment contract orders. The standard PG is in the value of 2% of each shipment. NO Performance Bond is posted for SPOT orders.
Performance Bond is generally issued in form of SBLC or BG. (Sellers choice.)
Types Of Letter Of Credit (DLC)
Although Documentary Letters Of Credit are rarely, if ever, accepted by Brazilian sugar Seller / Producers, we will include them here for informational purposes.
Revocable
This is an LC that can be cancelled or amended by the applicant or the Opening Bank without prior notice to the Exporter.
Irrevocable
With an irrevocable Letter of Credit the Issuing Bank gives its irrevocable undertaking to pay if all the terms of the LC are met. The Issuing Bank can only amend or cancel its undertaking if all parties to the LC consent to the change.
Confirmed
A Confirmed LC is one to which a second bank, usually in the Exporter's country and at the Exporter's request, adds its own commitment (confirmation) that payment will be made. Confirmation is generally used when there is perceived to be some risk that the bank issuing the Letter of Credit may not be able to fulfil its obligation to pay. This could be due to bank failure or instability in the country of the Issuing Bank.
Unconfirmed
If the LC is unconfirmed, the Advising Bank merely informs the Exporter of the terms and conditions of the LC without adding its own undertaking to pay or accept under the terms of the LC.
Transferable
A Transferable Letter of Credit is one that can be transferred from the first Beneficiary to one or more additional Beneficiaries by the Transferring Bank. It is normally used in situations where a supplier sells through an intermediary or 'middleman' to the ultimate Importer and is in a strong enough bargaining position to insist upon payment by Letter of Credit. By using a Transferable Letter of Credit, the intermediary is able to provide payment by LC to their supplier without the need for their own credit line with the transferring bank. An LC is only transferable if it is expressly stated to be so by the Issuing Bank.
Others
There are other less commonly used variations of Letter of Credit, for example Back-to-Back, Red Clause and Revolving. Your bank can advise you of the type of Letter of Credit best suited to meet your needs. More detailed information on other types of LC.
Special Types Of Letters Of Credit
Transferable
Transferable Letters of Credit are used when the Exporter is acting as an intermediary between the Importer and Exporter in a commercial transaction. In this instance, all of the rights and obligations of the LC are transferred from the intermediary to the ultimate supplier. The intermediary has no liability. The terms of the transferred LC must be the same as the original except for the amount, unit price, expiry date, latest presentation date and period of shipment. All of these may be reduced, or brought forward. The identities of the Importer and the ultimate supplier may need to be withheld from each other. Careful drafting of the original and transferred Letter of Credit is needed to ensure this occurs. (NB: Banks assume no liability or responsibility for any disclosure).
Back-to-Back
In this instance, two LCs are established completely independently of each other. The Importer establishes theirs in the Exporter's favor. The Exporter can then arrange a second LC in favor of the ultimate supplier of the goods or the supplier of raw materials. This type of LC should only become necessary where the underlying contracts are on terms which do not match or where a Transferable LC is unable to maintain secrecy on a particular aspect of the transaction. Due to the greater risk involved with this type of LC, they are rarely issued.
Revolving
If an Exporter makes regular shipments to a particular Importer under a long term supply contract, it may be beneficial for a series of shipments to be secured by a single documentary LC. A Revolving LC can achieve this by the LC being reinstated for the original amount after a given period, and allowing the value of the LC to be drawn each time a shipment of goods is undertaken. Be aware that as this is a continuing liability, it will have an impact on banking facilities.
Advance Payments (or Red Clause)
An LC that contains a clause, which authorizes the nominated bank to advance a portion of the value of the LC to the Exporter before shipping documents are presented. This enables the Exporter to purchase raw materials or to pay other costs before receiving the full payment, once conforming documents have been presented. Advances are made at the risk of the Importer. Drawings under an LC are made against a simple receipt from the Exporter that they will refund the amount if they do not ship the goods as required. The Importer's account is debited as soon as an advance has been made.
There are many more specialized financial instruments. We addressed here only the most commonly used instruments in the Brazilian sugar business.
letter_of_readiness.pdf | |
File Size: | 47 kb |
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sample_letter_of_intent.pdf | |
File Size: | 51 kb |
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stand_by_letter_of_credit.pdf | |
File Size: | 83 kb |
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terms_and_definitions.pdf | |
File Size: | 80 kb |
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business_terminology.pdf | |
File Size: | 67 kb |
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NCNDA/imfpa.doc | |
File Size: | 101 kb |
File Type: | doc |