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9. Number.-A letter of credit may be either original or supplementary. The former may serve as the basis for the issuing of the latter. For example, an exporter who has received a credit may request the bank to open a supplementary, or, as it is sometimes called, ancillary credit in favor of a third party, who may be a sub-contractor or a manufacturer furnishing goods to the exporter. In this case the original beneficiary is the opener of the credit and the sub-contractor or manufacturer becomes the beneficiary.

10. Location.-Credits are sometimes opened by a buyer in favor of a local seller in a transaction where the latter demands protection against cancellation of the order by the former. A number of firms which have experienced the advantage of holding irrevocable letters of credit in foreign trade seek to obtain similar protection against cancellation in their domestic business. By receiving irrevocable letters of credit, the seller is thus given a guarantee from the issuing bank that the buyer cannot repudiate his part of the contract of sale. The use of the letter of credit in domestic trade is limited, and the instrument finds its widest application in international commerce.

11. Financing Method.-Letters of credit issued by American banks are used largely to finance the movement of goods to and from the United States. American letters of credit may also be employed to facilitate the flow of goods between two foreign countries, a procedure which is described as indirect, rather than direct, financing. For example, a New York bank may establish a letter of credit in favor of a Brazilian beneficiary, at the request of a Cuban merchant to finance a shipment of coffee from Rio de Janiero to Havana.

From the above discussion, it is evident that letters of credit may be issued in many forms and combinations. These forms may in part be classified as follows:

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IV. Parties. Reference has been made to the various parties to the letter of credit, and as they will frequently be mentioned in subsequent chapters, it is well briefly to group them together. 1. The opener is the importer of the merchandise, who requests his bank to issue its letter of credit.

2. The beneficiary of the credit, or the accreditee, is the exporter who is shipping the goods.

3. The issuer is the bank which gives its letter of credit and is also known as the credit opener when it asks a second bank to issue a letter.

4. The acceptor is the bank accepting the drafts of its correspondent which has issued a letter of credit in foreign currency.

5. The notifier is the bank which informs the beneficiary of the opening of the credit. This bank may also be described as the adviser.

6. The negotiator is the bank which purchases the drafts of the beneficiary. The notifier is usually also the negotiator.

V. Advantages. At the opening of this chapter consideration was given to the special problems which arise in the financing of foreign trade. The following discussion of the letter of credit indicates in a general way how the operation of this

instrument to a large extent solves these problems. The advantages of the letter of credit may now be briefly summarized:

1. The burden of financing the transaction is transferred from the merchant to the bank. Neither the seller nor the buyer is compelled to extend credit, for this function is performed by the latter's bank.

2. The determination of the standing of the importer is made by the bank opening the credit. When a bank issues a letter of credit on behalf of an importer it is practically giving its opinion. concerning the credit of the buyer as expressed in the amount stated in the letter. The bank is in a better position to judge the standing of its own customer than the exporter who is usually located in a distant country.

These two advantages apply only to the financial aspect of the letter of credit, but the instrument possesses also commercial advantages to both importer and exporter.

3. The importer to a certain extent is assured that he will be called upon to make payment only upon receiving the goods which he has ordered, for the exporter must deliver documents which comply exactly with the terms of the credit.

4. The exporter who receives the letter of credit can feel confident that, upon the delivery of the proper shipping documents, he will obtain cash or its equivalent in the form of drafts easily negotiated. Especially is this true if he insists upon a confirmed-irrevocable credit which practically insures him against cancellation by the buyer, the buyer's bank and even the notifying bank, if he fulfills all the necessary obligations.

CHAPTER IV

OPERATION OF LETTERS OF CREDIT

The previous chapter has considered the meaning of the letter of credit and has presented a classification of the various forms which the instrument may assume. This chapter will trace the operation of the following commercial credit transactions:

1. Operation of a dollar credit.

2. Operation of a sterling credit.

3. Operation of a credit opened by a bank without a foreign department.

4. Operation of a credit opened through an advising bank. 5. Operation of credits which may be cancelled.

I. Operation of a Dollar Credit. 1. Applying for a credit. -In order to present in logical sequence the successive stages of handling a commercial credit an actual transaction will be used as a basis. Let us assume that the American Importing Co. approaches the X Bank where it carries its account and requests this institution to issue its letter of credit in favor of the Japanese Exporting Co. The bank first requires the American firm to present its requisition in a formal document known as an application for letter of credit (see Form 4).

The application is a document addressed by an importer to a bank in which the latter is requested to issue its letter of credit in accordance with certain carefully specified conditions. Most applications require the importer to furnish detailed information such as tenor of draft, content of bill of lading, insurance policy, commercial invoice, and other documents, method of shipment and the general nature of the transaction between exporter and importer. From these facts the bank determines whether or not it is advisable to finance the importer's undertaking. If it meets with the approval of the bank, the details contained in the application then provide the facts necessary for filling out the credit letter itself. The application is of special service to the importer, for it protects his interests by definitely presenting the terms concerning shipment, merchandise and documents,

which the bank must observe in issuing the letter of credit and in finally paying the drafts drawn by the beneficiary.

An application for a commercial credit must be scrutinized by the bank with the same care which is exercised in analyzing a request for a loan. As indicated above, the bank is extending its credit in the one case in the form of a letter of credit, and in the other usually in the form of a deposit account. A foreign credit like an ordinary domestic loan may be secured by requiring the applicant to deposit collateral such as stocks or bonds. These credits may be unsecured and the bank then depends entirely upon the personal credit of the importer. The bank is thus confronted with the problem of analyzing the standing of the applicant and so the foreign department of a large bank has recourse to credit files.

The credit risk of the importer is determined in about the same manner as that of the ordinary borrower, for both are usually conducting their business in the same country and often in the same city as the bank. It is therefore able to investigate the credit standing of the importer by resorting to the usual sources of credit information, such as property statements showing the assets and liabilities of the borrower, reports of Dun, Bradstreet and other commercial agencies, and reports of banks and business houses which have had business dealings with the applicant for a credit. In determining the borrower's rating, the bank lays special emphasis upon the current data to be found in the records of its various departments. It is essential to know the liabilities which the importer has already assumed in dealing with these departments. This information showing the importer's account with the bank is summarized in a statement blank known as the "offering" slip or ticket. This form usually presents the following data: (1) exchange purchased which includes drafts drawn by the applicant and bought by the bank, (2) obligations discounted, whether notes of the importer or bills and notes receivable from his customers, (3) renewed and time loans advanced to the importer by the bank, (4) drafts accepted by the bank under commercial credits or under acceptance agreements to cover exports made by the applicant, (5) balance carried with the bank computed as an average over a month or a year and also at the present time.

This offering slip may be prepared in two ways. The data

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