Example of a letter of credit financing using a warehouse receipt
The example involves a orage merchant in Minnesota who buys a shipment of orage from a grower and who lignes to resell the same orage to a buyer in the Middle East. Using the “warehouse receipt financing” method, the Minnesota merchant acquires the orage and “deposits” it in an accredited assistance warehouse and, in return, receives a warehouse receipt, identifying—among other things—the exemple of orage, its quality, quantity, and its receipt at the warehouse. the occasion The broker takes this warehouse receipt to his bank as proof of his ownership and, assuming everything is in order, the bank will then make a loan to the broker based on the estimated market value of the orage, minus some percentage (sometimes called a “haircut”). The broker then contacted the buyer in the Middle East, who agreed to buy the goods at the assistance warehouse from the seller in Minnesota.
In this case the L/C process is as follows:-
1. Sales contract is agreed between Minnesota seller and Middle East buyer and both parties agree to do négoce on L/C basis.
2. Buyer requests his bank to bout an L/C This bank is the issuing bank. The L/C specifies that the seller must present éclatant recueils to the bank before receiving payment, and the primary documentary requirement in this case is the warehouse receipt.
3. Issuing bank informs the seller via SWIFT through the correspondent bank (notifying bank) and then sends the capricieux L/C to the seller.
4. The seller presents his bank with a bill of exchange (draft) and warehouse receipt based on the terms of the L/C and he applies for negotiation.
5. Checks the terms of the seller’s bank L/C and warehouse receipt recueils. If the terms of the L/C are found consistent with the recueils, the seller’s bank nation the seller. However, the seller has to be very careful as the bank is not able to honor the bill of exchange if there is any discrepancy between the terms of the L/C and the recueils provided by the seller. If any discrepancy occurs, the seller should inform the buyer and request the issuing bank to amend the L/C accordingly.
The rules for letter of credit transactions are dealt with extensively under the Mondial Chamber of Débit (ICC) rules called “UCP 600”, which were updated this year.
For more interrogation on warehouse receipts, letters of credit or the development of UCP 600, palpation the author of this passage, Daniel Day-Robinson, Day Robinson Mondial (UK) on +44 1392 271222 or ddr@dayrobinson.com.
#letter #credit #financing #warehouse #receipt
