CHOOSING BEST FINANCING OPTIONS CASH AGAINST DOCUMENTS Seller wants Cash Against Documents payment on the transaction...

CHOOSING BEST FINANCING OPTIONS

CASH AGAINST DOCUMENTS

Seller wants Cash Against Documents payment on the transaction date.Documents are received by the bank on March 01.
Therefore transaction date is March 01,2018
AKBANK charges flat commission % 4.5 —for transfer. Transfer will be done on transaction date March 01.
KOMSIS will pay all amounts from their TL account with AKBANK ( They have enough money in their account .)

LETTER OF CREDIT

Komsıs is working with Akbank. Akbank charges following costs during L/C :

L/C Opening commission 0.5 pct ( 0.005 )
L/C Payment commission 1 pct (0.01)
SWIFT Charges $ 5 per message. ( Total 10 messages )

China Company is working with Bank of China. They are charging following costs

L/C Advising Commission 1 pct ( 0.01)
L/C Documents Reviewing Commission 0.5 pct ( 0.005 )
SWIFT Charges $ 7 per message ( 20 messages )

AKBANK will charge KOMSIS $ 25.000 commission for payment to Chinese bank. Akbank will also charge $ 15.000 for themselves.
Transferred amount and all other charges will be collected from KOMSIS’s Akbank account in Turkish Lira.
Transaction date is : March 01,2018

QUESTION : WHICH OPTION IS BETTER ?

Expert Solution

Cash against documents charges an upfront fees of 4.5%

In case of LETTER OF CREDIT, the

total fees adds up to = L/C Opening commission 0.5% + L/C Payment commission 1% + SWIFT Charges ($ 5 per message x Total 10 messages ) + L/C Advising Commission 1% + L/C Documents Reviewing Commission 0.5% + SWIFT Charges ($ 7 per message x 20 messages ) + $ 25.000 commission for payment to Chinese bank + Akbank will also charge $ 15.000 for themselves = 3.0% + $ 230
If the transaction value is V then Letter of credit cost will be lower if 3% x V + 230 < 4.5% x V or if V > 230 / (4.5% - 3.0%) = $ 15,333.33
Hence, for higher value transaction cost of letter of credit is cheaper than the cash on document option.
total fees is spread over the transaction and not upfront
Borrower has a better control over the transaction

Hence, from the perspective of a borrower, the letter of credit option is better

jeff jeffy answered 1 year ago

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