Question

CHOOSING BEST FINANCING OPTIONS

1. 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 .)

2. 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 ?

Answer 1

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