Managing Trading Risk

This document explains on a summary level how letters of credit are used as payment documents to reduce the payment risk in international trade.

For information on principles and types of letters of credit. See Using Letters of Credit for International Payments – Overview.

Outcome

Goods are imported or exported based on the terms of the letter of credit. Payment is made by the buyer's bank and reported in M3.

The results of the export affects the credit status of the buyer.

The following files are updated:

  • The letter of credit master file (CLOMAS)
  • The history file for letters of credit (CLOMHF)
  • The file for connections between purchase/customer orders and letters of credit (CLOORD)
  • The history file for purchase/customer orders (CLOOHF)
  • The file for connected documents (CLODOC)
  • The history file for documents (CLODHF)
  • The accounts payable file (FPLEDG) (for import)
  • The accounts receivable file (FSLEDG) (for export)
  • The general ledger file (FGLEDG).

For information on account entries created, see the respective sub-process.

Before you start

  • The following accounting rules must be defined in 'Accounting Rule. Set' (CRS395): AP10–205 (Letter of credit not paid) for import and OI20–105 for export.
  • A payment method for letter of credit must be defined in 'AP Payment Method. Open' (CRS071) and 'AR Payment Method. Open' (CRS076) respectively. Note that the 'Letter of Credit' check box must be selected.
  • Issuing bank and beneficiary bank must be entered in 'Bank. Open' (CRS690).

Follow These Steps

Based on the Request for Purchase, these options are available:

  1. Manage letters of credit for import purposes.

    Launch 'Letter of Credit. Open' (RMS100). Record the letter of credit and connect it to a purchase order. Use the registered information to keep track of each step in the workflow until you have paid the goods.

  2. Manage letters of credit for export purposes.

    Record the letter of credit and connect it to a customer order in (RMS100). Similarly to when importing goods, the manual or automatic setting of statuses control the life cycle of the letter of credit. However, the workflow itself is different.

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