Hi,
When setting up a transferable letter of credit, the customer will be invoiced the full amount (eg 1,000gbp). order to the supplier will be the full amount (eg 900gbp), but the bank will pay each payee their due (eg supplier 900 gbp, intermediary 100gbp)
How should the intermediary enter the sales invoice, the purchase invoice and how does this get matched to the bank statement (besides bank charges which are invoiced separately by the bank).
I think this query may be better answered by someone who understands the process better than what I do. So, apologies that I’m unable to help (although I will relook at this with fresh eyes in the morning), but hopefully another user will be able to advise on how to record this correctly.
I’m not familiar with this ‘transferable letter of credit’ term but it does sound a lot like normal invoice factoring.
I don’t think the OP is clear on who is paying what though so it is a bit difficult to follow the process here.
Invoice factoring is what crossed my mind first of all, but a transferable letter of credit is a document commonly used in international trade. There’s a outline of the process here: What is a Transferable Letter of Credit? | Letterofcredit.biz | LC | L/C
I can confirm that this is not invoice factoring, but a transferable LC.
To clarify for Lurch:
Client arranges guarantees with the bank for the payment, under some conditions to be fulfilled by the manufacturer.
When the conditions are fulfilled by the manufacturer, the bank has to pay the manufacturer. This is a useful mean to guarantee to the manufacturer that they will be paid (if the Client defaults, the bank has to fulfill the obligation), and guarantee to the Client that they will receive their goods, eg when both parties start engaging in business but do not yet have history to rely on.
When an intermediary seller is involved, the bank will pay (on behalf of the customer) the intermediary seller and the manufacturer their share directly, the intermediary seller doesn’t receive the full amount then pay the manufacturer.
There must some standard way of entering this in accounting,
The process does sound a lot like invoice factoring, and also lease purchasing.
Would you not be best doing this with a holding account?
I still think there are some steps missing in this. Exactly what is the process? When do you pay the bank, who does the client pay?
So like;
- Goods ordered from supplier by intermediary
- Supplier paid by bank
- Goods delivered to client
- Intermediary paid by client
- Bank paid by intermediary
Or some other order of working?
It sounds like a holding account is the way to go here. If I understand things correctly, if I’m the intermediary then what I want in my books at the end of the day is:
- sales invoice for £1000 issued by me to the customer
- purchase invoice for £900 from me to the supplier
But what happens with the payment is
- customer’s bank pays supplier £900 on my behalf
- customer’s bank pays me £100
So in QuickFile I set up the £1000 sales invoice and the £900 purchase invoice as normal and send the sales invoice to the customer. They ask their bank to provide a transferable letter of credit.
I create a new fake bank account in the “merchant” category called e.g. TLOC holding account. When I receive my £100 from the customer’s bank I tag it as a transfer from the TLOC holding account into my current account, leaving the TLOC account £100 overdrawn.
I then mark the sales invoice as paid into the TLOC holding account (which now reads +£900), and the purchase invoice as paid from the same account (leaving its balance at zero).
Lurch, steps are:
- Goods ordered from intermediary seller by client
- Goods ordered from supplier by intermediary seller
- Buyer, intermediary seller and supplier agree conditions of release of products (by supplier) and money (by buyer’s bank) - the LC. eg: condition is to provide the customs clearance, the waybill or other documentary evidence that the goods are ready for shipping.
- Buyer provides guarantee of payment to their bank
- Buyer’s bank issues LC under instruction of buyer, to the intermediary sellers bank.
- intermediary seller approves the document and intermediary bank provides LC to supplier’s bank.
- Supplier approves LC and starts manufacturing
- Once production is complete, supplier complete up to the point require to complete the LC (eg customs clearance) and provides the documentary evidence to their bank.
- supplier bank provides this to intermediary bank, who do a check, gets approval from intermediary seller, then provides to the buyer’s bank
- buyer’s bank does the check, if not fully compliant gets approval from buyer. If compliant, or upon approval from buyer if not, then buyers bank releases the money to the intermediary’s bank
- upon receipt, intermediary’s bank provide their share to the intermediary seller, and the due to the supplier’s bank.
- upon receipt of payment (or receipt of confirmation from buyer’s bank, I am not sure), supplier releases the goods for shipping.
So, both the supplier and intermediary are paid at the same time, and the goods are released at the same time.
Ian_robert,
Thank you, I think I understand the idea and this sounds like it could work.
What would be the difference between “loan accounts” and “Merchant accounts” that would make it more suitable to use one or the other?
The classification is whatever makes sense to you, but “loan” accounts would usually be used to record the capital on a bank loan or similar that you’ve taken out whereas “merchant” accounts record money held on your behalf by somebody else (e.g. when someone pays you by credit card but you haven’t yet received the funds from your merchant provider). In the TLOC scenario I guess all the transactions will occur on the same day - you mark both the sales and purchase invoices in your QuickFile as paid on the same day you receive your share of the money - but conceptually I think of it more as a merchant than a loan.
Ok, this makes sense.
Do we need to care about the amounts that do not get received by either the supplier or intermediate? eg bank fees. If we need to, is there a sensible way to do this?
You can handle that similarly using the merchant account, e.g. if you only actually receive £95 of your £100, with £5 withheld by your bank as fees, then you’d handle that with another purchase invoice tagged to a fake supplier called “bank fees” for £5 paid from the merchant account. Overall you’d end up with
- Sales invoice for £1000 paid into merchant account
- Purchase invoice for £900 to the eventual supplier, paid from merchant account
- Purchase invoice for £5 bank fees, paid from merchant account
- £95 money in transaction on your current account tagged as a transfer from the merchant account
The supplier would presumably do a similar trick in their accounts to net off any fees that they were charged, but that’s not your concern.
Thank you, this is useful info we can use to try this around.
I’ve just found what TLOC could stand for, I think I will (must) remember this!
This seems to have worked:
- Created merchant account to represent bank handling LC “Bank LC Handling account”
- Created CI for the amount the customer needs to pay (CI_CTM)
- Tagged the CI_CTM as paid into the “Bank LC Handling Account”
- “Input new transaction” in “Bank LC Handling Account” for the amount the supplier needs to receive
- Tagged this (letting QF automatically creating the purchase invoice) as a payment to the supplier
- Tagged the amount that arrived into our bank account as a transfer from “Bank LC Handling Account”
- “Input new transaction” in “Bank LC Handling Account” for the amount remaining, and tagged this as “LC Transfer Bank Charge”
- Since there are 2 visible bank charges: “LC Setup Fee”, and “LC Transfer Bank Charge”, the LC Setup Fee from the bank account was tagged as a bank charge
I hope this helps others who need to deal with Transferable LC (and us when we do more…)