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Hi colleagues,
I have written several blogs to cover the entire process of obtaining a letter of credit in SAP. SAP breaks down the LC process into the following modules.
- Treasury and Risk Management
- Financial Accounting
- Material Management
- Sales and Distribution
I covered the entire process of Treasury and risk management in my blog posts. This encompasses configuration and front-end processes. The configuration steps are explained, including the organizational level and product type level configuration.
What is the Letter of Credit
A letter of credit or LC is a written document issued by the importer’s bank (opening bank) on importer’s behalf. Through its issuance, the exporter is assured that the issuing bank will make a payment to the exporter for the international trade conducted between both the parties.
The importer is the applicant of the LC, while the exporter is the beneficiary. In an LC, the issuing bank promises to pay the mentioned amount as per the agreed timeline and against specified documents.
A guiding principle of an LC is that the issuing bank will make the payment based solely on the documents presented, and they are not required to physically ensure the shipping of the goods. If the documents presented are in accordance with the terms and conditions of the LC, the bank has no reason to deny the payment.
Organizational Level of Configuration
There are organizational-level configurations in every module. Which will be applicable on client level or organizational level e.g. company code. Configuring each company code is necessary for TRM, and some of them are at the client level.
The blog below will provide a detailed explanation of all the necessary details. The initial step is to finish these configurations.
https://blogs.sap.com/2023/09/30/trm-treasury-organizational-company-code-valuation-area-configurati...
Product Type Configuration for Letter of Credit
Letter of Credit requires certain configurations. In TRM we use a Jargon Product Type. Product type is an individual specific kind of Debt of investment Contract. e.g. Fixed deposit, Forex spot, LC, BG etc. Product type configuration are client level. If we have multiple company codes, we only have to configure them once.
All the necessary configurations for a Letter of Credit will be explained in detail in the following blog.
https://blogs.sap.com/2023/09/16/trm-treasury-letter-of-credit-configuration/
GL Account Assignment for Product Type
The next action to take is to assign a GL account to a product type. The assigning of GL Accounts is done once. The assignment for GL Account is at the chart of account level.
The blog that follows will explain how to complete this task.
https://blogs.sap.com/2023/09/11/trm-treasury-gl-account-assignment-for-product-type-financial-posti...
Process on Letter of Credit in TRM
After all the necessary configurations have been finished. In SAP, we have the ability to create a financial transaction or contract. FIORI apps will be used for execution of this front end process. The Blog below provides a comprehensive overview of all the necessary steps.
https://blogs.sap.com/2023/10/03/lc-for-import-issue-letter-of-credit-trade-finance-treasury-trm/
Some important steps are highlighted in the flow shared above. Through this, you can gain a comprehensive understanding of how the Letter of Credit process are in SAP.
Letter of Credit is integrated with your import and export transactions, minimizing risk in your international trade activities while speeding up process flows at the same time. You can monitor delivery deadlines and document receipts better for legal control purposes. You can use the following functions to minimize the risks of your import and export transactions:
You can maintain letters of credit, which you receive from banks, in the letter of credit Contract. You can use the following LOC types:
Revocable
Irrevocable, unconfirmed
Irrevocable, confirmed
You can enter all relevant delivery and document data in the header data of the letter of credit. You can also enter internal and external LOC numbers, Incoterms, company codes, addresses, and administrative data. The item data includes status data, business partner data, values, and bank data.
Integrated inbound and outbound logistics lets you assign letters of credit to import and export documents.
The system detects whether your import or export business partner is relevant for Letter of Credit Processing, which means you have to assign a letter of credit to that business partner.
You can enter bank master data by transferring the initial data from your feeder system to the GTS system and then enrich it in business partner maintenance.
You can monitor the status of your letters of credit with the following display options:
Existing letters of credit
Assigned letters of credit
Blocked documents
Two different users must carry out the review of the letter of credit and its subsequent activation.
You can print documents in accordance with the regulations for a letter of credit.
As an importer, you request a quotation from an exporter for goods that you want to purchase. The quotation could include shipping and insurance costs.
After you receive a quotation from the exporter, you create a purchase order based on that quotation.
The exporter creates a pro forma invoice and sends it to you.
You open a letter of credit at the opening bank in the country of destination (import country). During this transaction, you have to notify the opening bank which documents they need from the exporter. As an importer, you not only need the documents required by customs, but also the documents that are required by any other agencies regulating your product. These may include the following, for example:
Bill of lading
Commercial invoice
Export packing list
Single Administrative Document (EU only)
Shipper’s Export Declaration (U.S. only)
Certificate of origin
Insurance certificates
Licenses (if needed)
An import documentary credit gives your vendors a guarantee from your house bank that payment will be rendered within a defined period when the documents listed in the letter of credit are provided. For you as importer, using a letter of credit reduces the risk of having to pay for goods in advance or having to pay for goods or services that do not match the product descriptions in the letter of credit.
If you use a letter of credit, the vendor does not have to demand advance payment to safeguard the delivery; in addition, because the letter of credit guarantees the transaction, your vendor will often offer a better price.
The opening bank sends the letter of credit to the advising bank in the exporter's country.
The advising bank notifies the exporter that a letter of credit has been opened in his favor.
The exporter dispatches the goods in accordance with the conditions defined in the letter of credit.
The exporter provides the appropriate documents to the advising bank to document that the goods were dispatched in agreement with the letter of credit conditions.
The advising bank pays the exporter based on the received documents.
The advising bank sends the documents to the opening bank and receives payment.
The opening bank provides you (the importer) with the documents.
You calculate the import duty rates, submit the customs declaration within the legally defined period, and pay the customs duties.
Conclusion
I am optimistic that this blog will aid a large number of consultants in comprehending the complete process and implementing TRM in their organizations. ECC EHP8 and S/4 Hana have the Letter of Credit solution available.
Don't hesitate to like and share.
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