When delivering in-company Letter of Credit training to export managers and finance teams, I consistently receive feedback along the lines of:
“Our sales people would really benefit from a guide to requesting letters of credit as we never seem to receive them in an acceptable format or through a preferred bank.”
We strongly recommend that as export sales play as important a role as anyone in the letter of credit process, it is absolutely vital that they fully understand the considerable risks and costs associated with getting things wrong!
With this in mind, here is an initial guide aimed at your key sales people:
Prior to the issuance of a letter of credit, a seller should consider the following:
Initial considerations – risk, banks and costs
- Do I want or need a letter of credit? The buyer may not be willing to issue a letter of credit if he has a good payment track record and can obtain similar quality goods from other suppliers on cheaper or more favourable terms (ie: documentary collection or open account).
- Will the letter of credit be issued by a known bank? If not, I should contact my own bank to check the standing of the issuing bank. If there remain any concerns regarding the quality of the issuing bank, should I request that the letter of credit is confirmed by a major bank in my own country?
- In which country is my customer (the buyer) located? If I have any concerns over the political or economic situation which may prevent payment being made, should I request that the letter of credit is confirmed by a major bank in my own country?
- Which bank in my own country will advise the letter of credit? The issuing bank will usually advise the letter of credit through a correspondent bank. Will this bank be acceptable to me, particularly if the letter of credit is to be confirmed? If we cannot obtain a letter of credit through our preferred bank, can it be made ‘available with any bank by negotiation’?
- If we do not maintain a bank account with the advising bank, will they be prepared to handle our documents, given that they may not have undertaken ‘Know Your Customer (KYC)’ procedures? This is an increasingly IMPORTANT issue – refer to our article: Know your customer. Risks for banks and exporters
- Have I included ALL the letter of credit charges in my price, including bank confirmation fees, which will probably be expressed as a percentage of the L/C value?
- Have I included other costs relating to documentation fees (eg: third party documents, certificates of origin, legalised documents etc)?
Terms and Conditions
- What are the terms, conditions and documents to be stipulated within the letter of credit? Do they accurately reflect the underlying sales contract?
- The latest date of shipment: will I have sufficient time to manufacture / source raw materials in time for shipment?
- The period for presentation of documents to the bank: although under UCP600, the ‘acceptable’ presentation period (unless otherwise stated in the letter of credit) is stated as 21 calendar days after shipment date, the buyer may demand that documents are presented as soon as possible (eg: 7, 10, 14 days). Will I have sufficient time to prepare / obtain documents? Bear in mind that I may be reliant upon third parties to provide transport documents, certificates etc.,
- Payment terms. Will I be paid at sight or at a future date? Is the letter of credit payable in my country? In the case of deferred payment / acceptance will the bank be prepared to negotiate or discount?
- Will partial shipments be allowed?
- From which port / airport / other location are goods to be shipped / despatched?
- Where is the destination of the goods?
A lack of knowledge or understanding of Incoterms can result in logistical problems when requesting, preparing and presenting documents to the bank under a letter of credit.
Am I considering delivery of goods on EXW*, FCA or FOB basis? The buyer’s agent will be controlling the production of certain documents required to be presented to the bank. What if these documents fail to arrive in time or contain discrepancies?
(*Note: it is strongly recommended by the ICC that EXW is not appropriate for international shipments).
It may be more beneficial to consider terms such as CPT, CIP (suitable for all modes of transport including containerised goods shipped by sea vessel) or CFR, CIF (for non-containerised goods by sea), whereby I, as seller, will be engaging the services of a carrier or freight forwarder acting on my behalf. This will provide me with greater control over timing and production of letter of credit documents to the bank.
Delivered’ terms (DAT, DAP or DDP) may on their face provide the seller with great control (as with ‘C’ terms), however under these rules legal delivery is not completed until the goods arrived at the ‘named place of destination’ in the buyer’s country. Under such circumstances, sellers should be wary of the L/C requiring a ‘post-delivery’ inspection or acceptance certificate, issued or signed by the buyer confirming safe receipt of the goods. This can result in delays, or at worst, risk of non-payment if the document is not made available to the seller or does not comply with the L/C terms.
To avoid unnecessary delays, amendments, discrepant documents and of course, the associated bank charges, provide your buyer with your required terms, instructing them to provide you with a draft copy of the L/C prior to issuance by the bank.
A useful template for requesting a letter of credit is available for downloading free of charge here .
This guide is not exhaustive but should provide some food for thought when negotiating the terms of your next letter of credit.