Trade knowledge / Getting the Export Letter of Credit That You Want
Date: 2017-06-11
Getting the Export Letter of Credit That You Want
In a previous article, I wrote about selecting the appropriate payment term for your export sales. Let’s just assume that you’ve gone through the process of evaluating both the buyer’s creditworthiness and the country risk, and after a lot of research you've decided that the letter of credit(LC) is the way to go. Great!
Of course you don’t want just any old letter of credit. You want an LC that will best suit your needs, and that includes terms and conditions with which you feel confident that you will be able to comply. The best way for this to happen is to tell the buyer how you would like them to issue the letter of credit.
Letter of Credit Instructions
Most banks today offer a form detailing potential instructions to the buyer for establishing a letter of credit. This form should serve only as a framework; you'll need to provide all the necessary details. Let’s review some of the more important features you might want to include in your request for the letter of credit:
Name and Address of the Seller
Quite often companies have more than one location—a manufacturing site, main office, and maybe a warehouse. You should specify which address you want to see in the letter of credit. Also, make sure the buyer has your complete company name. If your company’s name ends in Inc., make sure the letter of credit also shows Inc. and not Incorporated. Remember, your documents must reflect the same company name and address as shown in the letter of credit in order to avoid discrepancies.
Currency and Amount
The exact amount you expect to be paid must be identified in the LC, as well as the currency in which payment will be made. If you are unable to identify the exact amount of payment due (i.e. you are selling a commodity by weight and are unable to determine exactly how much of the commodity will be loaded into the container) adding the word about or approximately before the actual figure will give you a 10 percent leeway, plus or minus, for the actual value of the letter of credit.
Since this is an international transaction, a dollar sign won’t do if you expect payment in U.S. dollars, as there are other currencies that also use the dollar sign. You will want to clearly identify the currency by using the SWIFT currency code, which is a three character alpha code. The first two digits represent the country, the last digit the currency. For example, USD represents United States Dollars and JPY represents Japanese Yen.
Advised, Confirmed and Payable At
Identify your preference for the advising bank. If your local bank has an international department that you’d like to work with rather than a bank located on the other side of the country, ask to have your bank named as the advisor. The same holds true for confirmation, if you have determined this is necessary. You can request that the LC be payable at your bank rather than at the counters of the issuing bank. This will help speed up the payment process.
Date and Place of Expiration
Specify that the LC is to expire in the beneficiary’s country rather than at the issuing bank’s counters. Feel comfortable with your ability to have documents presented to your bank on or before the expiration date. Remember, if the expiration date falls on a day that the bank is closed, such as weekends or holidays, you have until the next banking day to present documents.
Drafts
The tenor of the draft indicates when payment will be made. If financing is not required, the tenor is "sight" and payment will be made shortly after documents are determined to comply with the LC terms. If financing is required, it is limited to short term—in other words 180 days or less, usually identified in 30-day increments such as 30 days sight.
Merchandise Description
Specify exactly how you want to have the merchandise described in the LC. Your commercial invoice will have to reflect this description exactly, so you may want to limit the detail here by making reference to the purchase order number.
Incoterms 2010
Identify the Incoterm that you and the buyer have agreed upon. The Incoterm indicates where your costs and responsibilities as the seller end and where the buyer’s costs and responsibilities begin.
Transport Documents
The transport document covering the shipment when crossing international boarders is typically the document required in the LC. Frequently in the U.S. this is either an ocean or air bill of lading, but it could be a truck or rail bill of lading if the shipment is going into Canada or Mexico. (You can download sample bills of lading from the Shipping Solutions website.)
If shipment is by ocean, will you require a negotiable bill of lading? (Please refer to my previous article, Does Your Letter of Credit Allow the Buyer to Access the Goods Before You Get Paid?, for more information on this important matter.)
Latest Ship Date
This is the latest date that the transport document mentioned above can be dated. It is not the date that the goods leave your facility bound for the port of loading. If this date falls on a weekend or holiday, it does not extend to the next working day.
Shipment From/To
You may want to consider keeping the port of loading and discharge generic, such as any USA port. If it is stated this way, you have greater flexibility and will avoid discrepancies in the event of a strike at the named port or any other delay that might occur.
Commercial Documents
If possible, keep the number of commercial documents to a minimum. Perhaps limit the commercial documents to just the commercial invoice. The more documents that are required, the more chances for discrepancies. If the buyer wants additional documents, see if they would agree to receive those documents from you outside the LC.
Banking Charges
Who is going to pay for this letter of credit? It may be clearly stated in your contract that the seller has agreed to pay all banking charges including those of the issuing bank. But if it isn’t stated in the LC, it won’t happen. Today it's most common for the buyer to pay all issuing bank charges, and the seller to pay all other banking charges. If the drafts, as mentioned above, allow for financing, you need to clarify who will pay the acceptance and, possibly, the CAT305-5 discount charges. What about confirmation charges? It is best if the LC clearly spells out who is responsible for paying all of these charges.
Structuring an Export Letter of Credit
Unfortunately, just because you give your buyer your instructions, there is no guarantee that you’ll get the letter of credit of your dreams. As with the sales process, the structure of the letter of credit can also be negotiated.
If you receive a letter of credit that you find unacceptable, it doesn’t mean that you have to ship.SK07-1-N2 You always have the right to refuse the LC. Before you do, however, make sure that other areas of the company agree with this decision. By refusing the letter of credit, you just might lose the sale. At a minimum, you certainly will get the buyers attention. If they want your product badly enough, they might then issue a letter of credit that comes closer to your request.
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