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An international letter of credit (L/C) is a method of payment that is particularly suited to high value/high risk transactions. Part 1 in this series of two articles on letters of credit gave some background information and introduced the transaction flows involved in letters of credit. In this article I discuss the documents required to successfully execute a letter of credit.
Transport Documents
The transport document is externally produced by the carrier. This document is often the bane of the exporter. Most mistakes appearing on transport documents are fixable, except for shipment dates. Alteration of shipment dates is fraud, and no self-respecting carrier would do that. In any case, this sort of behaviour would cause them to lose insurance coverage, something they would not be keen to see happening.
There are a myriad of reasons for shipments being delayed. It could be due to the exporting firm's inability to fill the order in time and that, in turn, may be due to a supplier's late delivery of raw materials/components. Or it may be due to the ship arriving late because of weather or some other contributing factor. How can late shipment against the L/C be avoided?
Best practice tip: Plan early, of course. If you know that you are running very close to the latest shipment date, and there is a chance that you may miss it, seek an amendment asking for an extension of time to ship.
Now that the goods are with the carrier, how do you make sure that no errors on the transport documents occur? The carrier will be furnished with instructions—it is the responsibility of the exporter to properly instruct the carrier on how to handle the goods and how to issue the documents.
Best practice tip: Automate processes, if possible, and send the instructions electronically to avoid transcription and other human errors.
Where the exporter uses an intermediary, such as a freight forwarder, the onus does not shift. It is not a good option to simply give the forwarder a copy of the L/C and, in doing so, naively believe that the documentary risk has magically transferred to the forwarder. In the end, the exporter is the one who may experience payment delays, or no payment at all, if un-rectifiable errors appear on documents. Banks do not care who produces the documents, they just want to see them with the required data contents to satisfy the L/C demands. If errors occur these may be rectified, but usually at a cost, because there is no such thing as a free lunch!
Best practice tip: Get the carrier (or whomever else you may use) to send you a copy of the final transport document before it is issued so you can check for compliance against the L/C.
Other Externally Produced Documents
Other externally produced documents could be anything, such as government permits (e.g. quarantine), private contractors meeting import entry requirements (e.g. fumigation certificates), or chambers of commerce or consular certification of documents (e.g. certificates of origin). The same comments made under transport documents equally apply here. Make sure these documents can be obtained in time for presentation within the allowable period by the L/C.
Best practice tip: It is known that delays can occur with the issue of external documents, especially with consular certification. Act early, plan ahead. Find out what the time requirements are for certification and make sure you have adequately considered these. Lodge the documents as soon as possible.
Internally Produced Documents
Invoice, packing slips/lists, laboratory reports, material safety data sheets, certification of compliance with standards, certificates of insurance, beneficiary's certificates and bills of exchange (drafts) are all examples of documents that an exporter may produce in-house. How do you make sure errors are reduced or eliminated?
Best practice tip: Wherever possible, automate the production of documentation, preferably by using a specific export software package that may be able to be integrated with your main IT architecture. Automation should eliminate calculation errors, reduce data entry input time by removing duplicate fields across documents, and eliminate transposition errors. On average, more than 50% of data content is replicated across documents—think about it. Regardless of whether it is an invoice or a packing list, the buyer details will not change any more than the consignee details, or the description of the product. Make sure that another staff member (different from the data entry member) checks the documents before these are lodged with the bank.
Internally issued documents are easily fixed and can be resubmitted, but there are two issues to consider: one is the time available to correct and represent, as per the L/C allowable presentation period, and the other is the cost of rectifying errors—again there is no such thing as a free lunch!
Best practice tip: Automate your documentation production processes. Changes to documents produced through an automated system flow to all documents concurrently, thereby reducing error correction times and transposition errors.
Lodgement of Documents With the Bank
One thing needs to be clear for the exporter: the documents are yours until they are accepted by the bank, so you can take them back as many times as you like to correct them/have them corrected, unless these are unsolvable discrepancies, as discussed earlier. There will typically be a presentation period for the lodgement of documents—10 to 15 days seems to be average, but it could be shorter or longer but not exceeding 21 days. The presentation period is usually pegged to the date of shipment—usually the date of the transport document.
Best practice tip: The exporter should lodge the documents as quickly as possible after shipment to have the maximum period of time to make any changes, if necessary. Also, where the payment terms are at sight, payable on presentation of the documents at the counter of the exporter's bank, there may be cash flows to be gained by getting it right. The earlier the lodgement, the earlier the payment. Think of this as a reward or a bonus for the exporting firm because of the job well done by the relevant staff.
Summary: What Are We Trying to Avoid?
In a nutshell, we are trying to avoid errors on documents, which is not easy to do. No one is employed to do one L/C transaction at a time with the luxury of working in a vacuum and isolated from all other activity within the firm.
There are many competing factors, work pressures, timelines, and things that go wrong during the ordinary course of a day's work. However, none of these matter to the bank when checking documents for compliance and eventual payment in a L/C transaction.
L/C's are a double-edged sword; get the documentation right, and you can be assured of payment without interference from the buyer. But, get the documents wrong and it really is in the hands of the buyer as the bank cannot "buy" the documents from you. They would be in breach of the L/C application, so they will seek a waiver from the buyer and ask them to accept the discrepancies in writing.
What will the buyer do? Available estimates tell us that the bad debt rate is quite low on L/C transactions, estimated to be less than half of one percent, but this is cold comfort for the exporter that faces a bad debt. Other studies inform us of the alternative to the bad debt, which is a discount approach. This is where the buyer, sitting in judgement of the documents because they have discrepancies, exerts their "power" in the situation and demands from the exporter (and usually gets) a discount from the agreed price in exchange for accepting the documents. Thus, the exporter gets paid but at a reduced rate.
The whole purpose of dealing with a L/C, from the exporter's point of view, is to get paid. What is the point of having the L/C if the exporter cannot get the documentation correct? In failing to meet the L/C requirements, they lose the very thing they sought in the first place.
In conclusion, exporting firms are encouraged to adopt a multidisciplinary approach to the negotiation, management and processing of L/C transactions. Wherever possible, automated documentation should be used. Finally, documentation should be promptly produced and checked before lodgement with the bank.
In the end it is very simple: you are trying to avoid screwing up the process, so you don't get screwed yourself!
( linda )12 Jan,2012
| Product Model | Inside Diameter | Outside Diameter | Thickness |
| 293/500E NACHI | 500 | 750 | 150 |
| 292/500E NACHI | 500 | 670 | 103 |