Letter of Credit best practices

Dec 15, 2011 by Emmanuel Besserve

Letters of CreditLetters of Credit are one of the most common payment methods used in trade finance and usually considered as one of the safest way for a seller (located in one country) to receive payment from a buyer (located in another country).

The here below recommendations aim at assisting sellers in maximizing the likelihood of being paid under the Letter of Credit.

1/ Making the Letter of Credit irrevocable

The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. In these circumstances the Seller has full control on any potential corrections.

2/ Choosing the Issuing Bank

Dealing with Letter of Credit involves a lot of communications between the Issuing Bank (Buyer's bank) and the Advising Bank (Seller's bank) together with a good knowledge of the Letter of Credit mechanism.

When negotiating with the buyer before issuing a Letter of Credit, the Seller should seek advice from its Bank in order to get a list of banks in the country of the buyer where the buyer's bank is comfortable to deal with.  The seller should recommend to the buyer to use one of the selected banks to issue the Letter of Credit.

Using an Issuing Bank (Buyer's bank) that receives approval from the Advising Bank (Buyer's bank) helps to smooth the process of the Letter of Credit.

3/Confirming the letter of credit

Having the Letter of Credit confirmed is highly recommended when dealing with an Issuing Bank (Buyer's bank) that is located in a region showing political and/or economical instability. The Confirming Bank takes over the charge of paying the Advising Bank (Seller's bank) upon provision of the documents called in the Letter of Credit.

The charge of the fees paid to the confirming banks is agreed between the parties to the Letter of Credit.

4/ Verifying the product description

One of the most common issues that prevent the payment from the Issuing Bank to the Advising Bank is when the description of the goods in the commercial invoice does not match exactly the description of the goods stated in the Letter of Credit.

Take great care in verifying that the documents to be supplied to get the payment are fully compliant with the letter of Credit in their form and content.

5/ Calling 'manageable' documents in the Letter of Credit

When negotiating the Letter of Credit with the buyer, the seller must pay great attention to call documents that are 'manageable', i.e. on which the seller has a certain level of control.

For example, the request of a certification from the buyer once it has received is to be avoided!

6/ Avoiding shipping of the goods before amendment is confirmed

When a Letter of Credit is in the process of being amended, the seller shall not ship the merchandise until the amendment is confirmed and acceptable to him.

Once the goods are shipped the buyer would have less incentive to accept any amendment.
7/ Consigning the Bill of Lading to order of the bank

By consigning the Bill of Lading to order of the Issuing Bank, the Issuing Bank receives de facto title to the goods. It is then in the interest of the Issuing Bank to receive the payment from the buyer. If payment is not made by the buyer the Issuing Bank is under the obligation to retain the document for the benefit of the seller.

8/ Meeting the deadlines

When negotiating the Bill of Lading the parties shall make sure that the milestones agreed and stated in the Letter of Credit are reasonable taking into account their industry practice. In particular, the parties must take care to agree on an expiry date that allows modifications and potential delays.

Import Finance
About The Author

Emmanuel Besserve

Our international team from Europe, Asia, United States, Canada, Central and South America know what trading is all about. Our team is able to communicate in many languages and we are driven by the idea of providing our members with the highest quality of service that it is available. Let’s make it simple: we want to help you!

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