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Top tips; getting a letter of credit which is right for you
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Top tips; getting a letter of credit which is right for you

Posted on the 30th Nov 2014 in the category Letters of Credit


 A letter of credit ("LC") can be a very secure way of trading and getting paid quickly. However, in the majority of cases, exporters who rightly request payment by LC become exposed to unforseen costs, delays, and even a risk of not getting paid. Why?

  

If the structure and terms & conditions of the letter of credit are left to the buyer, or their bank, you will receive an LC which is biased towards the buyer and therefore offers limited (or no) protection to you, as the exporter. They can also be poorly drafted by the buyer or their bank resulting in confusion and ambiguity with the resultant risk that the bank interprets your documents as discrepant and cannot pay you.

 

Given the importance that all the LC terms & conditions can be fulfilled by you, as the exporter, here are some top tips in getting an LC which is right for you:

 

1. Send your buyer a specimen or details of the LC that you require ("letter of credit proforma"), and where

    possible, make this part of the contract

2. Ask the buyer to send you a copy of their completed LC bank application form, or even better, a draft of

    the LC prepared by their bank, for your approval prior to issuance. This will help to ensure that the LC

    meets your requirements. This practice also cuts down on the need, and therefore costs and delays, of

    seeking changes (amendments) once the LC has been issued

3. Particular attention should be paid to the following:

    Advising bank; try to get the LC advised through your own bank (or your preferred bank). Ask your

    buyer which bank they will (or can) use to issue the LC and then check with your bank whether they can

    handle LCs from the buyer's bank. It is good practice to always specify that the LC is "available by

    negotiation with any bank" just in case it is advised to you by another bank, thus allowing you to pass it

    to your bank on receipt, without the need for amendment

    Place of expiry; ensure the LC expires in your country and not that of your buyer

    Availability; stipulate that the LC must be available for payment, acceptance or negotiation with a bank

    in your country. If the LC is payable only at the counters of the buyer's bank, you will encounter a delay

    in getting paid, and at worst no payment at all, as you are exposed to a) documentary risk (the risk that

    the buyer's bank will find discrepancies in the documents), and b) the ability of the buyer's bank to pay

    you

    Confirmation; if you require a local bank to add their undertaking to pay (in addition to the buyer's

    bank), ensure the letter of credit allows or specifies confirmation

    Latest date for shipment; this should be a date that you can comfortably achieve

    Days allowed for presentation; the longer the period, the more time you have to get your documents to

    the bank, and to correct documents. For shipment by sea requiring bills of lading, 21 days is usual; for

    other transport documents (or forwarder's cargo receipt) try to negotiate 28 days. However, ALWAYS

    aim to get your documents to the bank as soon as possible - the sooner you present documents the

    sooner you get paid (and the more time you have to make any corrections after presentation)

    Documents; avoid documents which need to be issued, or signed, by your buyer as this places them in

    control. Keep the nature and content of documents (and goods description) simple (the more detail - the

    more that can go wrong). Avoid being required to send any original bills of lading direct to your buyer, or

    their agent, outside of the protection of the letter of credit

    Bank charges; who is to pay bank charges; typically the buyer will pick up issuing bank charges, and  

    you as the exporter, other bank charges, although it is possible to negotiate that all charges are payable

    by the buyer (albeit unusual)

 

    If you wish to receive a free letter of credit proforma template, or wish to receive future editions

    from our series "top tips for letters of credit", please email us at stephen@axstradefinance.co.uk or

    complete our enquiry form on our "Contact us" page


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