Five top tips for working with Documentary Letters of Credit
A Documentary Letter of Credit (L/C) is a method of payment used to facilitate international trade and is considered to be the most secure method of receiving payment for exports other than advance payments
A L/C is a written undertaking given by a bank on behalf of an importer (buyer) to pay an exporter (seller) a given sum of money within a specified time period, providing the exporter presents documents to the bank which comply with the terms and conditions stipulated in the L/C
L/C’s are used and accepted globally, and are governed by a set of rules regulated by the International Chamber of Commerce entitled “ICC Uniform Customs and Practice for Documentary Credits, UCP 600”
For the inexperienced exporter a L/C can appear to be a daunting prospect, but some simple steps can help to alleviate these issues:
1. Keep a document check list
When agreeing this method of payment with a buyer, agree exactly what documents will be stipulated in the L/C; these documents will usually be invoices, packing lists, Certificates of Origin and a document proving that goods have been shipped (Bill of Lading or Airway Bill)
A check-list is invaluable to ensure required documents are not missed.
2. Time is everything
Ensure you agree with the buyer timescales for shipment. Know your product lead times; leave sufficient goods production and despatch time
Late shipment and/or presentation can risk non-payment.
3. Ensure that the goods description is clear
The more information, the greater the possibility for errors and non-payment
Clarify details and documents with your customer and follow the UCP 600 rules
Ensure all parties involved use the same wording and terminology; documents should be consistent
Remember, banks deal in documents not goods therefore will not have the technical knowledge of your industry
4. Get an application copy to check and approve before it is issued
Try and obtain a copy of the L/C before it is actually issued by the buyers’ bank, so that when you receive the L/C, you receive exactly what you expect regarding the terms and conditions
Amendments = money, time and potential problems however amendments should not be necessary if the L/C is correctly followed. If they are needed, request and decide who pays for them
5. Keep copies of all documents on receipt of the credit
Your staff and freight forwarder are vital links. The freight forwarder should also check the credit and advise if you need amendments
Letters of Credit can be complex but need not be daunting however if you are running up against problems with your bank contact our expert Roy Broadhead on 0845 034 7200 for help
"Great course – really good to speak to someone who really understands L/C’s. I understand better how to use them to our benefit."
Caroline Barnett, JAB International, London