Letters of Credit - Right First Time11.07.2018

How to benefit from Letters of Credit (LC) in six steps.

LC’s are like marmite! You either love them or hate them! However, when it comes to International Trade Finance they can be very helpful in providing you with the security of payment you need when dealing overseas.

LC’s are mainly used when companies are trading in the Middle East, Africa and Asia. However, many UK corporates avoid using them when selling overseas, probably because there is a lack of confidence in getting the documents right first time! This can be simply due to a lack of discipline!

Did you know that 68% of LC’s are rejected by banks on first presentation, due to errors in the documents? This costs SME’s millions of pounds a year in lost revenue and additional costs. Getting the documents ‘right first time’ takes a little bit of work but is worth it. Preparation starts when the contract is being negotiated with the buyer.

Follow these 6 steps for a hassle-free process:

Step 1. It is useful for the seller to specify the wording that they would like to see in the LC. We, at Trade and Export Finance can help here as we believe in a simple secure way of working. Mark is an expert in LC’s and can draft it ready for submission to the buyer. Once the buyer issues the LC it needs to be checked closely by the seller to ensure that the sales contract meets the terms and conditions of the LC; that you can ship within the specified time frames and that you have enough time to present documents to the bank as required in the LC.

Step 2. Always ensure that the LC complies with the International Chamber of Commerce Uniform Customs and Practice (UCP) Documentary Credits 600 ICC publication. This is the ‘Bible’ which all banks use to ensure consistency in their governance.

Step 3. The seller should integrate the timings of the LC into their production schedules. This means that the LC should specify the latest shipment date. Therefore, you need to get the goods ready, inspected, (if that is required), and ready for shipment at least one week, but preferably two, before the latest shipment date. You should work closely with your freight forwarder who will help prepare the documentation and ensure that the shipment complies with the LC. Ensure that the packing instructions on the packing list comply with the terms of the LC.

Step 4. Ensure that the description of the goods in the LC matches that on your invoice, your bills of lading, your packing list and all the other documents. If in doubt, either speak to the advising bank who sent the LC to you or discuss it with your freight forwarder.

Step 5. Present the documents to the bank to whom you sent the original LC. This is normally a UK bank. Under UCP the bank has five working days in which to check documents. So, diarise a time to speak to the LC department to see how they are progressing with checking the documents. If the bank responds with ‘discrepancies’,  i.e. documents that don’t comply with the LC then ask them under what article of UCP they are rejecting the documents.

Step 6 Hopefully, if you have given yourself enough time and the discrepancy is not serious or impacting on the Bill of Lading or certifying document then you need to amend your invoices, packing lists etc., so that they comply and you can re-present the documents to the bank.

Tip: Always remember that banks deal in documents not goods, so therefore if your documents comply with the terms for the LC, you will get paid and you will get the benefit of the security that an LC provides.

In summary, the LC is a bit like a food recipe: if you follow the method, you will end up with a beautiful cake! Similarly, with an LC if you follow the terms and conditions, then you will actually get paid relatively simply.