What is a Letter of Credit?

A letter of credit is a generic term used for international sales transactions. a letter of credit is basically a mechanism, which allows importers/buyers to offer secure terms of payment to exporters/sellers in which a bank (or more than one bank) gets involved. The technical term for a letter of credit or L/C for short is 'Documentary Credit'.

At the very outset one must understand that “Letters of credit” deal in documents, not goods. The idea in an international trade transaction is to shift the risk from the actual buyer to a bank. Thus an L/C (a generic term recognised by banks, shippers and consignees) is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer. The Buyer is the Applicant and the Seller is the Beneficiary. The bank that issues the L/C is referred to as the Issuing Bank which is generally, but not always, in the country of the Buyer. The Bank that Advises the L/C to the Seller is called the Advising Bank which is generally, but again not always, in the country of the Seller.

The specified bank makes the payment upon the successful presentation of the required documentation by the seller within the specified time frame. Note that the Banks ultimate interest and thus there scrutiny is on the ‘ documents ’ and not the ‘ goods ’ for making payment. Thus the process works both in favor of both the buyer and the seller. The Seller gets assured that if documents are presented on time and in the way that they have been requested on the L/C the payment will be made and the Buyer on the other hand is assured that the bank will thoroughly examine these presented documents and ensure that they meet the terms and conditions exactly as stipulated in the L/C.

Where Cargo Overseas excel is that we have staff who are very experienced in handling letter of credit documentation. We fully understand the process behind letter's of credit and the importance that they hold and so have developed a department which can advise, check or completely take control of this function by preparing and presenting the documentation on your behalf.

Common Reasons why Letters of Credit Fail

1) Time Lines:

The letter of credit should have an expiration date that gives sufficient time to the seller to get all the tasks specified and the documents required in the L/C. If the letter of credit expires, the seller is left with no protection. Most L/C s fail because Sellers/Exporters/Beneficiaries were unable to perform within the specified time frame in the L/C. Three dates are of importance in an L/C:

a) The date by when shipment should have occurred. The date on the Bill of Lading.

b) The date by when documents have to be presented to the Bank

c) The expiry date of the L/C itself

When Cargo Overseas handle your letter of Credit on your behalf we will take responsibility for checking the shipping dates against the L/C. We will advise when you need to have the goods ready for transport to comply with the letter of Credit and then present the documentation within the time frame allowed.

2) Discrepancy within the Letter of Credit:

Letters of credit could also have discrepancies. Even a discrepancy as small as a missing period or comma can render the document invalid. Thus, the earlier in the process the letter of credit is examined, the more time is available to identify and fix the problem. This is another common reason why L/Cs fail.

Cargo Overseas upon receiving an L/C for preperation will go through and check for errors and omissions. Addresses and descriptions are an important part of the document and special care will be taken in ensuring that any alterations required are advised at the earliest opportunity.

3) Compliance with the Documents and Conditions within the Letter of Credit:

Letters of credit are about documents and not facts; the inability to produce a given document at the right time will nullify the letter of credit. As a Seller/Exporter/Beneficiary you should try and run the compliance issues with the various department or individuals involved within your organization to see if compliance would be a problem. And if so, have the L/C amended before shipping the goods.

The more involved in your business Cargo Overseas become the easier we are able to advise on these compliance issues. Where several L/C's vare issued from the same buyer a pattern emerges which we can advise if subtle changes are detected. We can also provide a second set of eyes to back-up your existing policies to ensure prompt payments are made by the correct and precise completion of your documentation.

Cargo Overseas expertise in Letter of Credit completion is second to none. We firmly believe that in this field we are not surpassed by anyone and our refusal rate by banks is minimal, in fact in the last three years we cannot recall a single L/C rejected on any grounds where we have been involved in the completion of paperwork.