What is a Letter of Credit?
A Letter of Credit is a generic term used for international sales
transactions. It 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
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.
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Letter of Credit