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Documentary Credit Transactions
A common question many companies selling overseas ask is: "Will our company get paid?" When you export, you significantly reduce your risk of non-payment by asking your client, the importer, to pay you through a letter of credit (“lc”). When your customer's bank issues an irrevocable lc naming you as the beneficiary, you get paid by your customer’s bank when you meet the requirements specified in the lc. This shifts the risk of non-payment from your client to their bank.
While lcs are considered to be one of the most secure means of receiving prompt payment for the sale of goods, exporters should understand that they can never completely control the payment process. Documents that are required to be presented under an lc are often prepared by other people, and may not meet the strict standards required by the banking community for payment.
Banks are not concerned with whether or not you, the exporter, have fulfilled your obligations under the terms of the sale contract you may have entered into with your buyer. Banks are only concerned with whether the documents you present to them in exchange for payment conform to the documents required under the credit, and whether you present the documents within the required time period(s).
Improving The Odds
There are a number of common pitfalls to look out for before accepting an lc from an importer. Addressing them early enough can greatly increase your probability of receiving prompt payment.
Keep Documents Simple
The most important thing from an exporter's point of view is to have as few documents as possible, to have as simple and concise a description as possible, and to be sure that all documents called for by the lc can in fact be produced.
As a seller, a problem can arise if the letter of credit requires a document to be signed by someone under the control of the buyer. The document may not be signed by the right person, or may not be signed at all. Avoid documents which must be issued or approved by the buyer – it defeats the entire purpose of the letter of credit.
Keep The Goods Out Of Your Buyer’s Possession Until You Are Paid
A prudent exporter will never let an importer take possession of the consignment until he has been paid under the lc. In cases where there are discrepancies in the documents preventing payment, if your buyer is already in possession of the goods he will have very little incentive to waive discrepancies so that you can be paid. If you are not paid by the bank, your buyer is still contractually obligated to pay for the goods, but the difficulty of debt collection in a foreign country makes it a very costly exercise. Your buyer, knowing this, will undoubtedly force you into negotiating a substantial price discount, if he pays at all.
To keep the consignment out of the buyer's possession, be sure to have the negotiable bill of lading consigned to order of the bank. A bill of lading is a document of title, so a consignment to order of the bank gives the bank title to the consignment until it has been paid for. If payment is not made, the bank has an obligation to hold the documents for you, or return them to you if instructed to do so.
Make Sure You Can Meet All The Deadlines
As an exporter should make sure that you can meet the (1) latest permitted shipping date, (2) the latest date for presentation of documents and (3) the date of expiry of the credit with a large margin for error. If the lc has already been issued to you, and you learn that you cannot meet the delivery date, do not ship the consignment until your client amends the lc in order to permit a later shipping date.
More information on the letters of credit can be found here: http://iccwbo.org/
Copyright © 2007 EPASS International Ltd. All Rights Reserved
Topics
Global trade is extremely dynamic. The risks are large, the rules are complex and the rewards are great.
A cash gap is created when a company pays its suppliers and subcontractors before it gets paid by its customers.
Funding the supply chain has traditionally been a battle between you, the small to medium sized buyer, and your suppliers and subcontractors with regards to payment terms.
A common question many companies selling overseas ask is: "Will our company get paid?"
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