How to Handle Letter of Credit and Avoid Discrepancies

Reducing the risk of exporting by successfully submitting documents under a letter of credit.

Steps

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    The Letter of Credit (LC) is useful to both the importer (purchaser) and exporter (seller). The basic terms of trade between the two parties will form an integral part of the terms and conditions of the LC and therefore it is important for the seller to provide as much detail (description of goods, availability for shipment, price, INCOTERMS bank name and address etc) in either a proforma invoice or contract of sale.
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    If the seller has any concerns about the financial stability of the buyers country then it would be wise to insist that the LC is confirmed (i.e. guaranteed by a bank in the seller's country).
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    Once the purchaser has instructed its bank (the Opening Bank) to issue an LC it should take about two or three days for the bank to create the document and transmit it to the Advising Bank. Most LCs are transmitted by wire and therefore will be with the advising bank within 24 hours of transmission. NB the Advising Bank may not necessarily be the buyer's bank.
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    As soon as the seller receives the LC advice it is vital that this document is examined to both ensure that the terms are as set out in the proforma invoice or contract of sale and also that any additional terms (such as the deadline for presentation of documents) can be complied with. The seller should request clarification from the Advising Bank if there are any terms within the LC that the seller does not understand. If the seller cannot comply with any terms then it is important to advise the buyer and request an amendment to the LC.
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    Once the goods have been shipped the seller must ensure that all documents are collated and not only match the terms and conditions of the LC but also are consistent with one another. It is recommended that at least one other person undertakes a second check as familiarity with the documents may well lead to a small discrepancy being overlooked.
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    If there are any obvious discrepancies (such as late shipment) then it would be best for the seller to contact the buyer and request an amendment to the LC. It is not recommended to ask the buyer to instruct the Opening Bank to accept a discrepancy as there is no guarantee that it will do so.
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    Before sending the documents to the Advising Bank check to make sure that the documents should not be presented to a third party bank (a Negotiating Bank)as any error in dispatch of documents may lead to a delay in the mail.
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    If possible have the documents presented for negotiation via your own bank who should be able to undertake a check against the LC before dispatch and may even be able to act as the Negotiating Bank and possibly speed up the process.

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Categories: Funding