Letter of Credit using Tips
Follow the tips below to avoid shipment delays for time-consuming and costly letter of credit amendments. Present this list to your importer.
- The exporter should carefully compare the letter of credit terms with the terms stated on the pro forma quotation. This is extremely important since the terms must be precisely met or the letter of credit may be invalid and the exporter may not be paid. If there are any discrepancies (including spelling mistakes), the customer should be notified immediately, and an amendment should be requested to correct the problem.
- Confirm that the amount of credit is sufficient to cover the F.O.B. costs plus all shipping expenses you want the bank to repay (inland and ocean freight, insurance, forwarding fees, consular fees, inspection fees, etc.). Banks pay only the amount specified in the letter of credit, even if higher charges for shipping, insurance, or other factors are documented.
- Be sure the letter of credit is irrevocable and will be confirmed by a prime U.S. bank. Stipulate that payment will be made upon presentation of documents to the U.S. bank confirming the credit.
- If your credit provides for separate amounts for the merchandise and for shipping expenses, be sure that sufficient funds are established for each, since banks cannot permit merchandise funds to be used for expenses, and vice versa.
- Be sure your bank is shown as the beneficiary, with its name and address spelled correctly.
- Be sure your correct name is shown as the "opener," since the same name must usually appear as the "buyer" and "importer" on your shipping documents.
- Require only documents you know your bank can supply, and if "analysis" or inspection" certificates are to be furnished, specify who to issue them and at whose expense.
- If the goods may be shipped in standard shipping containers, be sure to specify that "container bills of lading" are acceptable. Difficulties also may be avoided if the letter of credit and bill of lading clauses specify "shippers load and count" and "on deck or underdeck loading at carrier's option."
- If shipment is to move via barge, to be towed by tugs, or to be loaded aboard LASH ships (described below), be sure to specify this fact in your letter of credit. You should also consider stating in the letter of credit that "bills of lading are acceptable as 'on board' when issued by steamship companies for reloading on LASH ship."
- If "charter party" bills of lading are acceptable, this fact must be specifically stated in the letter of credit.
- Describe merchandise ordered in English, and in as general and as broad of terms as possible.
- If you must describe the type of insurance coverage required, be sure that type, such as "all risks", is available for the specific goods being shipped.
- Allow partial shipments and part payments in your letter of credit to avoid the necessity of expensive and delaying credit amendments should single packages be short-shipped or damaged on the wharf. Also, specify that any statement of quantity (gallons, ton, etc.) is approximate and not exact.
- Provide in the credit that shipment via air or parcel post is allowed, if your order may be so shipped. If air freight shipment is required, provide in the letter or credit that only one copy of the air waybill is required, and that it is consigned directly to you or your agent ("to order" air waybills are prohibited).
- Be sure adequate time is allowed for manufacturing, shipment, and presentation of documents before credit expiration (in general, a minimum of two months).
A Letter of Credit Typical Transaction
Below is the typical process that takes place when payment is made by an irrevocable letter of credit, which a U.S. bank confirmed:
- After the exporter and customer agree on the terms of sale, the customer arranges for its bank to open a letter of credit. Delays may be encountered if, for example, the buyer had insufficient funds.
- The buyer's bank prepares an irrevocable letter of credit, including all instructions to the seller concerning the shipment.
- The buyer's bank sends the irrevocable letter of credit to a U.S. bank requesting confirmation. The exporter may request that a particular U.S. bank be the confirming bank, or the foreign bank may select one of its U.S. correspondent banks.
- The U.S. bank prepares a letter of confirmation to forward to the exporter along with the irrevocable letter of credit.
- The exporter reviews carefully all conditions in the letter of credit. The exporter's freight forwarder should be contacted to make sure that the shipping date can be met. If the exporter cannot comply with one or more of the conditions, the buyer should be alerted at once.
- The exporter arranges with the freight forwarder to deliver the goods to the appropriate port or airport.
- When the goods are loaded, the forwarder completes the necessary documents.
- The exporter (or freight forwarder) presents to the U.S. bank documents indicating full compliance with the terms stated in the letter of credit.
- The bank reviews the documents. If they are in order, the documents are airmailed to the buyer's bank for review and transmitted to the buyer.
- The buyer (or agent) gets the documents that may be needed to claim the goods.
- A draft, which may accompany the letter of credit, is paid by the exporter's bank at the time specified or may be discounted at an earlier date.