Maximizing Collections Under Letters of Credit

Letter of Credit

March 15, 2016
Colin Evans
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How to Start Improving the Collection Success of your Export Letter of Credit Sales

For as long as any of us can remember, Export Letters of Credit have occupied the unique position of being both one of the most “secure” forms of trade payment but also one of the most frustrating and hard to collect.

What seems to simplify the whole process of managing L/C’s is the existence of global set of standard rules and principles called “Uniform Customs & Practice for Documentary Credits”, (“UCP 600”) however this over simplification is where the trouble can start.

First of all, Exporters make some simple (but expensive) commercial mistakes:

  • It’s true that some Letter of Credit rules are obtuse and often difficult to understand by exporters.
  • However, there is no avoiding the fact that some Exporters don’t appreciate that it’s a rigid commercial procedure and pay too little respect to L/C rules and standard banking practices.
  • Low frequency of L/C’s or overall size of the business mean there is seldom a specialist in organisations.
  • Exporters fail to co-ordinate the L/C process between their finance / commercial functions and production / shipping before starting the contract

However, it’s not all down to things in the control of the Exporter:

Banks apply their own strict interpretation of UCP 600 rules; generally speaking the bank’s decision is final.

  • Banks over ‘engineer’ letters of credit; in some instances banks demand almost impossible conditions from the beneficiaries in their L/C texts.
  • Issuing banks often with little commercial thought issue vague L/C texts open to multiple interpretations.

What can be done to prevent discrepant presentations?      Pre – Document Preparation Stage:

  • Discrepancies happen even for the most diligent exporter; therefore if possible build a strong relationship with your bank and the importer; if things go wrong there is a better chance of co-operation saving both time & money
  • Exporters must read & understand the key UCP 600 rules, with particular reference to the context of their export transactions.
  • Obtain the draft L/C text from the buyer before the original L/C is issued; this helps identify & fix problems before they arise and become difficult & expensive to put right.
  • Immediately contact your bank if there are any conditions or sentences on the letter of credit text that are incorrect, vague or open to interpretation.
  • Upon receipt, study the L/C text as early and in as much detail as possible – in most cases problems cannot be fixed at presentation stage, if in doubt, stop the process and consider halting the shipment.
  • Make sure that NO conditions are technically challenging and that ALL conditions can be complied with at the presentation stage.
  • It’s critical to check the list of required L/C compliant documents to be presented after shipment; it’s a prescriptive exercise but never under estimate the importance of the text, marks, inspections, signatures to be provided prior to presentation, which can eliminate the majority of L/C discrepancies.
  • Be proactive & contact the Buyer immediately if there are any conditions or clauses that cannot be complied with.

Document Preparation Stage:

  • Complete ALL documents as requested by the credit and make detailed reference to the L/C rules (UCP 600) when preparing the documents.
  • All company or third party signatures or authentications must be made by requested persons or institutions.
  • Present all required documents with no omissions.
  • Present the correct number of originals and copies as requested by the L/C.
  • Dates on the documents must be in accordance with those mentioned on the credit; set aggressive deadlines for final documents to be ready; avoid making late shipments or late presentations.
  • Maintain pressure on third parties (e.g. freight forwarders) where documents are being produced outside the company to ensure that presentation is made within time.         

Post Presentation Stage:

  • Even payment for documents accepted ‘cleanly’, can be slow or delayed, so keep the pressure on the Buyer & his bank to issue the L/C payment.
  • Check the status of the L/C daily with your bank; try and obtain early indications of the Issuing Bank’s review of the documents.

I am always happy to hear other ideas and contributions to this discussion and always looking to increase the quality of the service offering, please contact me via LinkedIn mail or visit Elite Treasury