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How To Cure The Letter Of Credit Headache

The Challenge:

Letters of Credit Challenge

My firm has just received an order for shipment of one of our machines under a letter of credit for only the second time.  The last order under a letter of credit was just a miserable experience!  We spent hours preparing our documents; yet when we submitted them to the bank selected by the buyer, they advised us that there were errors (discrepancies) in all of our documents.  We were eventually paid, but we owed the bank nearly $1,000 in fees associated with their review and (without correction) the associated discrepancies! 

Now we have another one of those letters of credit for a new customer in China and we don’t want to go through the same tedious process and end up owing the bank money for little to no assistance and … the same tedious process and still need expensive corrections at our client’s bank. 

What should we do?

Sandy in Cincinnati

The Solution:

 It’s a new day and I have some solutions for you.  Some of the solutions are easy, while others will take some (very worthwhile) effort. 

1. Contact a freight forwarder that you have worked with that has a clear understanding of letters of credit.  After having them sign a non-disclosure agreement, share with them the most recent letter of credit.  Ask them to provide you with recommendations on changes that might be made to the letter of credit.  The freight forwarder may charge a reasonable fee vs. the bill you will get from bank.

2. Contact your international banker for their advice on the letter of credit (even if they are not named in the letter of credit).  It is unlikely that the bank you work with will charge you a fee.

3. Attend a class on the letter of credit process that introduces you and your team to the rules of letters of credit known as ICC Uniform Customs and Practice for Documentary Credits (UCP 600).  These rules guide banks in determining whether a document is compliant with a letter of credit, especially commercial invoices, insurance certificates, and international bills of lading. UCP 600 has an article that identifies when documents must be submitted to the bank, known as the ‘21 day’ rule.

4. Establish a letter of credit review process to catch the problems in the letter of credit and the documentation that is being submitted to the bank. It may be best to have a one or two of your employees receive training and concentrate on future letters of credit rather than dilute the benefit of experience amongst your team.

All the best!

Catherine J. Petersen