Best practice when dealing with a letter of credit starts before it is received. Firstly the exporter should consider whether it is necessary to use a letter of credit, or if another method of payment could be acceptable (these issues were looked at in Section 3). If it is decided that a letter of credit is necessary, the terms and conditions of the credit should be agreed at the contract negotiation stage with the importer. The following issues should be considered:
- who will pay which bank charges;
- will the letter of credit be payable at sight or will there be a credit period;
- should the letter of credit be confirmed (if this is the case this must be stipulated when it is opened);
- which documentation will be requested under the letter of credit; and
- the date up to which the credit will be valid and the number of days to be allowed for presentation of documents (normally 21 days).
In order to ensure that all these points are considered the exporter should provide their suggested letter of credit wording to the buyer as early as possible during the sales negotiations. If this is agreed and built into the sale and purchase contract, there is less likelihood that goods or payment will be delayed due to problems with the letter of credit.
Even when the above steps are followed, it is essential to check the letter of credit as soon as it is received. The following is a checklist to be reviewed immediately on receipt of a letter of credit:
- is the credit subject to UCP500?
- can the goods be shipped within the period set by the letter of credit?
- do any documents need to be legalised?
- can the mode of transport specified be used?
- can shipment be made from the port/airport specified?
- are the prices correct?
Check that the credit terms conform with the underlying sales contract and in particular that:
- the names and addresses of both opener and beneficiary are complete and correct;
- the credit is irrevocable on the part of the overseas bank (under UCP500 this is the case unless stated otherwise);
- drawings under the credit will be either negotiable or payable in the UK rather than abroad;
- the description, price and quantity of the goods are in accordance with the terms of the contract. Remember that underdrawing a credit may sometimes cause problems, e.g. if trade discount has been forgotten when the opener instructed his bank;
- the insurance requirements of the credit are acceptable;
- the required documentation can be obtained;
- if partshipments and transhipment of goods are prohibited, the full quantity of the goods can be exported on a vessel direct from the port of loading to the port of destination;
- the goods can be shipped within the period specified and present documents to the bank within 21 days from the date of shipment, unless a shorter time is stipulated, but, in any case before the credit expires.
The exporter should send a copy of the credit to their shipping and forwarding agent.
If there are any terms or conditions within the credit which cannot be met, arrangements must be made, immediately, for the credit to be amended. Only the applicant (the buyer) can instruct the bank to amend the letter of credit. This will take time and there will also be a cost involved, but is better than the alternative of leaving the credit as it is and risking rejection of the documents when they are presented.
Once the exporter is certain that all the terms and conditions in the letter of credit can be met care must be taken to compile all the documentation correctly. It must be remembered that the documents must be in strict compliance with the letter of credit - the banks mandate to pay depends entirely on the correctness of the documentation.
A number of issues that should be considered as well as points to check when preparing individual documents are set out at Appendix 3.
Should the documents be rejected the exporter has the following options:
- correct documents;
- instruct the advising bank to request the issuing bank for permission to pay despite the discrepancies;
- offer the bank an indemnity if they will pay despite the discrepancies; or
- send documents to the issuing bank on a collection basis.
Options one and two are the best as the security of the letter of credit is maintained. With the third option the exporter may have to repay the money if the importer refuses to pay for discrepant documents and under the final option the security is lost.
- Contents
- Executive Summary
- Section 1 - Introduction
- Section 2 - Letters of Credit - An Explanation
- Section 3 - Global Payment Patterns
- Section 4 - The Survey
- Section 5 - Demonstrated Best Practice - Return to top of page
- Section 6 - Conclusions
- Glossary of Commonly Used Terms in Documentary Credits
- Appendix 1 - List of Discrepancies and Frequency
- Appendix 2 - Organisations Providing Letter of Credit Training
- Appendix 3 - Checklist for Compiling Documents Under a Letter of Credit
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