Export letters of credit opened in favor of the seller by the buyer handle most American exports. Letters of credit shift the buyer’s credit risk to the bank issuing the letter of credit. When a letter of credit is employed, the seller ordinarily can draw a draft against the bank issuing the credit and receive dollars by presenting proper shipping documents except for cash in advance letters of credit the greatest degree of protection for the seller.
The procedure for a letter of credit begins with completion of the contract. The buyer then goes to a local bank and arranges for the issuance of a letter of credit: the buyer’s bank notifies its correspondent bank in the seller’s country that the letter has been issued. After meeting the requirements set forth in the letter of credit the seller can draw a draft against the credit (in effect, the bank issuing the letter) for payment for the goods. The precise conditions of this letter of credit are detailed in it and usually also required presentation of certain documents along with the draft before the correspondent bank will honor it. The documents usually required are a commercial, invoice a consular invoice (when requested) a clean bill of lading, and an insurance policy or certificate.
Letters of credit can be revocable or irrevocable. An irrevocable letter of credit means the once the seller has accepted the credit, the buyer cannot alter it in any way without permission of the seller. Added protection is gained if the buyer is required to confirm the letter of credit through a US bank. This irrevocable confirmed letter of credit means that a US bank accepts responsibility to pay regardless of the financial situation of the buyer or foreign bank. From the seller’s viewpoint, this eliminates the foreign political risk and replaces the commercial risk of the buyer’s bank with that of the conforming bank. The confirming bank ensures payment against confirmed let of credit. As soon as the documents are presented to the bank, the seller receives.
The international department of major US bank cautions that a letter of credit is not a guarantee of payment to the seller. Rather, payment is tendered only if the seller complies exactly with the terms of the letter of credit. Since all letters of credit must be exact in their terms and considerations, it is important for the exporter to check the terms to check the terms of the letter carefully to be certain that all necessary documents have been acquired and properly completed. Some of the discrepancies found in documents that cause delay in honoring drafts or letters of credit include the following:
1) Insurance defects such as inadequate coverage, no endorsement or counter signature and a dating later than of billing of lading.
2) Bill of lading defects such as the bill lacking an on board endorsement or signature of carrier missing an endorsement or failing to specify prepaid freight.
3) Letter of credit effects such as an expired letter or one is exceeded by the invoice figure or one including unauthorized charges or disproportionate charges.
4) Invoice defects such as missing or failure to designate terms of shipment (C&F, CIF, FAS) as stipulated in the letter of credit
5) Documents those are missing, stalemated or inaccurate.
As illustrated in the global perspective at the beginning the process of getting a letter of credit can take days, if no weeks. Fortunately this process is being shortened considerably as financial institutions provide letters of credit on the Internet. As one example AVG letter of Credit Management LIC uses e-trade Finance platform (ETFP) an ecommerce trade transaction system that enables exporters, importers, freight forwarders carriers and trade banks to initiate and complete trade transactions over the internet. The company advertises that the efficiencies afforded by the internet make it possible to lower the cost of an export Letter of credit from $500 plus to $25.