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Why Export Letters of Credit Often Fails

Letters of credit related errors are common problems for companies involved in international trade. The eight measures discussed in this article can help companies reduce the inaccuracies in letters of credit related documentation, facilitating the payment process.

Many exporters who make mistakes in the preparation of the documents requested in the letter of credit. Whether manufacturers or traders, whether beginners or experienced firms, small or large companies located in developing countries or countries in the industrialized world, all tend to repeat the same mistakes.

Payment is subject to certain conditions. Irregularities in the documentation mean the non-compliance, resulting in the denial of payment. Surveys suggest understand that letters of credit are often denied because of irregularities. Payment is so refused or postponed.

Faulty documentation represents the major risk in the payment system by letter of credit – another risk being fraudulent documentation. Furthermore, the letter of credit is a sure way against commercial risks if it is irrevocable, and against political risks if confirmed.

Companies should strive to present a flawless documentation. This should even be part of the home policy through a strategy to eliminate errors before submission of the letter of credit. We present you below eight measures to help businesses in this way.

Measure No. 1: Organizing for export

A suitable organization and a division of labor within the company are the first steps to produce adequate documentation. The errors are the result of a lack of organization and a poorly trained team.

The creation of specialized services in the marketing and the export administration can provide a solution. The distribution of tasks involve the coordination and cooperation between these services. An error free documentation result of the joint work of the two departments.

The designated tasks for the export marketing service to get letters of credit and for the administration department, to meet the requirements of the letter. However, the administrative department should first approve the letter of credit, so make sure to respond. Commercial service should in turn ensure that the letter is acceptable and its conditions can be performed economically. The administrative department should then ensure compliance with commitments and deadlines, which sits credibility with buyers home. This well will bring a positive impact to the sales department and will help get other letters of credit.

Measure No 2: Negotiate the terms of the letter of credit in the contract

The definition of the terms and conditions of the letter of credit is involved in the negotiation of the sale contract, and they should be specified in writing. Contract negotiation is a crucial step to facilitate the observance of commitments. If you just ask for a letter of credit, you may receive this document provided conditions unenforceable for you.

When negotiating the terms of the letter of credit, your company must implement a policy designed to deliver or accept conditions that suit their ability and needs. For example, do not agree with a rule like DDP (delivered duty paid) – meaning that the exporter completing customs formalities the buyer’s country – if you are not able to fulfill this clause.

Wherever possible, try to negotiate a reasonable time and flexible terms, as for the delivery of the goods, “any port of destination” instead of a specific port. The flexibility facilitates the execution of obligations.

Once your company has defined its policy, it may entrust the negotiation of letters of credit for its export marketing service. If this task is done well, it will make the execution of the part of the service of the administration to easier export and punctual.

Measure No. 3: To study the letter of credit

We must carefully consider the letter of credit to determine conformity with the contract of sale and check that everything is clearly stated. To this end, it must know when to amend or reject it, it can be done through a checklist. A properly established letter of credit will require proper implementation; a faulty letter, improper execution.

The department responsible for export must study this document, even seek help from the sales department to make the necessary amendments and make contact with the customer or the bank that issued it.

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