Letter of Credit Tips for Exporters and Importers
Importers
When choosing what type of letter of credit to use, the importer should consider the standard payment methods in the exporter's own country.
The importer should keep all of the details of the purchase short and concise.
The importer should use a bank that is experienced in foreign trade as its issuing bank.
The importer should be prepared to re-negotiate or amend terms of the letter of credit with the exporter. This is a common procedure in international trade. With the most common type of letter of credit, irrevocable letters of credit, all parties must agree to amend the document.
The importer may reduce the foreign exchange risk by buying future currency contracts.
Purchase contracts and other agreements relating to the sale between the importer and exporter are not the concern of the issuing bank. Only the letter of credit terms is binding on the bank.
The validation time stated on the letter of credit should give the exporter enough time to produce the goods or to pull them out of stock.
A letter of credit is not a fail-safe. Banks are not responsible for the goods shipped, but are only responsible for the documents exchanged. Documents in conformity with the letter of credit specifications cannot be rejected on the grounds that the goods were not delivered as specified in the contract. The goods shipped may not be the goods ordered and paid for.
Documents specified in the letter of credit should include those required by the importer for customs clearance.
Exporters
Before signing a sales contract, exporters should inquire into the importer's creditworthiness and business practices. The exporter's bank will usually assist in this investigation.
In the case that the letter of credit is unconfirmed, the exporter should confirm the good standing of the importer's issuing bank.
The exporter should make sure that the letter of credit is irrevocable.
Often, the issuing bank will specify the advising and/or confirming bank. These designations are usually based on the issuing bank's established correspondent relationships. The exporter should make sure that the advising/confirming bank is financially sound.
For confirmed letters of credit, the exporter's advising bank must be willing to confirm the letter of credit issued by the importer's bank. If the advising bank will not confirm the letter of credit, the exporter should request another issuing bank as the current bank may have financial issues.
The exporter should carefully review the letter of credit to ensure its conditions can be met. All documents must conform to the terms of the letter of credit. The exporter must comply with each and every detail of the letter of credit specifications. If not, the security given by the credit is lost.
If amendments are necessary, the exporter should contact the importer immediately so that the exporter can instruct the issuing bank to make the necessary changes as soon as possible. The exporter should always know when the letter of credit's expiration date is throughout the amendment process.
The exporter should check with the insurance company whether it can provide the coverage required in the letter of credit and that the insurance charges listed in the letter of credit are all correct. Typical insurance coverage is usually the value of the goods plus about 10 percent.
The exporter must check that the goods exactly match the description in the letter of credit and the invoice description.
The exporter should understand the foreign exchange limitations in the importer's own country which could hinder payment procedures.
