Unfortunately, once both parties agree to the method of payment, sellers frequently don’t give much thought to the actual terms and conditions that are contained in the letter of credit. This is a mistake, and it can lead to a world of problems.
As the seller, you should pay particular attention to the international bill of lading requirements in the letter of credit.
I know there are companies out there that never look at their letters of credit (LC) until they are ready to present documents to the bank. Once they’ve received one from their customer, they assume it’s as good as gold and immediately put it away for safekeeping.
This practice sends shivers down my spine!
In a previous article, Deciding on Approriate Export Payment Terms, I suggested that companies should perform an annual review of payment terms for each of their customers. A company’s creditworthiness and/or their country’s risk factors may improve or decline over time, and you may need to adjust their payment terms accordingly.
You have shipped your product, payment is due, and the buyer claims they have made payment. As far as you can see, however, nothing has happened.
Does this sound familiar? I hope not, but if it does, let’s take a look at what might be causing the delay.
In one of my previous articles, I wrote about back-to-back letters of credit (LC) and how banks, particularly in the United States, just don’t have an appetite for that type of business. This article is going to discuss two alternative to using back-to-back LCs.
In a previous article, I wrote about selecting the appropriate payment term for your export sales. Let’s just assume that you’ve gone through the process of evaluating both the buyer’s creditworthiness and the country risk, and after a lot of research you've decided that the letter of credit (LC) is the way to go. Great!
Of course you don’t want just any old letter of credit. You want an LC that will best suit your needs, and that includes terms and conditions with which you feel confident that you will be able to comply. The best way for this to happen is to tell the buyer how you would like them to issue the letter of credit.
An important part of an international sale is determining payment methods. The major options include cash in advance, collections, letters of credit or open account.
It can take a lot of time and effort to make this decision, but every minute you invest in this decision can mean the difference between money in the bank or writing off bad debt.
My last article covered transferable letters of credit (LC) and how they may be a more acceptable alternative to a back-to-back letter of credit. This article is going to cover another alternative: an Assignment of Proceeds.
If you ever want to send a chill down the spine of your banker in the United States, just mention the phrase “back-to-back letters of credit.”
