My business dinner guest sat on the board of directors for a company preparing for their first export sale. This new venture thrilled the gentleman as he anticipated the prospect of the company’s initial entry into Mexico.
We discussed the benefits of the sale and examined some of the logistical details. Since he understood many of the twists and turns, he surprised me when he posed a basic question: "If we put the sale together, how will we get paid?"
In my experience, many U.S. importers, exporters and bankers don’t understand Incoterms rules.
They often don’t understand the definitions or the risks and responsibilities of even their favorite sales terms that they’ve always used. They also don’t understand how Incoterms relate to payment terms.
Many exporters become frustrated when they have shipped goods and then have to prepare documents to conform to the terms of the letter of credit. They suddenly realize they have to prepare or find certain documents that they did not anticipate, or they cannot meet other surprise requirements.
One frustrated exporter exclaimed, "Why would a foreign bank write a letter of credit with all these unacceptable terms and conditions?"
What a great question to ask! Let’s discuss it and find the answer.
How do you prove you own your car? You prove ownership with an official looking document called the title.
How do you prove you own a shipment of goods? Well, it’s a title of sorts, but it’s called a bill of lading.
The bill of lading (BoL or B/L) always signifies or declares the shipment’s ultimate owner (consignee).
For those of you who have worked with letters of credit in your export business, you know how complicated these transactions can sometimes become. However, if done the right way, getting paid this way has numerous advantages.
You could easily get frustrated if your letter of credit is delayed or not paid for any number of reasons. To help you avoid future frustrations and ensure a smoother process, follow these eight tips for using a letter of credit:
A documentary collection works well for many export transactions and provides a measure of security for both importers and exporters.
It provides security to buyers since they do not have to pay until they have documents, which provide proof of shipment. It also provides security to sellers since the buyer cannot receive the goods until he pays for them. Therefore, title to the goods remains with the seller until the buyer pays.
The International rules for letters of credit, known as the Uniform Customs and Practice for Documentary Credits (UCP), state, “A credit must state an expiry date for presentation” (Article 6d). It is relatively easy to find the expiry date in the letter of credit.
However, another date equal in importance is referred to as the last date for presentation. The presentation period—the window of time in which the exporter must present documents—is tied to the ship date as indicated in the original transport document.
One of the core tenets of an export transaction is that your documents must comply with the terms specified in the bank’s letter of credit. Even one small discrepancy can give the buyer license to delay or refuse payment—even if the goods meet specifications. These are the rules detailed in the Articles of the Uniform Customs and Practice (UCP).
Here’s a true story of how a buyer of pool cues gamed the system to delay payments to the manufacturer in Taiwan. But it was the factory that got the last laugh when it shipped the late-paying buyer a box of tree branches instead of cues!
Too often exporters receive a letter of credit and then become frustrated with the terms the issuing bank has provided.
They ask, “Why would a bank issue a letter of credit with terms and conditions like this?” The issuing bank does not arbitrarily set the terms.
Importers and exporters often ask, "What is the best method of payment for international shipments?
Many bankers answer, "Letters of credit." This is a self-serving answer. Of all the methods, letters of credit generate the most fee income for a bank.