My Checklist for Reviewing a Letter of Credit

Chris Lidberg | April 29, 2019 | Export Finance
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Checklist for Reviewing a Letter of Credit | Shipping SolutionsI 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!

Reviewing a Letter of Credit

One of the basic reasons a company uses letters of credit is because they assure payment. But in order for payment to be received, your documents must comply with the terms of the LC. In order to meet that requirement, you need to review the letter of credit before you ship your goods.

When you first receive an LC, you should read through it completely to get a basic understanding of the document. Then go back and review every detail.

Here are some of the details that I would suggest you check:

Is your company’s name spelled correctly and is the address correct?

Keep in mind that your company may have more than one location. The address that appears in the LC, which could be your corporate headquarters, may not be the address that is shown on your documents. Make sure these two agree or else the bank will call a discrepancy.

Was it necessary for the LC to be confirmed and, if so, is the confirming bank acceptable?

Please refer to my previous articles regarding LC confirmation. If you are uncomfortable with either the country of the buyer or the issuing bank, a confirmation may be in order. You also need to be sure that you are comfortable with the bank adding their confirmation.

Is the amount and currency of the LC correct?

Does the amount and currency agree with the sales contract? Remember, if the credit is issued for a stated amount, that’s it. You can’t draw one penny more than the LC value. If the words “about” or “approximately” are used with the amount of the LC, you automatically have a leeway of plus or minus 10 percent.

Is the tenor of the draft acceptable?

When are you expecting payment? If it’s at the time of document presentation, a sight draft should be required. If you agreed to a financing period, the tenor of the draft should properly reflect the correct number of days.

Is the merchandise described correctly?

This is one of those really picky points with the bank. The merchandise description on your invoice must exactly match the description in the LC. If it is misspelled on the LC, you’ll either have to misspell it on the invoice or have the LC amended.

This is one of the reasons why successful export companies rely on export documentation software. Software like Shipping Solutions eliminate redundant data entry, so that you only have to enter the information once and then it is automatically inserted in the proper format on all the export paperwork. Read the blog post, 5 Reasons to Invest in Export Documentation Software.

Does the Incoterm match your sales contract?

Incoterms 2010, which are published by the International Chamber of Commerce, determine where the costs and responsibilities of the seller end and where they begin for the buyer. Incoterms specify the method of shipment, who is paying the freight, and who is buying the insurance.

Are the transportation details correct?

Does the method of shipment agree with your sales contract? Are the ports/airports of loading and discharge acceptable? Is a negotiable bill of lading versus a non-negotiable bill of lading addressed correctly? These are critical issues that need to be correct in the LC.

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Can the shipping date be met?

Remember that if this date falls on the weekend, you still have to ship by this date; it does not automatically extend to the next business day.

Are the insurance instructions clear and correct?

Were you planning on providing the insurance, or was the buyer taking care of this detail? Does this correspond to the Incoterm being used?

Is the expiration date acceptable, and does it expire in the United States?

If this day falls on a weekend or a day when the bank is closed, you have until the next banking day to present your documents.

Are the document requirements clear and understandable?

Is the LC requesting any documents that you weren’t expecting? Will this add any additional expense?

Does the LC contain reimbursement instructions?

If not, payment won’t be made before documents arrive at the issuing bank’s counters unless your bank will make special arrangements. Is this acceptable?

Are the banking fees being paid by the correct parties?

It is very common for the buyer and seller to pay their own banks fees. Is this what has been agreed to and is it clearly stated in the LC?

Is the LC subject to the UCP 600?

If the LC was issued in a SWIFT format (a standard format used for a number of international banking transactions including the issuance of letters of credit), the issuing bank automatically agreed to subject their LC to the UCP 600. If the LC was issued in any other format and doesn’t mention the UCP 600, you probably should have the LC amended.

Proceeding with a Letter of Credit

If, after reviewing the letter of credit, you determine that everything is acceptable, you can proceed with the shipment.

If there are problems with the LC, however, you must make some decisions: Do you play it safe and go for the amendment, or do you go ahead and ship knowing there are going to be problems and discrepancies. Or is the LC so bad that you should think about canceling the order? If this is the case, please consult others in the company for their agreement before proceeding!

This article was first published in January 2003 and has been updated to include current information, links and formatting.

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