He told us that he purchased samples from a factory in Korea a short while ago and now wanted to place a large order. The factory informed him they would ship the goods upon receipt of a letter of credit.
Richard needed to complete an application for the letter of credit, and I offered to help him since he had not used one previously. We started at the top, the name of the beneficiary.
“Beneficiary?” he asked, “What is that?” I explained that the factory in Korea wanted the letter of credit, so we should name them as the beneficiary. He searched in his briefcase and we found their name and address on the invoice for one of the shipments of the sample products.
Then we needed to indicate the amount of the letter of credit. “Well,” he said, “we will have to figure that out.” He reached into his shirt pocket and found a piece of used adding machine tape that he had retrieved from a wastebasket in his office. He had walked through his warehouse and taken inventory on the backside of the tape. He started with the first item on the list, “I have three rolls of wire in inventory.”
“Okay,” I asked, “How many should you have?” “Fifty,” he answered.
“So you need to order 47, right?” I asked. “That’s right,” he said.
“At what price?” I asked. “Well,” he said, “we need to figure that out.” He found a price on an old invoice and we calculated the extension.
“What else do you need?” I asked. We continued the same procedure with each item.
After several items, I noticed Richard used some prices from old invoices with FOB quotes and others with CIF quotes. I informed him that by using different Incoterms we had mixed apples and oranges and suggested we use consistent terms instead. Unfortunately, his price quotes contained a mixture of Incoterms. With lack of better information, I assured him we could expect that the letter of credit would need to be amended.
When we completed the extensions, I added the totals and said, “Richard, it looks like the amount of the letter of credit will total $37,846.53.” “Yep,” he said, “that’s exactly what I thought it would be!”
(With the publication of the Incoterms 2010 rules, the terms FOB and CIF should be replaced with FCA and CIP to better reflect how containers are handled at ports.)
On another occasion, he wanted to open a letter of credit for the purchase of some gardening gloves. From his briefcase he retrieved six sample gloves. He set them out in a row on my desk. They appeared basically identical except for the colors of the markings. “Roy,” he said, “I want to order two styles. Which two do you think I should order?”
I answered, “Richard, I can’t do that. If I choose two and they don’t sell, who will you blame?” “Oh, I wouldn’t do that!” he said.
“Well, I am not going to decide,” I told him. “OK,” he said, “then just tell me which two you like!”
I said, “I guess I can do that.” Since they all looked alike to me, I simply chose two at random and he ordered those two.
To express his appreciation, he gave them to me as a gift. I used them in my garden for a number of years. Fortunately one fit the right hand and one the left, although, of course, they were different colors.
My objective for this article is to emphasize the importance of being proactive in a letter of credit transaction. Do you think Richard might have had a much easier task if the seller had provided quotes with some guidelines for the letter of credit? As it was, the seller left it up to the whims of Richard and me. A scary thought indeed.
Exporters, please note the benefit of being proactive. Provide your buyers with proforma invoices, which include instructions on how to issue letters of credit. Their appreciation will be unending.
Send me an email if you'd like Instructions to the Buyer for Opening a Letter of Credit.