Our firm has just begun to use letters of credit for our transactions, and I am the only one who is responsible for preparing all of the documents. What a headache!
Here's a situation that I faced just last week: The buyer's forwarder is booking the cargo with the ocean carrier. He told me that the earliest we can get our product on the ship is in two weeks, but that is after the unconfirmed letter of credit expires for shipping. Our customer is in India. They told us in an email to just go ahead and ship the goods and they will advise their bank to waive the discrepancies.
I am confused and I am having a difficult time explaining what this means to my boss who has told me to just ship the stuff; he said it's the buyer's problem once it leaves our dock.
Lost in a Letter of Credit
Dear Lost in a Letter of Credit,
Whether you are new with letters of credit or have years of experience, they are a headache. Here is a key phrase to pass on to your boss: A letter of credit does guarantee payment!
An unconfirmed letter of credit is a promise by the buyer's bank in India to pay your firm upon the successful error-free completion and presentation of the documents by a specific date stated in the letter of credit. If a date is not stated, Article 14 states you have 21 days from the bill of lading date to present your documents.
(Article 14 is found in a set of rules adopted by the bank and published the by International Chamber of Commerce. The rules are the Uniform Customs and Practices for Documentary Credits, Publication Number 600.)
Among the documents that must be presented is an international bill of lading showing that the goods were shipped according to the date specified in the letter of credit. Shipping after the date specified in the letter of credit is considered an error or, as a banker will tell you, "A late shipment is a discrepancy."
Your firm is at risk for non-payment if the buyer's forwarder ships the goods on the vessel after the latest shipment date. The Indian bank that issued the letter of credit might not pay you due to the discrepancy. It is often wise to hold the shipment then ask the buyer to amend the letter of credit to extend the latest shipping date, the date for latest presentation of the documents (if specified), and the expiration of the letter of credit.
My hat is off to you! Keep asking questions. Check out the articles written for this blog on letters of credit.
Now for some suggestions on what to do next:
First, consider using Incoterms that give you the authority to choose the forwarder and the international carrier. Under Incoterms 2010, those are such as CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), CFR (Cost and Freight), or CIF (Cost, Insurance and Freight).
Please note that the International Chamber of Commerce is due to release the new Incoterms 2020 this fall that will take effect on January 1, 2020. Those specific terms may change at that point.
Second, create a letter of credit template to send to your customers. Roy Becker offers a sample template in his article, How to Avoid the Most Common Errors in a Letter of Credit.
Third, request training from your international banker, forwarder, trade association or an independent training group like International Business Training.
Fourth, join an international trade association that has online discussions of international payment options.
All the best!