International Trade Blog

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.

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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:

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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.

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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.

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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.

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It is now easier than ever for companies to reach potential export customers. By doing nothing more than hosting a web page and attending a few trade shows, even the smallest companies are reaching nearly as many potential international customers as only large multinational corporations could once afford to reach.

Even though it may be easier to locate potential international customers, that doesn’t automatically translate into a profitable, growing export business. You wouldn’t just hop in a car in a strange town and expect to find your destination without directions. Likewise, a company will quickly get lost in the world of exporting if it doesn’t know where it’s going and how to get there.

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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!

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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.

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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. 

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An international letter of credit (L/C) is a method of payment that is particularly suited to high value/high risk transactions. It is one of the four traditional methods of payment and is quite complex.

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