Why is it Taking So Long to Get Paid? — Part 2

Chris Lidberg | September 15, 2002 | Export Finance, Letters of Credit
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Pay_Now-Pay_Later_SignsBack when I was working at the bank, it was not uncommon for someone late in the day to walk into the Letter of Credit area with their documents and think they were going to walk out with a check within the hour. Unfortunately, it just doesn’t happen that fast.

It’s pretty common knowledge that the vast majority of exporters dread the letter of credit process. However, other than cash in advance, it’s the only payment method where you are able to estimate when payment might be received.

So, just how long is it going to take to get paid?

Let’s say your goods are ready for shipment, and your freight forwarder picks them up on the first of the month. You’ve arranged inland transportation from your warehouse in the Midwest to the port of loading, which will probably take three or four days. Once the goods arrive at the port, it may take up to a week to get the goods on board the vessel and get the original bill of lading. We’re now at the 10th or 11th day of the month.

It will take you a few days to gather the remaining documents required by the letter of credit. (If the letter of credit requires any of the documents be legalized or consularized by a Consulate office, which is usually located in New York, you can add at least seven days to the process.) Once you’ve collected these documents, you would typically courier them to the bank, which adds another day to the process. We’re now at the 12th or 13th day of the month.

Once the bank has received your documents, according to UCP 500, article 13b, it has seven days to examine them and determine if they comply with the terms of the letter of credit. These are banking days, not calendar days. However, most banks today will try to examine the documents within two to three banking days. We’re now at about the 15th day of the month.

If your documents comply and if the letter of credit contains reimbursement instructions, plan on an average of another five banking days before payment is made. So now we’re at least up to the 20th or 21st day of the month.

If there are discrepancies in your documents, which is not an unusual occurrence, add another week to the payment process, during which time your bank is getting payment approval from the issuing bank. We are now up to the 27th or 28th day of the month.

If the letter of credit doesn’t contain reimbursement instructions, add at least another week to the payment process. Your bank will have to courier the documents to the issuing bank for their review before payment is effected.

I tell people in my seminars that they should expect to wait about a month from the time their products leaves their facility until they receive payment. Please keep in mind that the time frames I’ve given here are rough estimates, but it does give you a pretty good idea how long the letter of credit process can take.