An International Letter of Credit is a payment method which particularly suites the transactions of high value and high risk. This method is quite complicated, and one of the traditional ways of making international payments. The companies decide to trade through Letter of Credit Services because of two reasons. One reason is due to the rules and regulation of foreign government, and the second reason is due to the lack of trust between the parties those are going to trade with one another. This lack of trust mainly occurs depending upon the value of the transaction with which the financial risk is associated.
Example
Exporter A and Importer B are happy in trading the consignments of $30,000 on an open account basis at a time. Also, if this amount increases to worth $1 million, they will surely review the payment terms for the security of receiving payment and goods.
In LC Services for Exporters, the credit risk of buyers is substituted with the bank because the bank of importer issues the letter of credit to exporter’s bank, which guarantees the payment of the transaction. There is only one condition that is the exporter should meet the terms of documents of the letter of credit so that amount to be safely paid to him.
There are a unique set of rules for the transactions of Letter of Credit, which is referred to as the UCP 600. These set of regulations are administered by the IIC (International Chamber of Commerce). All the obligations and responsibilities of the parties those involved in the transactions of letter of credit are given in these set of rules under UCP 600 worldwide. These set of regulations put special emphasis on the processes and procedures of business banking services.
As concerned with the letter of credit, a seller is an exporter who is also a beneficiary, and the buyer is the applicant as well as the importer. The importer’s bank issues the letter of credit so it is issuing bank and the seller’s bank makes the payment, so it is advising bank.
Enterprise Risk Management Principles Regarding LOC
These principles are the pieces of advice for the exporting firm;
- An exporting company should follow these principles when it deals with LOC.
- These principles make it necessary that all the stakeholders of the exporting company who are involved in the transaction should be included in the decision making the process for choosing the letter of credit as being the method of international payments.
- The company should make sure that all the risk factors are being considered on the particular item at the final decision.
Export Transport Documents for the International Transaction
Carrier produces the export transport document. The export transport document is the bane of the exporter. The common mistakes that appear on this document are fixable except the shipment dates. It is fraud to alter the shipment date. No self-respecting carrier change the date of shipment. If they do so, they can lose the insurance coverage, which they do not want to have happened.
There can be many reasons due to shipment of goods can be delayed. The delivery of products can be delayed due to the inability of the exporting firm or exporter to fill the order in respective time and which in turn can delay the supply of raw material and other components. The second reason for the delay in the shipping of goods can be due to the late arrival of the ship on the board because of bad weather or some other reasons.
Internally Produced Documents for International Transaction
The exporter may produce a variety of documents in-house like an invoice, laboratory reports, packing slips, certification of compliance with standards, material lists, material safety data sheets, certificates of insurance, bills of exchange, and certificates of the beneficiary, etc.
Documents’ Lodgment with the Bank
The exporter should understand one thing that all the documents are of exporter until the bank accepts the documents. So, the exporter can take the documents back for as many times, he wants to recheck or correct them. There is a typical time for the lodgment of documents which can be of 10 to 15 days on an average. This period can also be shorter or longer, but this lodgment period does not exceed 21 days. This period is usually pegged to the shipment date and the document transportation date.
Conclusion
You try to avoid doing mistakes on all documents, but it is not much easy to do. The international transfer service does not allow anyone to do one letter of credit transaction while doing luxury work within the firm. Many factors like timelines, work pressure, and other things may go wrong during the course of action in a day. None of these factors matter for the bank when there is checking the documents done by the bank for completing the payment in a letter of the credit transaction.
This international transfer service is a double-edged sword because if the documents are right and complete, then only the exporter will get the payment without any interference of the buyer. If the documents are getting wrong, it is only in the hands of the buyer because the importer is buying the goods from the exporter, not the bank itself. In this case, there would be a breach of Letter of credit application. So, here the exporter will seek a waiver in writing from an importer if he would accept the discrepancies.
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