Letters of Credit - The Top 5 Problems

It is estimated that 70 - 80 % of Letter of Credit documents contain discrepancies upon first presentation to the bank.

This statistic is quite staggering and has hardly changed in all the 17 years I have been training companies on the subject of Letters of Credit. So what are the main reasons for failure?

1. Export Sales Managers often agree to accept Letters of Credit from buyers without understanding the risk and cost implications to the business. Unsatisfactory or unworkable terms and conditions can lead to delays and additional costs either through the requirement for amendments or the resulting presentation of discrepant documents.

2. Export Administrators, Shipping or Finance staff may be guilty of paying insufficient attention to detail when preparing documents. Remember that accuracy in Letter of Credit documentation as well as an understanding of and adherence to the provisions of UCP 600 is critical in order to get paid by the bank!

3. Lack of communication both internally and with third parties such as freight forwarders, insurance companies and even the banks themselves. Make sure that information is shared, with copies of the credit given to all people involved in the process. If any ambiguous clauses are contained within Letters of Credit, do not be afraid to pick up the phone to the advising bank to seek clarification.

4.  Dealing with a bank in the country of export, with whom you have no relationship. This may be the local office or a correspondent of the issuing bank who has no knowledge of your business and therefore has little incentive to assist the beneficiary. Working with many of the main UK and European banks, I am aware that Export Letter of Credit business represents a healthy income stream and if you are an exporter regularly receiving Letters of Credit, there will be a strong appetite for your business. Look out for banks with a local document checking service as well as international trade specialists who may be prepared to invest in time to understand your business.

5. Sadly, there has been an increasing trend for the banks to become more 'picky' when checking documents presented under Letters of Credit. If you feel strongly that a bank document checker has been over zealous and that a discrepancy is unjustified or not in accordance with the UCP 600 rules, don't be afraid to challenge them. I have heard of many cases of late where inexperienced document checkers have raised invalid discrepancies and have subsequently been overruled by senior bank staff when challenged by the beneficiary.

So how do we ensure that your documents stand a chance of being in the top 20% of compliant presentations?

The key solution lies in the regular training of all key staff involved with Letters of Credit as well as ensuring that you work with banks and freight forwarders who understand your business and are prepared to work with, rather than against you.

Book Letter of Credit Training Now!