Libya Update

We have received the following update via the Midlands World Trade Forum (MWTF) with regard to the current situation in Libya:

"It is believed that Tripoli port has closed and that Lloyds of London, the insurers are looking at the cost and type of cover that will be made available for freight. The Libyan Embassy in London are not taking phone calls and legalised documents are not being issued.

Most Letters of credit issued by Libyan Banks require documents to be legalised by the Libyan Embassy therefore most presentations will have discrepancies. It will therefore be difficult for the paying Bank to contact banks in Libya and also the buyers of the goods for them to agree the discrepancies.

Exporters should exercise extreme caution before shipping, it is therefore suggested that goods are only shipped once legalised documents have been received.

Alternative solutions are being looked and will keep you updated as we receive them."

A Letter of Credit Success Story

Last night I attended the North West branch meeting of the Institute of Export (IoE International Trade). We received several fascinating presentations on a range of exporting topics, but one in particular given by the host organisation, Innospec, grabbed my attention.

Regular readers of this blog will be familiar with my mantra of effective management of Letters of Credit from sale negotiations through to document presentation. Innospec's Group Assistant Credit Manager told us that like many companies, Letters of Credit have been increasingly used to mitigate the risks associated with new or challenging markets.... and like many companies they were experiencing huge problems with presenting complying documents and incurring very high bank charges.

Upon initial assessment it was found that only 46% of presentations made to the bank under Letters of Credit were compliant.

The company decided to put in place a range of processes, tools and education to equip all relevant company personnel with the skills to effectively and efficiently manage Letters of Credit, thereby significantly reducing the number of discrepancies and amendments.

The result? 

Innospec now have an enviable success rate of 98% compliant presentations to the banks and have seen a massive reduction in associated bank charges.

The message here is not to underestimate the benefit of reviewing your Letter of Credit processes and undertaking a tailored programme of training for your key people. 

It DOES work!

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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! 

Letter of Credit Checklist for Sales Managers

When delivering in-company Letter of Credit training to export managers and finance teams, I consistently receive feedback along the lines of:  

"Our sales people would really benefit from a guide to requesting Letters of Credit as we never seem to receive them in an acceptable format or through a preferred bank."

I strongly recommend that as export sales play as important a role as anyone in the Letter of Credit process, it is absolutely vital that they fully understand the considerable risks and costs associated with getting things wrong!

With this in mind, here is an initial guide aimed at your key sales people:

Prior to the issuance of a Letter of Credit, an exporter should consider the following:

- Do I want or need a Letter of Credit? The importer may not be willing to issue a Letter of Credit if he has a good payment track record and can obtain similar quality goods from other suppliers on cheaper or more favourable terms (ie: Documentary Collection or Open Account).

- Will the Letter of Credit be issued by a known bank? If not, I should contact my own bank to check the standing of the Issuing Bank. If there remain any concerns regarding the quality of the Issuing Bank, should I request that the Letter of Credit is confirmed by a major bank in my own country?

- In which country is my customer (the importer) located? If I have any concerns over the political or economic situation which may prevent payment being made, should I request that the Letter of Credit is confirmed by a major bank in my own country?

- Have I included ALL the Letter of Credit costs in my price? Such costs are not limited to bank charges, but will also relate to documentation fees (eg: Third Party documents, Certificates of Origin, Legalised Invoices etc).

- What terms and conditions will be stipulated within the Letter of Credit? Do they accurately reflect the underlying sales contract? To ensure that I am able to comply with the terms, have I discussed with the importer the following:

o   The advising / confirming bank in my own country? The Issuing Bank will usually advise the Letter of Credit through a correspondent bank. Will this bank be acceptable to the exporter, particularly if the Letter of Credit is to be confirmed? If we cannot obtain a Letter of Credit through our preferred bank, can it be made 'available with any bank by negotiation'?

o   The latest date of shipment: will I have sufficient time to manufacture / source raw materials in time for shipment?
 
o   The period for presentation of documents to the bank: although under UCP 600, the ‘acceptable’ presentation period (unless otherwise stated in the Letter of Credit) is stated as 21 days, the importer may demand that documents are presented as soon as possible from / after shipment (eg: 7, 10, 14 days). Will I have sufficient time to prepare / obtain documents? Bear in mind that I may be reliant upon third parties to provide transport documents, certificates etc.,
 
o   Payment terms. Will I be paid at sight or at a future date? Is the Letter of Credit payable in my country? In the case of deferred payment / acceptance will the bank be prepared to negotiate or discount?
 
o   Who will pay the bank charges?

o   Will partial shipments be allowed?

o   From which port / airport / other location are goods to be shipped / despatched?

o   Where is the destination of the goods?

Incoterms® 2010

o   Am I delivering EXW*, FCA or FOB?  The buyer’s agent will be controlling the production of certain documents required to be presented to the bank. What if these documents fail to arrive in time or contain discrepancies? (*Note: it is strongly recommended by the ICC that EXW is not used for international shipments).
 
o   It may be more beneficial to consider terms such as CPT / CIP, CFR** / CIF**  whereby I, as exporter, will be engaging the services of a carrier or freight forwarder acting on my behalf. This will provide me with greater control over timing and production of Letter of Credit documents to the bank. (**The ICC recommend that CFR and CIF are appropriate for sea shipments only - non-containerised cargo. If goods are containerised traders are advised to use CPT or CIP, which are appropriate for any mode of transport, including multimodal shipments where main carriage is by sea.)

This list is not exhaustive but should provide some food for thought when negotiating the terms of your next Letter of Credit.


Letter of Credit Training for Export Sales Managers 

Letters of Credit - what are the benefits?

Documentary Letters of Credit are effective in mitigating the commercial and financial risks associated with trading internationally and are beneficial to both exporters and importers.

Advantages to the Exporter 

- Where there is no existing relationship with a customer, a Letter of Credit provides an assurance of payment from an independent party (ie: the bank), subject to conditions being met.

-  Opens the door to new or potentially difficult markets (eg: where unstable economic or political conditions exist), particularly where a nominated bank in the exporter's country is prepared to add its confirmation that payment will be made.

- Payment is guaranteed upon presentation of conforming documents to the bank. Banks deal in documents and are not concerned with the goods, services or related performance of the exporter (article 5, UCP 600).

- Predictability of cash flow. The structure of a credit includes timeframes for shipment and subsequent presentation of documents, therefore the exporter can be fairly certain when payment will be effected (subject to compliance with the terms and conditions). The bank may also be prepared to negotiate / discount the value of the documents presented under ‘term’ or ‘usance’ Letters of Credit.

- A structure / framework within which payment is triggered. The skilled exporter will provide copies of the credit to all interested parties / departments, including the freight forwarder with clear instructions with regard to accurate preparation and disposal of documents.

Advantages to the Importer

- Stipulates the terms and conditions which make it more likely that goods will be received in order and on time.

- Removes the need to release cash in advance to the supplier, thus reducing the risk of non-delivery or delayed delivery of the goods.

- Predictability of cash flow. By stipulating a period for shipment and subsequent presentation of documents, the importer can be fairly certain when payment will be triggered.

- By providing the supplier with a Letter of Credit, the bank is guaranteeing payment (subject to compliance with the credit terms) and therefore the importer could request longer periods of credit to finance the transaction.

- Banks may be prepared to finance greater amounts for longer periods under Letters of Credit as opposed to overdraft, due to heightened visibility and knowledge of the transaction.

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Letter of Credit Confirmation Costs - A Guide

Have you ever closely analysed the Letter of Credit tariffs charged by a range of local banks?

Whilst the standard 'transaction' charges (advising, examination, discrepancy fees etc) are fairly consistent, the ways in which Letter of Credit confirmation 'risk' fees are taken can vary greatly between banks.

Questions to consider are:

1. Does the confirming bank charge a minimum fee (eg: £200)?

2. How is the charge calculated? Letter of Credit Confirmation fees are 'market driven' and will depend on the bank's view of the issuing bank and country concerned. The basis for charging will be an annual risk percentage (eg: 2% p.a*), with many banks charging on a 'per quarter or part thereof' basis. Thus if you have a credit valid for 4 months, in our example you would be charged a full two quarters (ie: 1% of the Letter of Credit value). Some banks will be more flexible, offering to charge on a 'monthly basis or part thereof'. In the case of one client, receiving Letters of Credit for values in the multi-millions I even came across a bank willing to charge on a daily basis!

Shop around - it may save you considerable costs!

(*example cost is for illustrative purposes. Fees will vary significantly depending on bank view of risk).

3. Is the confirming bank likely to offer an estimated cost in advance of receipt of the Letter of Credit, thus giving you an opportunity to more accurately factor in the cost into your price?

4. When dealing in more 'difficult' markets, it may prove challenging to find a major bank willing to add confirmation Letter of Credit. This doesn't mean to say that no bank will do so - you may have to lower your sights slightly in terms of the 'grade' of a potential confirming bank, but this may offer you more security than merely relying solely on the strength of the issuing bank / country concerned. We work with associates who may be able to assist with laying off risk to willing banks, so feel free to contact us on 0800 043 4052 or email: info@mjhayward.co.uk for information.

5. As an alternative to 'up-front' confirmation, have you considered requesting an unconfirmed Letter of Credit available with 'any bank by negotiation'?  There are major banks out there happy to consider offering a 'Commitment To Negotiate' conforming documents presented under unconfirmed Letters of Credit. This is a great option where credits are advised by a bank that is unacceptable / unfamiliar to you.

Letter of Credit Training for Exporters

Taking Control of your Letters of Credit

Who do you currently present your Letter of Credit documents to?

Your own bank?
Another preferred UK bank?

Or…… are you being forced to deal with the Issuing Bank’s London office or their preferred UK correspondent?
 
Consider completing and sending to your customer a Letter of Credit Request Template prior to the issuance of the L/C, thus taking more control by stipulating your preferred advising / confirming bank(s).

By obtaining L/Cs advised regularly through the same bank(s), you will stand a greater chance of developing a strong relationship with document checkers who will become more understanding of your business and work with you to minimise costly discrepancies.

In the event that the Issuing Bank is unable to advise the L/C through one of your chosen banks, you could request that the credit is stated to be ‘available with any bank by negotiation’, thus giving you the flexibility to approach a bank of your choosing when presenting documents.*

(*Please note that you should try to establish the willingness of your preferred bank to check and potentially negotiate documents beforehand. If the L/C is not ‘confirmed’, the UK nominated bank has no obligation to negotiate and may refuse to do so, particularly if there is a perceived bank or country risk. Article 12a. UCP600 refers).

A specimen L/C Request Template is available in word format from the resources page of our website:
www.mjhayward.co.uk/resources.php

Please feel free to adapt to your own requirements.