Trading with China by Letter of Credit

A warm welcome to Richard Casburn who has recently joined MJ Hayward Associates from HSBC as our new Training Partner.  He brings a wealth of experience in Trade Finance having worked in international banking for more than 30 years.

Richard provides some current thoughts on developments in the way Chinese banks handle Letters of Credit:

"One of the most significant developments relating to Export Letters of Credit over the past few years is the way that many banks in China have changed their interpretation in the way that L/Cs are handled. 

As China becomes more westernised with English being commonly spoken, many banks are adopting a much more sensible approach when they examine documents under L/C presentations.

Chinese banks historically had a reputation for scrutinising every word in every document, and in many cases rejecting documents if a word was incorrectly spelt, even by one letter. 

Clearly, in certain instances such as descriptions of goods etc, spellings must be exact. However this old practice of letter by letter scrutiny in every document has largely ceased, and also UCP 600 which was not always widely recognised in China, is now accepted and embraced by the majority of banks.

A really significant change is that some major banks such as Bank of China will, when issuing L/Cs, now be prepared to ask another bank to add its confirmation. This was almost unheard of until recently, however some of the smaller, local Chinese banks will still adhere to the old perception that it is not honourable to ask another bank to add its name to an L/C. In these cases, silent confirmations and commitments to negotiate remain relevant."         

Financing Transactions with Letters of Credit

A Letter of Credit is an excellent tool in terms of providing payment security to the seller and more certainty of shipment of the goods / provision of services to the buyer. It can also be very useful for improving cash flow for both parties. This factor is rarely considered by sales or purchasing managers when negotiating contracts with overseas trading partners.

I have spoken with several exporting companies recently, who have turned away potentially lucrative contracts due to the buyer requesting unacceptable credit terms, often well in excess of the seller's normal terms of payment.

There is however, absolutely no reason why a seller should not accept such terms provided that the Letter of Credit gives the appropriate level of security.

If the Credit is available with an approved nominated bank in the seller's country and such bank has given a clear commitment or a confirmation to the seller, it is possible to receive funds immediately following presentation of complying documents, ie: at 'sight', even though the Credit may be available by acceptance or deferred payment (eg: 90, 120, 180 days etc).

Under such terms, the nominated bank may be prepared to prepay the seller by way of 'discounting' the draft (Bill of Exchange) presented with the documents, or to 'negotiate' the documents, either with or without recourse to the seller, deducting interest for the duration of the credit period.

In the case of confirmed Letters of Credit, such discounting or negotiation will usually be made without recourse, thus providing the seller with financing that is normally viewed as 'off-balance sheet'.

By engaging with the nominated bank at the earliest opportunity, sellers can establish the cost of financing (often at lower rates than borrowing on overdraft for the period), and factor into the price. 

Buyers can use Letters of Credit as a means of obtaining longer periods of credit in the knowledge that the supplier can still obtain payment at an early stage. In the Far East and Asia, it is common for suppliers to view Letters of Credit issued by major banks as a tool for obtaining pre-shipment finance. I have come across many instances where UK or European buyers have been able to obtain significant discounts on the price of goods purchased, by issuing Letters of Credit instead of trading on open account terms.

Are your Letter of Credit documents 'strictly compliant'?

When working with clients, I regularly receive feedback that the banks are 'picky' when checking documents.

You've no doubt heard the term 'dotting the i's and crossing the t's'.

Despite the repeated assertions of the major banks that they exercise common sense when checking documents, we are hearing that checkers repeatedly raise spurious discrepancies such as slight typographical errors, titles of documents and issues with regard to beneficiaries' or applicants' addresses (despite the provisions of UCP 600 article 14j).

Another common issue is the apparent inconsistency, not only between the banks, but also between individual document checkers at the same bank! I have been told many times of instances where documents drawn in respect of a partial shipment have been presented and found to be clean, only for an identical presentation under a subsequent partial shipment to be rejected due to discrepancies.

Such issues continue to be a source of great frustration and represent a constant challenge for exporters shipping against Letters of Credit, therefore we suggest that you follow the mantra I preach throughout my training sessions:

"Don't give the bank document checker a reason to think about whether to pay you!"

In other words, don't leave any room for ambiguity when preparing your documents:

1. Documents to the Letter of Credit - word for word.

2. Documents to each other - keep data consistent.

It is vitally important that your key staff are equipped with the skills and knowledge to handle Letters of Credit, from the point of sales negotiations with buyers through to preparation and presentation of documents to the bank.

It is also necessary for staff to have an appreciation of the provisions of UCP 600 (the L/C 'rules') in order to understand what banks are looking for in terms of data content, signing of documents, interpretations etc.,

Call us on 0800 043 4052 or email us: info@mjhayward.co.uk to see how we can help you minimise risks, cost and hassle when handling Letters of Credit.

In-Company Letter of Credit Training

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!

Book Letter of Credit Training Now! 

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