Getting paid using a Letter of Credit – Introduction

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By using Letters of Credit an exporter is guaranteed payments from international buyers.  However, four factors need be in place beforehand for this to work.

♦ 1.  The Credit needs to be workable.  This means that the actions and documents requested in the Credit are possible and obtainable.  Obtaining a workable Letter of Credit requires a proper strategy which starts at the contract stage.

♦ 2.  The Credit needs to cover all the requirements of the seller and buyer.  The buyer is usually known as the Applicant.  The seller is usually known as the Beneficiary.  The Beneficiary is the party in whose favour the Letter of Credit has been opened and the Applicant is the party who opens the Letter of Credit via the banking system.  To ensure that all the conditions required by the buyer and seller are in place, means that all parties have a good standard of export/import knowledge and for the communication links between the buyer and the seller to be properly established.

♦ 3.  The Beneficiary should know how to complete the documents so that they make a compliant presentation.  A compliant presentation is one where the bank checking the documents finds no faults in the supply and wording of the documents.   A Letter of Credit guarantees payment to the beneficiary, but only if they make a compliant presentation.

♦ 4.  The Beneficiary should give clear payment instructions to the bank paying the money (usually known as the negotiating bank) so the bank knows exactly where and to whom the funds are to be paid.  When payment is made will be one of the conditions of the Letter of Credit and this needs to be checked on receipt of the Credit by the Beneficiary to ensure the payment terms are acceptable.

If all these factors have been considered and acted upon, then the seller should be able to obtain guaranteed payments from a buyer based anywhere in the world.  However, ensuring these factors are in place can be complicated and are often dependent on the countries involved in the transaction, the goods being traded, the banking relationships available to both parties and the value of the contract.

This is the first in a series of articles aimed towards offering basic advice to anyone wishing to obtain payments through a Letter of Credit.



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