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How to deal with Irrevocable Letters of Credit
What is a Letter of Credit?
A Letter of Credit (LC) is a guarantee of payment issued by Importer’s bank. It guarantees payment to Exporter, provided its terms and conditions are met. It is safe, has universal acceptance and is the most commonly used method

A Letter of Credit (LC) is probably your best guarantee to get paid for your shipment, if a cash prepayment is not feasible and it usually is not.

From which perspective?
In this article, we shall look at the procedures from the exporter’s/supplier’s  point of view as we do not feel it necessary to clarify the subject for buyers as they usually know what it is all about. Or they should, anyway.
Here are a few reminders and tips that might make handling a LC somewhat easier for you.

When a buyer places an order with you and he tells you that his order is as good as his LC is going to be, so, why don’t you just go ahead and start producing:
Don’t ever do it! There is no substitute for a LC. Perhaps you don’t know that, but he does and his and your bankers do too.

If you start producing without having received your customer’s LC, you take the risk that your customer may cancel his order, never open his LC, bankrupt his company, vanish into thin air. You name it, he can do it. Especially, if or when he feels sorry about having placed the order – for whatever reason – in the first place. He may ruin his reputation by doing so but it won’t cost him anything. Whereas you are stuck with merchandise you thought you had sold, and can now go try and sell to the highest bidder. If you can find one, that is.

So: Rule No. 1 is that you wait until your banker informs you the LC has been received before you even think about starting production

The best procedure to follow is:
You have received your client’s order, either by fax, letter or during a buyer’s trip or on trade fair.
You confirm the order, preferably send your proforma invoice with your confirmation, stating all particulars, such as:
- Number of goods ordered
- Description of the goods ordered
- Prices
- Packing
- Shipping conditions (FOB, CNF, Ex Factory, Freight Prepaid, whatever)
- Delivery time (one that you can keep. No gambles or wishful thinking)
When confirming the order, ask you customer to open an Irrevocable LC at sight in your favour (state bankers name, address, etc) and to give it a validity until the date upon which you are certain you can ship, allowing 2 weeks after that date for negotiation of the documents at your bank.

Also request that partial shipments as well as transshipment be allowed.

So: If you have received an order on January 1st and you feel sure you can deliver within 8 weeks after receipt of the LC (Never just say that you can ship within 8 weeks. Always say that you can deliver the goods within 8 weeks after receipt of the LC!!). Then ask for a validity of at least 10 weeks, to be on the safe side i.e. 10 March for shipment and 25 March for negotiation of the documents.

Also inform your customer that this delivery time is definite only if he opens his LC at once! Or not later than a date given by you then and there. Otherwise he might open his LC sometimes during January or even February, still giving it a validity until 10 March for shipment and 25 March for negotiation of the documents, and then what??

You want him to allow partial shipments because for some reason you might not be ready with the complete order before the LC expires and you want to ship whatever you have produced before that date and get your money.

If he does not allow partial shipments, you will have to be very, very certain about your ability to deliver all the goods i.e. the complete shipment in one go. Otherwise you might have to ask your client to extend his LC at a certain date and he might not be willing to do so and then you are stuck. But good.

Do always carefully read the requirements in the LC as you will have to follow up exactly. To the letter.

If or when you are not in agreement to what is stipulated, do not start producing but ask your client to alter his LC according to how you want it and to what you and he had agreed upon. If he changes the LC accordingly, you may go ahead and start producing.

Do note that, when you are to ship CNF or CIF, you will never have to wait until your client instructs you what shipping company or what steamer to use. That is entirely up to you and you can ship when you please as you please. As long as you stay within the validity of the LC.

When you ship on FOB basis or Ex-factory however, it is up to your customer to select the shipping company, or even the steamer, if he so chooses.

It is wise to have him state in the LC what shipping company he wants the goods to transport. Otherwise, you may have the goods ready for shipment and, until you know what shipping company to deliver the merchandise to, you will just sit there, waiting for the information until the shipping date mentioned in the LC may have expired and, there you are: you can’t ship because you are too late now and you will not get your money because you have no bill of lading, etc. to prove that the goods were shipped on time. So, you cannot go to the bank, asking them to pay you for goods that weren’t shipped.
Be as careful as you can and possibly more careful than you usually are.

Read the LC thoroughly, ask for advice when you are not sure you understand it all.
Stick to everything that is mentioned in the LC.
See to it that your final invoice matches your proforma invoice to the letter.
Please note that it is you who will have to pay for any amendments of the LC, not your client.

It is always better to be safe than sorry!
 
 
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