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Letters of Credit
Can anyone tell me what the pros & cons of Letters of Credit for Export purposes are.
Banks don't seem to like them. Why?
Do they provide the cash that the Exporter needs to fund a large order, or are they a way for the Buyer to hang on to his money for as long as possible?
Any information would be appreciated.
Banks don't seem to like them. Why?
Do they provide the cash that the Exporter needs to fund a large order, or are they a way for the Buyer to hang on to his money for as long as possible?
Any information would be appreciated.
Answers
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Firstly, I would suggest that unless your export shipment is over �10k, it may not be worth using them.
The credit is issued by the importers bank and it alows a UK bank to pay on its behalf if the exporter presents the correct information (the "Letter" plus shipping documents etc) within a time scale. This guarantees payment, and you could, in theory, rest easy knowing you will be paid.
They are the most expensive and complicated payment procedure but they are also the most secure- the only thing better would be payment up front.
HOWEVER:
I don't understand your comment about the banks as they banks LOVE Letters of Credit - they make a fortune out of them in charges as many things can go wrong and the banks will charge at every opportunity. Your documents will be scrutinised and even the tiniest error or spelling mistake will mean the bank won't pay up until you have corrected the change (and paid for it) - and this is all done to a time limit. The figures state that 80% are rejected at the first presentation (at about �75 a time for the banks)
If your payment goes through companies that are not technologically advanced, it is easy to see where errors can be made in hand writing or translation.
Use them for big shipments or where you have new customers and you are not sure about them and need a safeguard although they will go wrong with new customers all the time as they won't be used to them. Also, don't forget to factor in the costs of the Letters of credit into your prices
The credit is issued by the importers bank and it alows a UK bank to pay on its behalf if the exporter presents the correct information (the "Letter" plus shipping documents etc) within a time scale. This guarantees payment, and you could, in theory, rest easy knowing you will be paid.
They are the most expensive and complicated payment procedure but they are also the most secure- the only thing better would be payment up front.
HOWEVER:
I don't understand your comment about the banks as they banks LOVE Letters of Credit - they make a fortune out of them in charges as many things can go wrong and the banks will charge at every opportunity. Your documents will be scrutinised and even the tiniest error or spelling mistake will mean the bank won't pay up until you have corrected the change (and paid for it) - and this is all done to a time limit. The figures state that 80% are rejected at the first presentation (at about �75 a time for the banks)
If your payment goes through companies that are not technologically advanced, it is easy to see where errors can be made in hand writing or translation.
Use them for big shipments or where you have new customers and you are not sure about them and need a safeguard although they will go wrong with new customers all the time as they won't be used to them. Also, don't forget to factor in the costs of the Letters of credit into your prices
Thank you very much for your comprehensive answer Markandshez.. The amount is well over �10K, over 6 figures, and we would be dealing with companies in the Sub Continent where language and spelling mistakes may well be a problem.
Would the bank require Guarantees from us? I believe you can buy insurance for LC's.
Do you know anything about Discounted Letters of Credit?
Cheers
Would the bank require Guarantees from us? I believe you can buy insurance for LC's.
Do you know anything about Discounted Letters of Credit?
Cheers
i have limited experience of lc's, but i have used them when selling used machinery to foreign countries.
a couple of tips:
1) get the lc drawn on a british based bank, this makes it easier to sort problems,
2)request a copy from your client before it is made official, as any spelling mistakes can be rectified then, 9we had our company name spelt wrong)
3)if you have a very good relationship with your purchaser, then you can request the documents of your lc go through 'on trust' this means any discrepancies are ignored and the money gets paid out, if the correct documents are presented. i sold a fibreglas plant to a chinese company by letter of credit and the documents went through on trust.
a couple of tips:
1) get the lc drawn on a british based bank, this makes it easier to sort problems,
2)request a copy from your client before it is made official, as any spelling mistakes can be rectified then, 9we had our company name spelt wrong)
3)if you have a very good relationship with your purchaser, then you can request the documents of your lc go through 'on trust' this means any discrepancies are ignored and the money gets paid out, if the correct documents are presented. i sold a fibreglas plant to a chinese company by letter of credit and the documents went through on trust.
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