Letters of credit related errors are common problems for companies involved in international trade. The eight measures discussed in this article can help companies reduce the inaccuracies in letters of credit related documentation, facilitating the payment process.
Many exporters who make mistakes in the preparation of the documents requested in the letter of credit. Whether manufacturers or traders, whether beginners or experienced firms, small or large companies located in developing countries or countries in the industrialized world, all tend to repeat the same mistakes.
Payment is subject to certain conditions. Irregularities in the documentation mean the non-compliance, resulting in the denial of payment. Surveys suggest understand that letters of credit are often denied because of irregularities. Payment is so refused or postponed.
Faulty documentation represents the major risk in the payment system by letter of credit – another risk being fraudulent documentation. Furthermore, the letter of credit is a sure way against commercial risks if it is irrevocable, and against political risks if confirmed.
Companies should strive to present a flawless documentation. This should even be part of the home policy through a strategy to eliminate errors before submission of the letter of credit. We present you below eight measures to help businesses in this way.
Measure No. 1: Organizing for export
A suitable organization and a division of labor within the company are the first steps to produce adequate documentation. The errors are the result of a lack of organization and a poorly trained team.
The creation of specialized services in the marketing and the export administration can provide a solution. The distribution of tasks involve the coordination and cooperation between these services. An error free documentation result of the joint work of the two departments.
The designated tasks for the export marketing service to get letters of credit and for the administration department, to meet the requirements of the letter. However, the administrative department should first approve the letter of credit, so make sure to respond. Commercial service should in turn ensure that the letter is acceptable and its conditions can be performed economically. The administrative department should then ensure compliance with commitments and deadlines, which sits credibility with buyers home. This well will bring a positive impact to the sales department and will help get other letters of credit.
Measure No 2: Negotiate the terms of the letter of credit in the contract
The definition of the terms and conditions of the letter of credit is involved in the negotiation of the sale contract, and they should be specified in writing. Contract negotiation is a crucial step to facilitate the observance of commitments. If you just ask for a letter of credit, you may receive this document provided conditions unenforceable for you.
When negotiating the terms of the letter of credit, your company must implement a policy designed to deliver or accept conditions that suit their ability and needs. For example, do not agree with a rule like DDP (delivered duty paid) – meaning that the exporter completing customs formalities the buyer’s country – if you are not able to fulfill this clause.
Wherever possible, try to negotiate a reasonable time and flexible terms, as for the delivery of the goods, “any port of destination” instead of a specific port. The flexibility facilitates the execution of obligations.
Once your company has defined its policy, it may entrust the negotiation of letters of credit for its export marketing service. If this task is done well, it will make the execution of the part of the service of the administration to easier export and punctual.
Measure No. 3: To study the letter of credit
We must carefully consider the letter of credit to determine conformity with the contract of sale and check that everything is clearly stated. To this end, it must know when to amend or reject it, it can be done through a checklist. A properly established letter of credit will require proper implementation; a faulty letter, improper execution.
The department responsible for export must study this document, even seek help from the sales department to make the necessary amendments and make contact with the customer or the bank that issued it.
Measure No 4: Plan the obligations
Proper planning is necessary for the proper implementation of commitments, that is to say it must prepare the products and specified documents, and provide shipment and timely submission.
This is a crucial step, as the export administration service must be able to assume. Its director must be competent; it should have the ability to organize and coordinate the activities necessary for planning; it should be able to manage resources such as adequate funding, a well-trained team, technology and effective procedures.
Measure No. 5: Detect the most common errors in the preparation of documents
In preparing the documentation, make sure you have a competent team and powerful technology. Feel free to browse the following list against to rectify and avoid common mistakes. This list is based on surveys and a thorough study of the Uniform Customs and Practice for documentary credit (UCP 500) issued by the International Chamber of Commerce.
Measure No. 6: Review documents before presenting them
Despite your efforts to create seamless documentation, some errors may remain; must find and eliminate them by careful consideration.
Check the accuracy of documents using a checklist as suggested on page 15. This list must reflect the requirements of UCP 500.
Dates and signatures
Pay particular attention to dates (especially those on the inspection certificate and the insurance document) signatures (especially those affixed on the transport document), and the authenticity of the documents and their consistency . The date of the contract must appear. If the letter of credit specifies that certain documents must be signed, the signature must be present. Moreover, it must be the hand of the person affixed to the required procedure and the right place.
Again, the documents must be complete, consistent with each other and comply with the stipulations set forth the letter of credit and the provisions of the UCP 500. To check consistency, do not hesitate to use a list control. All original documents required by the letter should be (see the comments of the International Chamber of Commerce on Art. 20b if necessary). therefore strictly observe the requirements of the letter and the conditions of UCP 500, because the bank’s inspector strictly held there at the time to review the documents.
Better to prevent and eliminate errors before submission of documents rather than the correct afterthought, or even end up later to justify a failure you had considered insignificant. Indeed, it is better to count with an impeccable record, rather than the whim of the inspector of the bank or the buyer. Contrary to what you think, the bank and the buyer could not pass up a gap that has seemed unimportant.
Measure No. 7: Submit documents appropriately
Be sure to present the case in the time limit, the right place and, of course, taking into account the banks of schedule. Indeed, remember that good time management means good performance of obligations.
Measure No. 8: Conduct regular monitoring
Strict monitoring is essential for the proper performance of a contract. Take action that transactions are not consistent. If you fear an unexpected delay in your letter of credit related commitments, seek to amend and extend the time. As soon as you notice a problem in performance of the contract, notify the buyer.
Services of the marketing and export administration should arrange for the performance of contract work.
In conclusion, a duly established documentation improves the flow of cash.
Export letters of credit – Ten Common Mistakes
1. The calendar is not respected, eg shipping, or the submission of documents is delayed.
2. The documents listed in the letter are not prepared in accordance with, apart from the transport document, the insurance document and the invoice.
3. The certificates of origin for example or inspection, are not signed.
4. The description of the goods on the invoice does not match that of the letter of credit.
5. Order documents are not properly endorsed.
6. Drafts and bills of exchange are not presented in accordance with the provisions of the letter of credit, or they are not properly transferred.
7. The insurance document is dated after the date of shipment, or risk coverage is not that specified by the letter: the type of risks, the extent of coverage or the currency of the sum insured do not agree with what is written in the letter of credit.
8. The transport document is not signed by the UCP 500, or is not established in accordance with the letter of credit.
9. The documents have no coherence between them.
10. The type and number of required documents and their copies are not identical to those stipulated in the letter of credit.
Checklist for documents requested in the letters of credit
* The transport document. Says he date of shipping? Is it signed? He carries the name of the carrier on the front? Is it clear and freight paid under the terms of the letter of credit? Says he loading date as UCP 500? Are the ports of loading and unloading the same as stated in the letter of credit? Is the document type used good? So it should not be a bill of charter party if such a document is not required by the letter of credit. If the transport document is a bill of lading for maritime container in accordance with the letter of credit, make sure it shows the number of containers and the total weight does not exceed the total capacity of the containers: in fact, the bank could inspector doubt the authenticity of the document. Make sure that there is no transhipment or partial shipments if they are forbidden by the letter.
* The bill. The description of the goods listed on the Commercial Invoice it matches that of the letter of credit? The invoice is executed it to the buyer’s name as stipulated in the letter? Says she amount, quantity, prices and costs under the terms of the letter of credit or the limits imposed by the UCP 500? The number of copies it corresponds to the one specified in the letter?
* The insurance document. Is this document duly required by the letter of credit or in accordance with UCP 500? He covers all risks from the specified shipping date? The amount and currency they correspond to those cited in the letter of credit? Is the document signed and endorsed?
* The packing list. She agrees with that of the letter of credit? Is it consistent with other documents such as the commercial invoice, for example?
* Signatures. All certificates required in Are credit letter signed? Are they legalized according to specified terms? Have the amendments or additions been authenticated?
* The bill of exchange. Is this piece included in the file according to the requirements of the letter of credit? Is the bill of exchange drawn duly signed and endorsed? Is the amount in line with the commercial invoice?
