We have just concluded a Letter of Credit supported transaction. Despite the anecdotal feedback from colleagues, countless online support documents, and bank information claiming that LC's can be somewhat cumbersome, we entered into the transaction with high expectations that it would be the best course forward to close the transaction quickly, while protecting all parties involved.
Well, we can very proudly say that the ultimate result of the transaction was a win, win, win, for all parties involved, however it was not without a multitude of learnings. It would be selfish to keep all of what we have learned to ourselves, so here are some of our key takeaways that will be applied to our next LC transaction -
1.Terms of the LC must match the Terms of the purchase contract -
Reading the title of point number one seems pretty straight forward. It also seems like common sense. The devil is in the details, so the main point here is, both agreements must agree with each other, and do not expect any difference between the two sets of terms to compliment each other. For example
- Delivery terms of Equipment Agreement (and scope of delivery) usually set the standard documents required for the LC. If you have an LC with the terms of FOB, however your Equipment provision is truly EXW, the LC will demand documents to be provided by the Supplier that aren't physically available (such as a BL, or Export Doc)
2. Don't overlook who is responsible for each specific step!
If you have an LC that is FOB terms, be very clear on each and every step during the transfer of Equipment, and who is in control of the documentation. Documentation control must complement the LC and responsibilities.
For example, review the following scenario.
- LC is FOB terms, Seller is responsible to load the Equipment to the Buyer's vessel
- Buyer is responsible for sea freight
- LC term for documentary requirement is a Marine Bill of Lading
The above scenario is very common, however the risk is, the Seller must trust the Buyer to forward the Marine Bill of Lading only after the Equipment has been released to the Vessel. If there is no trust between the Buyer and Seller (which is usually the case and why LC exist in the first place) then this basically removes the value of using an LC in the first place!
Luckily in our case, we were proactive and employed strong risk consideration and mitigation approach to the scenario, which ultimately resulted in the Seller retaining control of this important document for the LC submission.
3. Banks usually do not exist to solve problems
Manage your expectations with your trade specialist and the banks' readiness to support challenges that exist with a LC. Banks have one job to do, and that is to protect their own risk, and they typically do not show great creativity with these transactions. Consider some of the positive experiences we had working with the banks -
- Establish a strong and regular communication with your trade specialist who will be handling the LC file. Keep in regular contact with them before the period of document filing.
- Try to have your trade specialist involved in reviewing the draft forms, and documents before the submission of the documents. Usually they will claim that they cannot do any review, and the LC process is the only official review, however with a good relationship, they can provide proactive feedback on concerns with your document based on their previous experiences
- Ask, ask and ask questions until you are satisfied you understand the process. One silly example we experienced is, after meeting with our trade specialist to finalize the plan to submit all documentary requirements, we submitted the forms. Then the bank sent us an email saying that we were missing a cover letter, and the cover letter must be signed and stamped by the LC beneficiary (who was traveling away, so we needed to sign, stamp and courier a simple cover letter as it was not identified during the preliminary planning meetings).
Letters of Credit are not the only method of securing an international trade transaction!
MKS is proud to identify ourselves as problem solvers, and as such we have secured international trade transactions with success in a variety of methods including -
Wire Transfer supported by Corporate/ Personal Guarantees
Shipping Equipment to neutral location for the exchange of funds/ ownership
Escrow
Bitcoin/ Cryptocurrency (best for markets that may experience foreign currency restrictions or controls)
Please contact us for any questions!