What are the Difficulties in Collecting Money by Letter of Credit? Leave a comment

Case

Our company recently signed a big contract to export a large number of goods to a German company, with letters of credit as the main settlements. After signing the contract, we got 20% of payment in advance, and the rest will be settled through L/C. I have studied import and export business, but I feel that the pressure is high when I operate such a large contract through L/C. Also, I am anxious that there will be a problem in this step. I hope to talk about the difficulties and key points of L/C operation in combination with my actual situation.

Analysis

Exporters who use L/C as a means of collection are mainly intended to obtain payment through the bank after shipment according to the documents prescribed by L/C. If the bank thinks the documents you provide have discrepancies, the bank has the right to refuse to pay. Therefore, making documents without defects is the most important goal.

Making documents without defects is easier said than done. There are some common problems.

Problem 1

In the L/C clause, there are some requirements for documents that you cannot do no matter how hard you try. For example, some L/Cs require delivery documents within seven days after shipment. However, the goods may also be shipped on September 30th. The National Day holiday in China is seven days, so you can’t get the bill of lading at that time, let alone delivery it. Therefore, this is something that cannot be done in reality.

Even if there is no long holiday, it is not easy for preparing some documents within a week. Therefore, such a clause as the delivery date of the 7th is risky.

Also, L/C stipulates that the seller will send a copy of the set of documents to the customer using DHL within three days after the date of B/L. However, if there is no DHL service in the local area, this will not be possible.

Problem 2

The initiative of some documents is beyond the control of the seller. For example, L/C requires that the documents submitted contain a product acceptance certificate signed by the buyer’s inspector. So, the initiative is not at the seller but the buyer. In other words, if the buyer does not sign the acceptance certificate, the seller cannot provide the certificate to collect the money from the bank.

In the case of FOB, the customer arranges transportation. However, he asks the shipping company to provide reports on the status of the ship, such as its age and the rating of the classification society. Sometimes, the customer finds a worn-out ship to save money, which cannot meet the requirements of L/C. At this point, you may not be able to provide appropriate ship status documents. You also can’t control a situation like this.

Problem 3

The exporter’s understanding of the L/C provisions and the practices involved may not be accurate and comprehensive. In practice, exporters are generally unlikely to have a deep understanding of UCP600. Their understanding of L/C also focuses on 46A(DOCUMENTS REQUIRED). Therefore, it is possible that some documents cannot meet the regulations of the UCP600 or requirements of the L/C. Then, it will result in a refusal. And, if the 47A (ADDITIONAL CONDITIONS) is not carefully watched or understood, it may fail to meet the UCP600 regulations.

For example, when the documents are sent to the bank, the bank says that all documents are required to indicate the L/C number and the issuing bank according to the requirements of 47A, but you don’t. But there is no time to change, and you can only send inconsistent documents to the issuing bank.

Problem 4

Carelessness and omission cause inconsistent data between documents. This situation is very common. For example, the invoice time is June 30, but the invoice time on the certificate of origin is June 25. But you may not find this problem when you check it yourself.

Problem 5

Sometimes, even if you offer a document with no flaws on the surface, there are still some unexpected things. For example, Citibank finds the nationality of your ship is Libya, but Libya has been included in the US Treasury sanctions list. Citibank will undoubtedly refuse to pay.

 

The above lists some common problems encountered in the operation of letters of credit. It is safe to collect by letter of credit, especially since you have received 20% of payment in advance. The customer is unlikely to refuse payment. Therefore, according to the situation you said, the risk of collecting money with a letter of credit is not great, but you need to be careful when operating.

 

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