A Letter of Credit (LC) is an important method of payment in International Trade. It is a type of a bank guarantee which ensures that if compliant documents are presented to the negotiating bank payment will be received as per the LC terms.
It should be noted that LC’s come with associated costs. The opening charges are borne by the Importer who becomes the Applicant (the Buyer), any charges outside the country of the Applicant are borne by the Beneficiary of the credit, the Exporter (the Seller).
Charges can include costs such as advising commission, acceptance commission, any amendment charges, confirmation commission (if applicable), checking/paying commission, transmission charges, courier charges for original documents and reimbursement fees (if applicable). These can total up to several hundred pounds depending on which bank in the UK is used for handling the documents with multiple presentations against the LC further increasing charges. When quoting for the goods on any Incoterm basis, many companies do not take these costs into consideration and this results in reduced margins.
There are further complications when LCs are raised on an EXW/FCA basis. Using these Incoterms, it is the Importer which contracts for carriage and they can choose any Agent in their country to arrange the shipment. Such Agents might not necessarily work with Freight Forwarders in the United Kingdom (UK) who have experience raising transport documents for LC presentations.
In these situations, it is often found the transport document is raised and sent off to the Applicant for approval without the Beneficiary being able to ask for any changes which may be required under the LC. Crucial information can be missed off, spelling is not thoroughly checked, declarations and signatures are not sufficient to comply with the LC requirements. It can take time to see a draft document for checking and for any of the requested changes to be applied. A Freight Forwarder who is not familiar with transport documents raised in accordance with an LC might dismiss the importance of minor changes required such as spelling, dates, correct version of the document with the right stamps and signatures. The Beneficiary may have to wait several days for the transport documents to be sent to them therefore delaying the presentation and, in many cases, receipt of payment. Each shipment, even for the same Applicant, might mean working with a different Freight Forwarder in the UK as they offered the cheapest rate for that shipment.
Quoting for goods on CPT/CIP basis might seem like more work in getting the right price from a Freight Forwarder, ensuring the service is of good quality and that the Applicant will accept the costs. However, in the long term, finding a Freight Forwarder that understands the company requirements and has worked with LCs previously will mean that the transport document will be for the Beneficiary to approve. The Freight Forwarder will know what sort of information is required and in what format it should be included, they will work with the Beneficiary on agreeing the documents in advance so that when the goods move the originals can be issued straight away. As the Beneficiary is paying their fee there is the ability to apply pressure on them to get the transport documents right and provided in a timely manner. The Freight Forwarder will also provide the required proof of export for the shipment, this can be an issue when trying to obtain this from a Freight Forwarder contracted by an Applicant.
LCs are a secure way to get paid for goods, however they require a thorough assessment of the costs which will be incurred to ensure that the quotation to the client and the subsequent LC is raised for an amount which will cover the Beneficiary’s costs and protect margins. By contracting for carriage there is an increased chance of being able to present compliant documents as there is control over the transport documents being raised by the appointed Freight Forwarder.