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Ten Best Practices That Minimize L/C Problems


From the October 2000 edition of Managing International Credit and Collections

One of the best ways to minimize letter-of-credit problems is to develop a standard practice for dealing with them and then insist that the credit staff stick to it. This often means working with the sales department and the export manager to standardize the process. After talking with several international credit executives and bankers knowledgeable about letters of credit, MICC has developed the following list of best-standardized letter-of-credit processes.

  1. As part of the information provided to the buyer, spell out the company name and address. This is a common area for discrepancies in letters of credit.
  2. Work with the sales department to develop short, accurate descriptions of the goods sold. Incorporate the description into all documentation. The more detailed the description, the higher the odds of having a discrepancy. Remember, common sense is not a requirement for those checking letters of credit. Banks have been known to reject letters of credit that are only a penny off.
  3. On acceptance of the sales contract, immediately acknowledge that payment will be made
  4. Make sure that the requirements include the minimum number of documents your seller will need to get the goods into the country. Usually this includes an invoice, packing slip, and transport documents. However some countries also require certificates of origin.
  5. Get the purchaser to fax or e-mail you the proposed letter-of-credit documents. Have a knowledgeable member of your staff review these documents in advance to decrease the chance of your bank bouncing the documents as discrepant.
  6. Review the letter-of-credit documents as soon as they arrive at your office. This will give you the maximum amount of time to correct any discrepancies.
  7. Learn and use the UCP 500 rules as administered by the ICC. Most international banks, insurance companies, and freight forwarders will comply with these guidelines.
  8. Make sure that all documents required and presented with the letter of credit are consistent. Occasionally, companies will negotiate terms that conflict, making it impossible to have a letter of credit that can be used for payment.
  9. If your company uses letters of credit extensively, consider establishing an in-house expert or team of experts that only handle your letters of credit. Make sure they get any training they may need.
  10. If your use of letters of credit is not extensive, consider hiring one of the firms that specialize in letter-of-credit handling.

While adhering to this set of policies will not completely eliminate letter-of-credit troubles, it will make a serious dent in the problem.

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