ExtraCredit
Business news for the finance professional
The
following newsletter contains information to benefit credit and
risk management professionals, and is being sent to you as a client
or contact of Trade Risk Group, a leading specialty broker for credit
insurance. For comments, to unsubscribe, or to find out more about
credit insurance, please contact gene.ferraiolo@traderiskgroup.com
6 Ways to reduce unworkable letters
of credit
Credit managers are often faced with the task of getting
paid when they have a letter of credit that contains conflicting
issues. Compounding this problem is the fact that banks have no
incentive to change their practices regarding fee-generating services
since the "fees and interest banks can collect on trade finance
transactions are directly proportional to the confusion and complexity
of the issued credit," says John W. Dunlop, president of AVG
Trade Group.
This
results in what Dunlop calls unworkable letters of credit. He says
that sellers (not the credit manager of course) contribute to the
problem because they would rather take the risk of a bad letter
of credit then lose the sale. The problem ends up on the desk of
the credit manager, who must figure out how to get paid - without
the letter of credit.
Unworkable
Terms
"An unworkable letter of credit," says Dunlop, "is
one that contains conditions that the beneficiary cannot comply
with. The result is a discrepant submittal of negotiable documents
and the loss of protection."
Dunlop
is quick to point out that unworkable letters of credit are different
from unfavorable ones. Though there maybe conditions in the latter
that are not to the beneficiary's liking, these conditions can be
met. With an unworkable letter of credit, meeting the conditions
- either because two conditions contradict each other or because
of insufficient timing or other impracticalities - becomes physically
impossible.
To
help credit professionals, Dunlop has prepared a list of the most
common unworkable terms in tellers of credit. They are as follows:
• Performance conditions. Since the buyer does not wish to
tie up its credit for any longer then the minimum amount of time,
the latest shipping date, the expiry date, or the presentation date
are apt to be inadequate.
• Document requirements. This might include a requirement for
documents that the beneficiary cannot produce or procure before
shipment - for example, a signed inspection certificate detailing
the origin or each component in an assembled product. Even if this
information were known, American chambers of commerce will only
certify American products, so any product with a foreign component
would not be given a certificate, and this requirement would not
be met.
• Additional conditions which the beneficiary cannot meet.
Dunlop gives the example of a requirement where the applicant asks
the beneficiary to supply a copy of the carrier's insurance policy
instead of a certificate of insurance. Such policies are typically
umbrella policies to cover the ongoing operations of the carrier
and are not available to freight forwarders or their customers.
• Ambiguities. When two contradictory requirements are included
in a letter of credit, the beneficiary has no way of complying.
Dunlop cites the example of the INCOTERM FOB being used in one place
and then a requirement that freight be prepaid to the destination.
Other vague terms such as "an original copy" or a "certified
fax" make it impossible for the beneficiary to comply.
Minimizing
Unworkable Conditions
While completely eliminating these unworkable items is probably
impossible, the international credit professional can do many things
to make sure these issues are either eliminated or dealt with in
a timely fashion. Here's what you can do:
1) Identify the unworkable issues. Start with Dunlop's list of common
items and add it to ones that recur in your shop.
2) Work with the buyer. Often the buyer is not aware that these
conditions exist in the letter of credit. Once the buyer understands
the seller's issues with the letter of credit, it can negotiate
with the bank to have them stricken from the letter of credit.
3) Communicate with the buyer about these conditions in writing.
In this manner, the new wording can be included, and the buyer can
five it directly to the bank. The change will come in the form of
an amendment that should reflect the seller's recommended wording.
Dunlop suggests that the letter sent to the buyer should, if at
all possible, include references to the letter of credit not conforming
to UCP 500. This information will be useful to the buyer if its
bank insists on its own language.
4) Provide the buyer with letter-of-credit instructions that spell
out the terms and conditions that should be included. If at all
possible, make this a standard document that the sales force gives
to all customers that are required to provide letters of credit.
5) Review the amendment as soon as it is received from the bank.
If is does not conform to what was requested of the buyer, make
an assessment of whether accepting the amendment as is or requesting
another amendment is worthwhile. Remember in all likelihood, time
will be running out.
6) Get your staff up the letter-of-credit learning curve. Not all
the letter-of-credit problems originate with the customer. Occasionally
those in the credit department make mistakes. Dunlop has put up
a letter-of -credit tutorial on his Web site. Anyone can use it
at no cost. Insist that your staff go through the various modules.
It is available in several languages.
Credit
professionals who follow Dunlop's advice will reduce the number
of unworkable conditions that they encounter in letters of credit.
John W. Dunlop can be reached at 619-692-9648 or johnwdunlop@avgtsg.com.
For more information about letters of credit or handling letters
of credit over the Internet, visit AVG Trade Group's Web site, http://www.avgtsg.com. |  |
|
