Supplementing your global freight management strategy with letters of credit can be challenging but worthwhile.
Whether shipping an import from China, an auto export to Dubai, or machinery somewhere else internationally, a global management approach using a reliable freight forwarder can be the difference in a successful delivery with minimal twists and turns and, well… everything else. The freight logistics machine is complex, challenging to navigate, and entrenched with restrictions and regulations that must be followed for customs and a variety of other agencies when imports or exports are involved.
Sometimes shipping under a letter of credit is the way to go. For a bank to issue one, they are indicating a validation of their customer (the buyer), which is worth the money when executed correctly. The fees can be paid by the buyer, the seller, or shared between the two. If the selling party successfully prepares the letter of credit correctly & presents it to a bank for negotiation, the funds can be transferred within as few as 10 days of the presentation of all the required documents.
This kind of financial flexibility is actually quite advantageous, and that kind of backing from a bank can open many doors for trading and transportation.
Letter of Credit Definition:
A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
With all of these great positives, there come a handful of pitfalls as well. Here are 6 reasons why you should find a forwarder to handle it for you:
1. Can be cost prohibitive
For smaller trading or manufacturing companies, the cost of issuing a letter of credit is not always the right instrument to warrant the sell of their cargo (products). Sometimes knowing where to draw the line is difficult to identify, so it’s helpful to have experienced professionals assisting you.
2. Often esoteric and difficult to understand
Letter of credits can be convoluted by nature and therefore, they’re not always the best instrument for negotiating with the negotiating bank.
The negotiating bank is associated with the issuing bank & will review against a few points (fees) the terms & the conditions of the letter of credit & enforce the letter of credit preparer (here the shipper) to be exact to the letter.
3. International, international, international
Not all banks have international departments & therefore many letters of credit simply do not apply well to an international body involving an importer, exporter, customs, shipping lines, & export documentation.
4. Details can delay and derail you
If not ameniable to all parties out of the gate, one can easily experience delays in fixing the languages inside the letter of credit to allow for simplicity of terms. When shipping under a letter of credit the devil is in the details. Any out of place comma or misspelling will be regarded inside the letter of credit as part of the instrument of negotiation, which could mean trouble.
5. Failing to meet the the terms
How many times can the seller prepare & fail to meet the terms from the negotiating bank? It varies, but without a freight forwarder managing this process, you may end up with shipments sailing off or air freighted without meeting the rigorous requirements of the negotiating banks. This is even more trouble, not to mention that each and every amendment has an added cost.
6. What it looks like when it completely falls apart
Shipments under a letter of credit can be delivered overseas without the funds ever being paid – this being the worst-case scenario for the seller. This happens when the LOC shows requirements not met by the seller. It can come from a poorly written letter of credit that’s accepted by the seller, buyer, shipper, or consignee. The problem is real & few suppliers / shippers have the experienced staff to handle the preparation of the letter of credit, first in the creation stage & then in the preparation to meet the requirements of the negotiating bank.
Shippers exporting from the United States should designate their freight forwarder early on. From the inception of the letter of credits, the terms & conditions should originate from here & be accepted under pro-forma by the consignee/importer.
It is of the opinion of many forwarders that no buyer should subject their supplier / shipper to their own terms & conditions or the use of their own forwarder, unknown to the supplier. It not only increases the possibilities for mistakes, but it also has the potential for lost control of the shipment along with the negotiating document being put in the hands of a forwarder representing the interest of the buyer & not the interests of the vendor or shipper.
Interested in exploring your options as a seller/exporter? Contact us to get a quote today!