Don’t let a misfired “letter of credit” Keep you from delivering the goods
A recent client of ours was shipping truck parts and large tractor tires to Djibouti, East Africa. They had a letter of credit (LOC) that they showed to my international freight forwarding company after a freight quote was requested & after a firm booking was already in place with a carrier.
After thoroughly reviewing the conditions of the LOC we ran into a rather big problem – it didn’t really agree with the freight quote we had already provided or the client’s intentions for their shipment.
You see, they thought the LOC is as good as money in their pockets, but they did not take into account it undermining the outcome of their payment & the shipment altogether.
What really happened here?
To start, I don’t think this client was all that illogical in their thinking of how to approach their shipment. Wouldn’t it make sense to you to know you have the means to do something before you actually do it? He was trying to be as informed as he could be, and get guarantee of payment to minimize risk. Intuitively, I give him credit for trying.
Unfortunately, this industry isn’t always as intuitive as it probably should be, but that’s understandable when considering the complexities involved in international relations.
What is a letter of credit? It is a legal document, and it must be followed to the letter by all parties to execute and get him paid. This client had their booking already in place andLOC before engaging our team, which has more than 30 years of industry expertise to draw from, so we were unable to ensure they did it right from the beginning. He should have come to us first, so the terms were accurate and not assumed.
The discrepancies were minor in their eyes, but not so by the eyes of the lending institution. Here are a couple of examples:
- The letter for the overseas shipment showed truck parts, but not his big truck tires. They’re not considered to be one and the same.
- The importer required a condition to show an on-carriage delivery well beyond the destination port, but the letter of credit did not include that.
Banks charge for any correction or amendement, and turnaround could take days or weeks. We had to inform the client that the quote provided did not meet the requirements of the letter of credit that asked for an on-carriage beyond the destination port (something they failed to mention when getting the quote).
As a shipper you need to provide your prospective buyer a pro-forma invoice & a detailed packing list showing the exactness of the prospective purchase.
Second, you should provide your opinion on how you wish to see this LOC executed. These opinions can be shared first with your freight forwarder to be sure the shipping documents & exact shipping terms meet your & the buyer’s interests.
How we helped:
We were tangled between what needed to be fixed and the client’s attempts to handle everything on their own to save on costs. But because the shipping requirements differed from what the LOC covered, amendments needed to be made, which cost time and money, which are often considered to be one and the same.
Your freight forwarder’s responsbilities go beyond moving your freight. They are bonded to regulations, and licensed forwarders will not deviate or cut corners, and that is in your best interests.
They were given two choices:
- Amend the LOC by contacting your buyer and have them amend with their bank to bring changes to the commercial invoice & the cost of freight to a destination beyond the port.
- Sign a waiver stating everybody’s involvement, taking responsibilities for any fees, delays in payment and shipping, and other penalties they incur because of the mistakes. This is where things w
I don’t know if I need to say it, but you should always go for the amendments to prevent any guesswork or trouble getting your funds. It’s just not worth the extra risk. Technically, they should have just started the process by coming to us first, but that’s neither here nor there.
When you initiate your business with your overseas buyers, you ought to work through pro-forma invoice & Packing list. Contact your international freight forwarding company early to discuss your specific business transactions and how to close any gap to insure success. A strong, rapport with your international company is invaluable.
Interested in connecting with one of our experts? Get the ball rolling on your project with a free quote from ETC International Freight System today!