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How Corporate Trading Helps Exporters Protect The Bottom Line


From the February 2000 edition of Managing Exports

The Letter of Credit-that not uncommon source of headaches for export pros-was the topic of Vastera's ( December 15 teleconference. Two experts were on hand to share L/C "best practices," Bill Moore, business development manager at National Westminster Bank (, and Sandra Strong, of international trade consultants Strong & Heard.

"L/Cs are treated by many exporters as something frightening," notes Strong. She points out that export pros tend to forget they have a major say in how an L/C is structured. She advises exporters to focus on three areas: taking control of export L/Cs, knowing and using the UCP 500 rules to best advantage, and setting up an in-house system for the L/C function.

1) Take Control of Export L/Cs

A L/C is a method of payment that aims to protect the seller and buyer equally. Strong outlines a number of steps to follow in shaping this agreement to your maximum benefit: "On acceptance of the sales contract, the exporter should acknowledge that the payment is to be made under an irrevocable L/C and send a suggested draft of terms and conditions," advises Strong. These should be included in the L/C application the buyer submits to their bank. "Making this a standard practice can get rid of a number of problems between buyers and sellers once L/Cs have been set in place and the bank has actually issued the credit," she says. Elementary as it may sound, provide your company name and address in a simple, easy-to-read format. A common discrepancy in L/Cs is a buyer getting an exporter's name and address wrong on the application form. "Just spending a bit of time can avoid a lot of minor and petty discrepancies," Strong points out.

A key area is the description of the goods. "The shorter the description the better," Strong says. "A general description, such as 1,000 widgets as per purchase order number 123 dated 24 April 2000, should satisfy the buyer and that is the description that should be repeated on the document."

The type of credit and the kind of payment terms should be set out in advance. "Suggest what you want to the buyer," Strong advises. "For example, you can say that last shipment date will be 31 March, 2000, and give an expiration date of at least a month after that. That will give you time to use the last shipment date and still present documents to the bank."

The minimum documents you require are those needed by your buyer when the goods arrive-an invoice, a packing list, and a transport document. "If the country requires certificates of origin, that can be added because it's required at entry," Strong says. It's up to the exporter to put the minimum number of documents forward for the buyer to put on their application.

The documents you submit to the bank must comply 100% with the terms of the L/C. "Good communication with your buyers helps," Strong points out. "Ask them to fax or e-mail a copy of the proposed application to be vetted by somebody at your company before it's submitted to the bank." Any changes at this stage are free. Encourage your buyer to keep the requirements of the L/C as simple as possible.

Once a L/C is open, the issuing bank sends it to the exporter. Review it carefully. "A standard checklist should be completed," says Strong, "so that all the terms and conditions are noted and checked against the order and the agreement with the buyer." Few export pros realize that they can actually reject a L/C. To do so, notify the advising bank that the terms are not acceptable and return the credit to them. "This costs the exporter nothing," Strong notes. "Contact your buyer quickly and explain that the credit is only being rejected because the terms are at odds with the contract agreement." If you want the terms changed, you must ask the buyer to contact the issuing bank to amend the credit. "Amendments cost money," notes Strong, "and it should be agreed between the buyer and the seller who will pay these costs."

2) Learn and Use UCP 500 Rules

UCP 500 is a uniform set of rules administered by the International Chamber of Commerce (ICC) that banks, insurance companies, freight forwarders, exporters, and buyers must comply with. It is also a basis for the resolution of disputes. UCP 500 automatically adds certain terms to any L/C governed by UCP 500 rules. Strong describes these as follows: "First, unless the L/C clearly states otherwise, it is irrevocable. "Second, unless the L/C states otherwise, documents must be presented to the bank within 21 days of the shipment date. "Third, banks have seven banking days after shipment to reject the presentation. "Fourth, all documents presented to the bank must be consistent with each other." This puts a lot of pressure on export pros, because not only must they check that each document is compliant with the L/C, they must also thoroughly check that there are no inconsistencies. "For example," says Strong, "the value on the invoice may be $14,900.95 while on the transport document it's been rounded up to $14,901. The bank can reject this based on inconsistencies." UCP 500 can be ordered from Amazon. International banks provide free copies to their customers.

3) Establish an In-House 'L/C Team'

"Too often, when I'm called in to look at exporters and the way they handle L/Cs, I find that there is no person or team actually responsible for monitoring the L/C from contract stage to presentation of documents," says Strong. "Once this has been fragmented, control is lost and control is everything." She advises that all internal or external parties responsible for documents needed for the payment be under the control of some central party. "Whether that's one person or a team depends on the size of your organization," she says. "The team or person responsible for the collation and presentation of the claim must be included in the contract acceptance stage," says Strong. A few good practices this team should implement include the following: "The exporter must collate the set of documents required by the L/C, check that each document is in the correct format, that it's signed or endorsed as required, that the information on each document is in line with the terms, and that no document contradicts each other," says Strong. This is onerous and time consuming but it's essential if you want to get paid without delays. The documents have to be presented to the nominated bank within the presentation period- the number of days after the shipment date of the goods but before the expiration date. "A good housekeeping practice," Strong advises, "is to attach a cover letter when submitting these documents to the bank. The cover letter should have your contact details and payment instructions, your bank details."

Use Banks to Maximum Advantage

Bill Moore advises export pros to fully exploit the capabilities of banks when it comes to export L/Cs. He lists four ways a good international bank can strengthen L/C procedures: "A good banking relationships can help you understand your overseas markets," says Moore. NatWest Bank, for example, has regular ongoing contact with over 3,000 banking groups that provide access to 125,000 branches in 160 countries. "We visit these countries on a regular basis, looking at political and economic risk," he notes. "You can control the L/C to your benefit," advises Moore, "by researching and locating acceptable banks for confirmation. Get indicative pricing for this confirmation, as well as the period of credit risk such banks are willing to confirm for you." This will vary from country to country. "Build this into your cost calculations at an early stage in negotiations," Moore says. "Prepare your finance prior to the sales discussions, then keep them up your sleeve during negotiations to preserve your competitive advantage." Use L/Cs to finance your exports. The ability to grant extended terms of credit can win the sale. "Your banker can discuss the strength of the L/C underlying and the confirmation, as well as discuss post-shipment finance with you," says Moore. "This is often at better margins than is available through your normal working capital services with a bank, and avoids using up cash reserves." Your customer gets the period of credit desired, and you can finance your exports at better rates than would normally be available. "At the end of the day we would hope to see your sales increase substantially," says Moore.

Make it easy for customers to deal with you. "Your customers," Moore points out, "can use their local banks for L/Cs, making it easy and straightforward. Don't use one office representation," he advises, "that could be hundreds or even thousands of miles away from where they do business."

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