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Letter of Credit Instructions
Letter of Credit instructions should eliminate any terms and conditions that may prevent you from being paid under the letter of credit. For example, you would want to be sure that the expiration date of the letter of credit permits sufficient time to correct, if necessary, any mistakes found when the documents are presented for payment. Given the high failure rate of initial presentations of letter of credit documents, having sufficient time to correct errors is critical. Letter of Credit Instructions typically include the following guidance to buyers being asked to provide a documentary Letter of Credit.
- Advise your customer in writing what terms the Letter of Credit should contain - and what it may not contain. This should be done before the customer applies for the L/C.
- Ask that the L/C be confirmed by a U.S. bank - preferably the seller's bank.
- Ask that a draft of the L/C to be sent so the exporter/seller can check for unacceptable terms or conditions before the buyer submits it to the issuing bank.
- When the bank presents an advanced copy of the Letter of Credit, check it in detail to ensure that every one of its terms and conditions can be met within the prescribed time limits.
- Be aware that there are three time limits associated with a L/C:
- The expiration date of the credit,
- The latest shipping date, and
- The maximum time allowed between shipment and presentation of documents to the issuing bank
- If you cannot meet any of these deadlines, arrange for the L/C to be amended.
- If the L/C calls for documents that can only be provided by a third party, be sure that these you control these third parties. Also, make sure thatn the L/C includes a reasonable amount of time for this documentation to be received.
- Before presenting documents to the confirming bank, check every item to make certain it fully complies with the terms of the letter of credit. If any document is non-conforming, don't send it in and hope the discrepancy will somehow be overlooked. Instead, get started fixing the problem.
© 2011 by Michael C. Dennis. All Rights Reserved. Michael is the author of "Credit and Collection Handbook." E-mail questions or comments to him at mcdennis13@yahoo.com