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    Letters of Credit: Tips for Smooth Sailing


    © International Trade Centre, International Trade Forum - Issue 1/2001 

    Q. What problems usually arise with a letter of credit process? 

    A letter of credit is a form of documentary credit whereby a bank guarantees payment on behalf of a buyer, subject to the condition that the beneficiary (exporter) submits documents conforming to the terms of the letter of credit. The letter of credit is usually created using an international standard form. It contains a brief description of the goods, a list of documents required to obtain payment, the shipping date and the expiration date after which payment will no longer be made. Upon fulfilment of all the conditions set down in the letter of credit, the exporter can submit shipping and other documents stated in the letter of credit to the bank to collect payment. Common problems associated with the letters of credit process are listed below.

    Problems with the letter of credit 

    • Documents required by the credit are missing.

    • Documents required to be signed are not signed.

    • The credit amount is exceeded.

    • The credit has expired or the documents are presented late.

    • Shipment was short or late.

    Problems with the bill of lading 

    • The bill of lading is "unclean" (it includes comments relating to

    damage, or other deficiencies in the goods).

    • A marine bill of lading is required, but the bill does not state that the goods were shipped on board a named vessel.

    • The bill of lading shows shipment between ports other than those specified in the credit.

    • The bill of lading shows that the goods were shipped on deck. This is normally forbidden unless the credit explicitly allows it.

    • The bill of lading offers no evidence that freight was paid by the exporter (if this was required).

    • There is no endorsement (if endorsement is necessary).

    Problems with insurance 

    • The insurance document is different from what is specified in the credit (e.g., a certificate of insurance is produced while the credit calls for a policy).

    • The insurance risks are not those specified in the credit.

    • Insurance cover is expressed in a currency other than that of the credit. This is forbidden, unless the credit explicitly allows it.

    • The sum insured is below the figure required.

    • Insurance cover does not begin on or before the date of the transport document.

    Inconsistencies among documents 

    • Descriptions of the goods on the invoice and in the credit are different.

    • Weights differ between two documents.

    • Marks and numbers differ between two documents.

    • Exporters should remember that it is vital to check the letter of credit when they receive it and to ask the buyer to amend the credit if they think they will have any difficulty in complying with its terms before shipment