A contract on payment by Letter of Credit as a means for settling trade finance gives the delusion of safety it spawns self-satisfaction with merchants who think that all is well and dandy with a business contract securely in hand. It may be true in well-known markets where good associations with counter-parties and banking staff will normally help with minor discrepancies and modifications to documentary credits. But this is not the case with rising markets trade finance.
Read This Story Carefully
An overseas seller makes a contract with the Buyers and he called for payment to be made by a confirmed irrevocable letter of credit opened in his favor through an account with his nominated Asian bank. Days later, the Buyers gave the green light for him to start producing goods as they approved of the pro forma invoice he sent them. He started with production of the required goods. Days later, he sent another e-mail to the Buyers because the promised Letter of Credit was still not received.
Finally a reply came to him. They informed him that a Letter of Credit made out in his favor was on its way. Three days later, he got a phone call from his bank telling him the long awaited Letter of Credit arrived. Unfortunately, he found lots of discrepancies and want them corrected. He again waited. A week ensued and the amendments came but this time a new condition required shipment to be transported in a 20-foot container consignment - no consolidation allowed. He had only 550 cubic feet and, therefore, his goods need to share space in a container with those of other shippers. There is little time left. He got on another phone with the Buyer insisting that the shipping term be changed to Less-than-container load. By this time, the goods were already stored in the warehouse awaiting shipment.
The Letter of Credit was about to expire and the Buyer transparently asked that his transport “Open Account”. He had little choice but to fulfill partly since he considered the Buyer a big trading house. Months went past and dozens of e-mails sent and telephone calls made, he was however to collect payment. It is presently a made-up story? Sorry, no, the writer was once a panel member of a corporate assembly with a wholly-owned cargo forwarding subsidiary that practiced similar sad stories of despaired shippers.
How to Overcome from this:-
Read This Story Carefully
An overseas seller makes a contract with the Buyers and he called for payment to be made by a confirmed irrevocable letter of credit opened in his favor through an account with his nominated Asian bank. Days later, the Buyers gave the green light for him to start producing goods as they approved of the pro forma invoice he sent them. He started with production of the required goods. Days later, he sent another e-mail to the Buyers because the promised Letter of Credit was still not received.
Finally a reply came to him. They informed him that a Letter of Credit made out in his favor was on its way. Three days later, he got a phone call from his bank telling him the long awaited Letter of Credit arrived. Unfortunately, he found lots of discrepancies and want them corrected. He again waited. A week ensued and the amendments came but this time a new condition required shipment to be transported in a 20-foot container consignment - no consolidation allowed. He had only 550 cubic feet and, therefore, his goods need to share space in a container with those of other shippers. There is little time left. He got on another phone with the Buyer insisting that the shipping term be changed to Less-than-container load. By this time, the goods were already stored in the warehouse awaiting shipment.
The Letter of Credit was about to expire and the Buyer transparently asked that his transport “Open Account”. He had little choice but to fulfill partly since he considered the Buyer a big trading house. Months went past and dozens of e-mails sent and telephone calls made, he was however to collect payment. It is presently a made-up story? Sorry, no, the writer was once a panel member of a corporate assembly with a wholly-owned cargo forwarding subsidiary that practiced similar sad stories of despaired shippers.
How to Overcome from this:-
- Ask to draw a valid or legal letter of credit before starting production of goods.
- Ask for advance payment to start your production.
- Ask for two-dimensional letter of credit.
- Put a third party as a guarantor of transactions such as Banks or other financial institutes. Businesses specially put banks as a guarantor known as Bank Guarantee.
- Ask to add all rules and regulations related to your transactions from production to shipment.
- Read all terms carefully and then sign your contract.