It works like this: freight forwarders get paid by overseas buyers to transport shipments from sellers in other countries. In the process, freight forwarders often create the documents that are required by financial instruments that transfer funds from the buyer back to the seller in exchange for the goods. Called Letters of Credit, or LCs, these instruments mitigate the importer's credit risk by substituting the creditworthiness of a foreign bank or other financial institution. In effect, exporters often use LCs to minimize their risk of nonpayment by an overseas buyer—that is, to retain some control over payment.

If the LCs were always letter-perfect, exporters would get paid (at least in theory) not long after the goods land on the buyer's dock. But most of the time, these documents are far from perfect. That's because the freight forwarders, who create the documents, have little incentive to issue perfect documents. After all, the forwarders get paid by buyers, who benefit from payment delays.


But banks won't release their funds to the seller unless they receive documents that are letter-perfect. Even inconsequential discrepancies, like a misspelled first name or a day's difference in a date, can tie up payment for a shipment worth hundreds of thousands of dollars. All this time, the bank earns interest on the payment they're holding. And even a few days worth of interest on a payment can be substantial.

Once a bank rejects a letter of credit because of errors—which happens 70 percent of the time—the burden then falls on the seller of the goods to correct and resubmit the documents quickly. And although the exporter might be a world leader in manufacturing semiconductors, or wireless phones, or computers, they're probably not international financiers. The time, stamina, and specialized expertise required for a business to get an export payment released from a powerful financial institution—especially a foreign one—can drain the enterprise¹s resources for days, and often weeks.