The Letters of Credit Problem

For more than 400 years, the letter of credit (LC) process has been used to minimize payment risks during international shipping. During that time, LCs have caused more than their share of payment delays. The problem isn’t with the process; instead, the problems are caused by discrepancies in the actual documentation.

During the LC process, LCs are generally prepared by one of four parties:

In-house

Banks

Freight forwarders

Outsourced specialists

Most of these options come packed with problems. In-house processing takes its toll on a company’s under-trained staff, often leading to document discrepancies, extra processing and courier fees, and messy staff relations – all leading to finger pointing and lower morale. Freight forwarders can handle the process; however, they get paid to move freights, not manage documents – and their allegiance is to themselves, not the exporters, making it difficult to hold freight forwarders responsible when problems arise. While banks can modify LC documents, they can’t draft originals, causing communication problems between parties and slowing down the overall process.. In fact, many banks simply cut and paste their work on LCs without giving any individual attention.

Outsourced specialists are trained professionals skilled and experienced in dealing with LC problems and delivering discrepancy free documents. They are the smartest, safest way to go.

The Letters of Credit Battle

Things can get messy when you get multiple parties involved with international transactions. During the LC process, someone has to draft the original documents. If it’s not done through a quality outsource firm, then they are most likely drafted by freight forwarders. Freight forwarders have little incentive to issue perfect documents – and documents with even the smallest problems delay payments. For the buyer who has to pay the forwarder, payment delays are just fine and dandy.

All sorts of errors can delay a document – even misspelling a name or putting the wrong date in – causing millions of dollars to be left in limbo. When banks reject LCs (something that happens 70% of the time), the seller must correct and resubmit the document. Regardless of industry, the seller is most likely not a trained specialist in international finance, making the whole process cumbersome, taxing, and very draining.

The Consequences Of Payment Delays

A single misspelling on a LC can have a ripple effect that potentially shatters businesses:

Lost market share: Competitors who receive faster payments can immediately reinvest those funds into manufacturing, advertising, R&D, and much more. Those waiting for payments, however, are left in limbo.

Operational delays: It takes money to make money; when money’s in transit, operations have to be held up and business has to take a back seat to logistics.

Increased expenses: Take the hourly rate of what you pay your staff. Multiply that by the countless hours lost to drafting documents, correcting mistakes, rechecking them, and other logistical tasks. Wouldn’t it better if your staff focused on what they were supposed to be doing?

Lost control of export sales: Generally, document discrepancies void the defined “obligation to pay”, returning control to the buyer – thus defeating the purpose of getting an LC in the first place!

Wasted money on bank fees: Banks love finding discrepancies – they charge a penalty fee for each one. Without professional document drafting and checking, problems – and penalties – accumulate quickly!

Lost management confidence: Someone has to assume the blame for delayed payments and lost revenue. LC problems can hinder team morale, leadership abilities, and even the direction of a manager’s career.

With so many problems associated with LCs, it makes no sense to risk using a freight forwarder, bank, or in-house drafting. The smartest thing to do is to use a trusted outsourced professional. Learn more about the QLC solution or see a sample analysis of how QLC saves companies money.