Letters of Credit - What the Sales People Need to Know

“A sale is not a sale until it's paid for.”

It’s an over-used phrase perhaps, but one that export sales people need to live by strictly in order to survive. The risks and complications of international business are so wide ranging, and any sales negotiation needs to give careful attention to how payment will be made, which is equally as important as setting the price and determining shipping arrangements.

International letters of credit are a means of payment that are often misunderstood. Essentially, they are an undertaking from a bank to make payment when the terms of the contract are agreed with. They are a very effective means of securing payment in some circumstances, and often are the only legal method of getting paid. But contrary to popular opinion, they are not “money in the bank.” Some reports have found that a majority of letters of credit are refused on first presentation, and in some circumstances, exporters are forced to resort to less secure methods of payment when they discover too late that they can’t meet the conditions of the letter of credit that has been prepared.

While sales staff probably don't need to understand every dot  and comma of letter of credit rules and conditions, they do need to understand how a thorough appreciation of the process by both parties, and especially the requirements of the seller, can play a vital role in avoiding disaster and certainly in saving time and money for the company.

A letter of credit is an undertaking from the issuing (or confirming) bank to make payment when agreed documents are presented. That sounds so easy, doesn't it? But there are complications.

The first thing sales people need to understand is that banks operate on a doctrine of strict compliance. This means that every detail has to be correct and consistent. If a typing error, or a variance in description, or quantity, occurs on any document, the bank will refuse to pay. They actually have no choice.

Often such mistakes can be easily corrected by simply reproducing the flawed document. But sometimes, it just isn't that simple. To give just one example, in many industries there are agreed levels of variance in delivering an order. When someone buys natural goods such as leather skins, it's understood that the eventual delivery will not be exactly as described in the order. Skins very in size, there's no avoiding it, and people who are familiar with the industry know that. But if an order specifies a quantity of skins all in a certain size, and the shipping documents don’t comply exactly, the letter of credit is likely to be refused. It’s up to the salesman to make sure that this unavoidable variance is carefully described in the customer order, and crucially in the application for the letter of credit.

Letters of credit also have specific terms about delivery deadlines, method of shipment and more. Unless there is clear communication between both parties, the customer may inadvertently put a needless condition on the letter of credit that makes it very expensive or perhaps even impossible for the exporter to comply.

It’s the application process that is really crucial to producing a letter of credit that can be complied with. It’s the customer (or their agent) who completes the application, and has to make a number of crucial choices that may be impossible to change later.

When negotiating a sale, a sales person needs to be very carefully briefed by his colleagues in finance and shipping about the detailed requirements of the company. They also need sufficient understanding of the application process to be able to explain to the customer what they need him to do in order to make the letter of credit terms achievable. The sales representative, who is usually the person with the most direct contact with the customer, can help to make the process run smoothly by getting involved with the application process. But of course, this will only help if the representative has enough basic knowledge of the process and in particular what his company needs.

So however competent the financial department are, the sales representative is a vital part in the aim of getting a letter of credit that the exporter can comply with, and that will therefore avoid unnecessary delay and expense. Take care to ensure that your sales representatives know what is needed, and the consequences of getting it wrong.

Article written by Tim Hiscock - Associate of Strong & Herd LLP

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