Getting Paid for Export Shipments
by
Joseph Zodl
© 2000 Joseph Zodl
(excerpted from remarks at Upgrading Our Potential Conference, sponsored by
the University of Phoenix, Phoenix, Arizona, June 9, 2000)
We talk about the need for export compliance on the one hand and marketing on the other, but it makes no sense to be exporters if we don't get paid.
Payment in advance is the ideal, but that doesn't mean your customer is willing to do so. Open account is an alternative that's ideal for the importer--he obtains the product and has a chance to sell it before payment to you is due. This creates a risk on the export side.
What we've done over the years is put banks in the middle with "documentary credits" or "letters of credit" as well as another alternative called "documentary collections." From there, other alternatives exist such as "cash against documents" which are covered in my book, but which are outside our scope today.
The essential of a letter of credit is that the buyer of a product makes arrangements with his bank to guarantee a payment providing certain documentary conditions are met. His bank then makes arrangements with a U.S. bank (advising bank) to pay the seller providing those conditions are met.
It's important to note that there are four parties involved: (l) the buyer, (2) the buyer's bank, (3) the advising bank, and (4) the seller. I don't say "seller's bank" because, while it's fine for the seller to express a preference as to the bank he chooses to deal with, the letter of credit will still come through to a bank that the buyer's bank has a business relationship with. Of course, it is always possible for a seller to retain the services of his own bank to act in a capacity specific as to advising the seller before documents are officially presented.
It's also important to note that only the buyer and the buyer's bank are normally present when the letter of credit is being drafted. The seller is not there. So if you are selling under a letter of credit, it's important for you to have given a list of parameters to the buyer before the letter of credit is even written.
Many sellers do this as part of their catalog, or as part of their proforma invoice. Many others provide their own list of parameters that they send to all buyers.
An example would be that the seller is located in Irvine, California and is selling to Asia on an FOB basis. The seller does not want a letter of credit to come through requiring shipment via an Atlantic or Gulf Coast port. So stating "letter of credit must permit shipment from California seaport" is important. The seller does not want to say "Los Angeles" because the routing may require shipment via a carrier who calls "Long Beach, California" which would then be a discrepancy. Stipulating California seaport gives the seller the flexibility needed. Of course a statement "letter of credit must permit shipment from any U.S. seaport" is even more flexible, but the buyer may be unwilling. An Asian customer may fear that the California seller actually will ship from an East Coast warehouse with the result of a higher ocean freight.
Another example would be that the seller needs 60 days to manufacture product to specification (e.g., a U.S. manufacturer of electrical products makes product that runs on 220 on special order only). Then there is still the matter of time for the cargo to get to the seaport and for the vessel to sail. One of the necessary parameters might be "letter of credit must permit 90 days for shipment."
Especially important is that all involved at the seller's company must be aware that a letter of credit is not an absolute guarantee of payment. It is a guarantee by a bank that payment will be made if the documents presented are in accordance with the specifications of the letter of credit exactly. Sometimes there is a push to "make the month" or "make the quarter" and "go ahead and ship, the letter of credit is on its way." Then there is the very real possibility that the company will (1) ship, (2) see the letter of credit, (3) find a discrepancy. Discrepancies that can come about include, for example that the buyer may be talking repeatedly about using steamship line "A" and may in fact have used that company in the past. Now, under the new letter of credit, a requirement is in that line "B" is to be used because a new cargo contract has been signed. Shipping under the wrong carrier will result in a discrepancy.
Remember, too, that there are dishonest people out there and they exist in all industries and all countries. It is not unheard of for a dishonest buyer to issue a letter of credit that says ":Shipment must be after February 15 but before February 14" which is impossible. If a seller ships without seeing such a letter of credit, or ships under the verbal assurances that the letter of credit will still be honored, he is "acting at his peril" as the lawyers would say. In the instance of an air shipment, it is possible that the buyer will be able to obtain the goods at destination before the letter of credit documents are even submitted. If an ocean, truck, or rail shipment is not handled on a "to order" basis, it is still possible for the buyer to obtain the goods and renege on payment.
The most important things to take from today are (1) a letter of credit is not an absolute guarantee you will be paid, ever; (2) a letter of credit is a guarantee from a bank that payment will be made, even if the buyer tries to back out, providing that all documentary conditions are complied with exactly; (3)the seller must protect his interest by advising the buyer of his parameters; (4) order bills of lading and similar steps must be taken in order to protect the seller's interest in the goods in the event of nonpayment on a letter of credit with discrepancies.