Reasons Why Letters of Credit Fail

1) Not Adhering to Time Lines

The LC should have an expiration date that gives sufficient time to the seller to get all the tasks specified and the documents required in the LC. If the LC expires, the seller is left with no protection. Most LC s fail because Sellers/Exporters/Beneficiaries were unable to perform within the specified time frame in the LC.

Three dates are of importance in an LC:
a) The date by when shipment should have occurred. The date on the Bill of Lading.
b) The date by when documents have to be presented to the Bank
c) The expiry date of the LC itself.

A good source to give you an idea of the timelines would be your freight forwarding agent. As a seller check with your freight forwarding agent to see if you would be in a position to comply.

2) Not Noticing The Built-In Discrepancy In the Letter of Credit

Letters of credit could also have discrepancies. Even a discrepancy as small as a missing period or comma can render the document invalid. Thus, the earlier in the process the letter of credit is examined, the more time is available to identify and fix the problem. This is another common reason why LCs fail.

3) Compliance with the Documents and Conditions within the Letter of Credit.

Letters of Credit are about documents and not facts; the inability to produce a given document at the right time will nullify the letter of credit. As a Seller/Exporter/Beneficiary you should try and run the compliance issues with the various department or individuals involved within your organization to see if compliance would be a problem. And if so, have the LC amended before shipping the goods.

Learning the Terminology of Exporting INCOTERMS

Shipping terms set the parameters for international shipments, specify points of origin and destination, outline conditions under which title is transferred from seller to buyer, and determine which party is responsible for shipping costs. They also indicate which party assumes the cost if merchandise is lost or damaged during transit. To provide a common terminology for international shipping, INCOTERMS (International Commercial Terms) have been developed under the auspices of the International Chamber of Commerce.

Want to know about the latest Incoterms? You can read it here.