Risks In L/C Payment Methods Need To Know To Not Lose Money

If you think that international payment wants to be safest, you should use L/C (letter of credit) because it is convenient for the two sellers: commitment to receive money if they present a valid set of documents even though the buyer has from refuse to receive the goods or change their mind not to buy anymore.

The buyer has time to turn around capital and strictly control the transaction process, limiting the forging of import documents.

The bank has clearly demonstrated its role as a third party with the best role of payment, supervision and debt collection compared to other methods.

However, if the loophole in the payment of L/C is not clearly visible, the enterprise still bears bitter fruit when it is negligent from the following risks.

Risks to know when using L/C . letter of credit payment
In this article, we would like to analyze the risks that importers and exporters need to know in order to limit them from the perspective of the parties that can affect them:  from banks, exporters and transporters and importers.

1.1: Risk from L/C issuing bank
This is the risk that the seller may face when the buyer opens an account at the issuing bank of the L/C that does not guarantee solvency, has poor credit, or does not have a Swift code.

Mitigation solution:

The seller can ask the buyer to open L/C at reputable and well-known banks
In some cases, it is possible to designate the issuing bank of the L/C to be the bank's agent in the exporting country or vice versa with a secured relationship.

1.2: Risks from exporters can cause to importers
In many cases, exporters do not send enough goods or when receiving goods that are not the same as sample product images, negotiated on commercial contracts. At this time, the risk will be borne by the importer.

Solutions to reduce risks from exporters

- Work with reputable partners to negotiate closely on delivery conditions (must have photos and videos sent to importers)
- Consult the bank about the partner's business history
- Clearly stipulate the penalty clause in the foreign trade contract if the contract is not performed
- Send staff to directly supervise the packing and shipping process
- In many cases where the value is large, both parties must deposit in a bank. In case one of the two parties makes a mistake, the other party will still be compensated.
- In addition to the main requirements in the L/C, it is also necessary to prepare additional bank tools such as: Standby Letter of Credit, Performance bond, Bank guarantee...

1.3:  The exporter does not comply with the provisions of the L/C
Delivery delay due to failure to collect and prepare in time (In case the exporter has not prepared the goods in time)

Processing solution :

- Estimating the time to prepare goods and collect goods accurately to be prepared for the worst case scenario
- If the exporter fails to deliver the goods in time, the L/C adjustment fee will be borne by the exporter

1.4: The exporter fails to deliver the goods as stipulated in the contract
Goods can't be loaded on time, train delay, out of seats, change train...

Solution :

- Survey the transport route right after signing the contract
- Rent a train if you have a lot of goods
- Choose a shipping company that has the strength in that shipping route
- In case the exporter does not commit to deliver the goods on schedule, it is necessary to correct the L/C .
If the exporter delivers the goods in part: First of all, read carefully to understand the y/c of ​​the L/C

– Specify how many times each delivery batch, how much delivery time

– The volume of goods delivered several times, divided into each batch, how many cases if the exporter does not deliver the goods on schedule, this fee is usually borne by the exporter.

Risks arising from the exporter's side in the payment of L/C
The exporter fails to present the set of documents in accordance with the L/C regulations

Solution:

- Prepare full documents, when making L/C payment, it is necessary to have good personnel to avoid the case of multiple L/C corrections.
- Choose a business partner has goodwill, does not make it difficult or take the opportunity to evade
- Need to negotiate in the contract all the documents that need to be prepared in the set of documents to limit the extra arising after signing the contract
- Strictly control the risks that may arise when using L/C
- Get advice from the beneficiary bank to support the exporter
- Learn carefully about L/C payment regulations and documents set
- Timely prepare documents for negotiation on the day of L/C opening, limit dreaming too early or open on the day the goods are on board if the exporter has not prepared the L/C in time.
Exporters send invalid documents, fake documents

In many cases, importers receive fake documents sent by exporters, or check the contents of the goods are not the same as the documents, or the set of documents is not valid according to the regulations of the importing country.

Solution:

- Documents related to goods such as: C/O, I/P, C/Q, Test Report...  must be issued by a competent authority
- Regarding the bill of lading, the shipping company created after loading goods must be checked and supervised by the representative of the importing party (information on the date of departure, release date, train name, number of trips, train schedule ...)
- The importer must receive the original bill of lading to check and compare with the documents on the L/C .
- Documents need to be signed by the representative of the inspecting importing party and signed by competent authorities.

Risks due to unreliable shipping lines, old ships
Using an unreliable shipping company will have cases of missing delivery, lost goods, damaged goods without compensation, using an old ship that may have an accident without receiving adequate compensation for this error from the carrier.

Solution:

- When paying L/C, the importer should reserve the right to actively charter the ship
- Designating a reputable shipping company or having an office in the importing country will help the importer minimize risks