5 Things You Should Never Do When Working with a Letter of Credit for the First Time :

Most of the times letter of credit is not the first payment option for exporters and importers. Exporters and importers tend to choose other payment options such as cash against document, advance payment or mixed payments over letters of credit. But as situation dictates foreign traders have to use letter of credit in international trade transactions. On this article I would like to explain 5 most costly mistakes that exporters repeatedly make in their lc operations. 

Most costly mistake 1 : Doing a business with an importer to whom you have no real information...
Business is not a virtual thing. You should have a real knowledge about your counter party before starting to do any kind of transaction. I have seen a lot of exporters who tried to finish a transaction without having a decent information about their buyers by just trusting a letter of credit. Letter of credit does not protect you against any immoral buyer. 

Please answer below questions to understand how much you know about your buyer. 

Table 1 : Customer questionnaire

If you can not answer "yes" to all of these questions immediately, than you should be starting to re-think about the whole business. If you answered more than 1 question negatively, than you should be very careful about the trade transaction in terms of risk issues.   

Most costly mistake 2 : entering business offers which are too good to be true...

In most cases scammers seduce exporters with unbelievable proposals. They do not bargain for the prices, they order big quantities, they promise to pay "at sight" not "usance" terms. As a buyer if you do not intend to pay anything than sky would be the limit for you. You can propose whatever you think would be necessary to seal the deal. These proposals can be sum up as "too good to be true" type business offers. If you meet a buyer one day who is promising very favorable conditions to you, please keep in mind that you might be loosing money at the end.

Most costly mistake 3 : underestimating risk factors associated with the transaction
Businesses turn around on risk and profit axis, more you take risks, more you can get profit. But some exporters lost their common sense and take too much risks to make more profit in a short perod of time. This behavior associated with an extreme risk taking behavior.  However normally you have to understand your risks very well before signing any contract with your buyer. Than you should take preventive steps to reduce each risk level to acceptable degrees. If you would like to learn more about risk factors in a letter of credit transaction please follow this link.

Most costly mistake 4 : "I can do it in my way" perception...

Letters of credit are different than other payment methods in international trade in terms of flexibility. Banks play a key role on lc transactions. Letter of credit rules are strictly followed by banks. As a result you have to prepare required documents as per credit terms, latest letter of credit rules and standard banking practices. Otherwise you can not get your payment under a letter of credit. 

Most costly mistake 5 : lack of knowledge...
As I have mentioned above letter of credit transactions are governed by one of the most complicated rules of whole international trade practices. In order to complete a letter of transaction without experiencing a negative result, you need to understand how logistics, finance and governmental procedures work very well. Also you need to be very careful when reading the credit terms and conditions. You have to note down every detail and clarify each point that can not be understood openly. Do not be shy asking questions to issuing bank or confirming bank to comprehend the credit.
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Do you know the most biggest mistakes that exporters do when working with a letter of credit for the first time?
5 Things You Should Never Do When Working with a Letter of Credit for the First Time, titled article is written by Ozgur Eker. You can find important failure points for unexperienced exporters.

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How much do you know about your buyer?
Did I find this customer from a trade exhibition or a customer visit?
Does my customer have any proven business relationship in my sector?
Does my customer visit me before the business was initiated?
Is there any positive feedback that I have gathered about my customer?
Does transaction doable in regards to my buyer's perpective?
    Summary :

  1. Learn who your buyer is. Try to get references of your buyer from your sector. If needed make a financial investigation.
  2. Be careful about too good business opportunities. Be aware of scammers.
  3. Understand risk factors associated with your transaction
  4. Accept the fact that letter of credit is not flexible in terms of regulations. 
  5. Learn the rules. Read the credit well. Eliminate all gray areas.   


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