How to protect yourself as an exporter when working with a letter of credit against various risks?
I will be explaining the letter of credit control process under 3 main categories.
Stage 1: Preliminary Investigation Period :
Learn Your Customer:Nothing can protect you against an ill will customer. As a result you need to make sure that your customer is a valid company with a proven track of business and has a financial credibility to complete the transactions.
How to investigate your customer?
In order to understand that you are dealing with a genuine customer, who has financial strength to start and complete the transaction, you should follow below steps:
Check your customer’s country risk: Customer’s country risk is one of the key elements you should check before entering any contractual relationship with your customer. Be aware of political risks, economic risks as well as risks associated with sanctions, embargoes and anti money laundering regulations.
Check your customer’s references: Check your customer references by asking the potential customer to other companies that have been working with, to freight forwarders, custom brokers and governmental organizations such as Commercial Counselors.
Check your customer’s credit report: You can buy credit reports from "international corporate credit information supplier" companies. Corporate credit reports tell you that how much credibility your customer has. For example if the credit report suggests you that you could give 20,000EUR credit to your customer, while your customer is pushing you to enter into a business with total amount of 500.000,00EUR, you should be alerted. Always buy a credit report on a new customer when working with a letter of credit for the first time if business amount is significantly big for your company.
Stage 2: Sales Contract Period :
After you investigate your customer, you can proceed to the sales contract drafting period. Letter of credit is not a sales contract. As a result must have a sale contract even if you will be working with a letter of credit.
After checking your customer’s credibility and signing a sale contract, now you can proceed to letter of credit control phase. Experienced exporters demand “draft letters of credit” from importers in order to make the amendments without paying extra costs.
A draft letter of credit is prepared by the issuing bank in swift format, contains all the aspects of the actual letter of credit with one exception, the draft letter of credit is not an operative instrument as the issuing bank intentionally indicates so.
Letter of credit is a balance payment method in international trade. Both exporters and importers are protected by letters of credit in certain amount, if they act properly. Today I am going to show you how to protect yourself as an exporter when working with a letter of credit against various risks.