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.

I have already explained “What is a sale contract? How can we use a sale contract in a letter of credit transaction?” previously on my website. If you need further help, please read my article. 

Stage 3: Letter of Credit Control Period:

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.

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How to check a letter of credit as an exporter? 
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.

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letter of credit control process
Letter of Credit Control Categories
  • Preliminary Investigation Period : You should check your customer's background and credibility at this stage.
  • Sales Contract Period : You should draft and sign a sales contract at this stage.
  • Letter of Credit Control Period : You should control letter of credit draft at this stage.

country risk map 2014
Country Risks in International Trade
  • Each country has a unique risk level : You should understand that a letter of credit issued in US and Myanmar have different country risk levels.
  • Try to understand not the current economical and political risks of the importing country but 6-12 months period of time. 

On the following pages I explain letter of credit control process by one by. On the next page you can read and learn how to check irrevocability of the letter of credithow to check date of issue, latest date of shipment and date of expiry of the letter of credithow to verify issuing bank in an L/C transaction.