7. Accounting Worksheets: Costing, Financial Forecasting and Product Pricing 108
Keep in mind that ﬁnancing and the associated costs and beneﬁts should be included as part of
your negotiations. You can use them as marketing tools, and therefore they should be outlined
carefully by you and the buyer. An LC can be useful if you are unsure of a prospective buyer’s
creditworthiness, but are satisﬁed with the creditworthiness of your buyer’s bank.
While it may be difﬁcult for you to obtain reliable credit information about a foreign buyer, it is likely
less difﬁcult for the buyer’s bank. Moreover, this vehicle can be structured to protect your buyer,
since no payment obligation arises until the goods have been satisfactorily shipped or delivered as
• The Letter of Credit is issued by the buyer’s bank and is “advised” through the seller’s bank. When
acting as an advising bank, the seller’s bank is conﬁrming to the seller that the LC is a real liability
of the issuing bank.
• The advising bank is NOT liable for anything else. If the seller is not comfortable with relying on the
credibility of the buyer’s bank, the seller can request a conﬁrmation.
• Also, it should be noted that under Letters of Credit, banks are liable only if the documents
submitted and the LC are 100 percent correct.
Be Aware of Potential Dangers
1. Non-acceptance and non-payment by the buyer
2. Bank’s refusal to honor the presentation or seek approval from the buyer, and sending of
the documents back to the beneﬁciary
3. Acceptance by the buyer, but delayed payment (could be up to six months or more)
4. Acceptance by the buyer, but negotiation of a lower payment price
5. Penalty for late shipment
6. Incurring of discrepancy fees
7. Settlement in court in a foreign country
LC Terms and Conditions
The terms and conditions required for payment are spelled out in the LC.
• When the terms and conditions have been met, as veriﬁed through the presentation of all required
documents (that is why export Letters of Credit also are referred to as documentary Letters of
Credit), the buyer’s bank makes the required payment directly to your bank in accordance with the
terms of payment.
LCs may be utilized for one-time transactions, or they can cover multiple shipments, depending on
what is agreed to between you and your buyer. It’s important to make sure you can deliver your
order according to the terms and conditions of the LC before accepting the LC. Make sure you
review the details of the Letter of Credit and the required documentation with a bank that has LC
experience. If all parties agree, the LC can be amended after it is opened at an additional cost.
In addition, it is advisable to speak with an international banker before your buyer opens a Letter of
Credit to ensure that proper language and conditions are incorporated into it. Letters of Credit can
take many forms, but a typical transaction may involve the following steps.
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