Letter of Credit in practice: pitfalls and solutions

Are you curious about the most common pitfalls and how to prevent them? We have listed the problems and their solutions for you in this article.

A Letter of Credit is a powerful instrument, but the process is strict and detailed. In practice, situations can arise that require an expert approach. By understanding the most common problems, you will be better prepared.

Discrepancies: every exporter’s nightmare

What is a discrepancy?
A discrepancy is any deviation, no matter how small, between the submitted documents and the terms of the L/C. The bank checks the documents very strictly. A simple typo, a date that is off by one day, or a missing checkmark can already be marked as a discrepancy.

What are the consequences?
The consequences can be significant. As soon as the bank identifies a discrepancy, the irrevocable payment obligation becomes void. The bank is no longer obligated to pay and will reject the documents. This puts you, as the exporter, in an uncertain position: your goods are on their way or have already arrived, but your payment is no longer guaranteed.

The role of Elceco: our expertise is focused on preventing discrepancies at all costs and, if necessary, resolving them.

• Prevention is better than cure: Before the goods are shipped, we analyze the L/C for any ambiguities or unfeasible requirements. We then meticulously check every draft document before it is finalized and sent to the bank. This preventive check is the most effective way to avoid problems;

• Resolving discrepancies: In the unlikely event a discrepancy is found, we assist you immediately. We analyze the situation and advise on the best solution. This could be correcting the document (if time permits), requesting a ‘waiver’ (a statement from the buyer agreeing to the deviation), or negotiating with the bank. We take over the communication and guide you through this complex process.

Amendments: dealing with changes in the transaction

What is an amendment?

An amendment is a formal change to the terms of the L/C after it has already been issued. The reality of international trade is that things can change. Consider a production delay that makes it impossible to meet the latest shipping date, a change in the ordered quantity, or a different transport route.

How does it work?
An L/C can only be changed by mutual consent. The buyer (the applicant) must instruct their bank to issue an amendment. This proposed change is presented to you (the exporter) through the banks. You then have the choice to accept or reject the amendment. The changes only officially take effect after your acceptance.

The role of Elceco: requesting and processing amendments can be slow and prone to errors.

• Advice and coordination: We advise on whether an amendment is necessary and help formulate the required changes clearly to prevent misunderstandings. We support you in communicating with the buyer and the banks to speed up the process;

• Verification: Before you accept an amendment, we carefully check the text to ensure that the change has been implemented correctly and has no undesirable side effects for your position. This ensures that the security of your L/C remains intact.