What is it?
Many exporters ask their buyers to arrange a letter of credit. This is a payment guarantee from the buyer's bank. The letter of credit is intended to ensure that the exporter can ship the goods and be confident that the buyer will pay for them later.
But the letter of credit payment guarantee is conditional upon specified documents being provided by a given date. A discrepant letter of credit arises if the exporter fails to meet the deadline or provides documents that do not match what is specified. Each such failure is called a discrepancy.
The letter of credit is discrepant. What do I do?
This can often happen.
Some export banks that we work with experience 100% discrepancy rates on the letters of credit that they rely upon.
Often letters of credit ("LCs") have quite complex conditions involving the provision of many documents produced by different parties within short timeframes. And a discrepant LC is not a disaster. There are some important principles:
The LC issuing bank cannot waive discrepancies without the consent of the buyer.
It is best to pre-clear discrepancies before documents are presented to the banks under the LC.
Although the banks control the process, it is best if the exporter and the buyer can sort out the issues between themselves and then give clear instructions to the banks.
The letter of credit is discrepant. Do I get paid?
There are three things that can happen:
The buyer instructs his bank to accept the discrepancies. The exporter gets paid and the buyer gets the documents so that he can land the goods.
The buyer instructs his bank to offer a lower price. The exporter's bank needs to accept this price and then the exporter gets paid and the documents are sent to the buyer as (1).
If the buyer does not agree or the exporter rejects the terms offered, then the buyer's bank will send the documents back to the exporter's bank. If the LC is properly organised, this will prevent the buyer from collecting the goods so the exporter can recover them.
So the exporter has to trust the buyer?
Yes. A letter of credit that is discrepant no longer includes any active obligation to pay. In fact, it has turned into a documentary collection.
Is a discrepant LC worth anything?
Yes. Experience shows that LCs fail when communication between the buyer and the exporter has broken down, or if the buyer has changed his mind on the transaction. The LC provides a number of protections, even if discrepant:
Original shipping documents are not provided to the buyer without the exporter being paid. This prevents the buyer from cheating the exporter.
In organising the LC, the buyer has committed time, money and resources demonstrating a commitment to the purchase order, and a validation to all the involved parties that the purchase order is real.
Is there an alternative to the letter of credit?
Yes.
Our www.prima.trade platform provides a simple way for buyers to approve invoices at shipment against shipping documents. This is a 3-way match at shipment - which then means that some or all of the invoice amount can be turned into cash. Sometimes buyers can pay early (for a discount), or provide supply chain finance or the approved invoice can be used with a trade finance company.
In all cases, the exporter is paid upfront without the cost, expense, complexity and uncertainty of the letter of credit.
See here for more information about our 3-way match process.
Get your buyer in touch with us today (mail us at info@prima.trade).