What is it?
Many exporters ask their buyers to arrange a letter of credit. This is a payment guarantee from the buyer’s bank. It is intended to ensure that the exporter can ship the goods and be confident that the buyer will pay for them later.
But the LC payment guarantee is conditional upon specified documents being provided by a given date. An LC becomes discrepant if the exporter fails to meet the deadline or provides documents that do not match what is specified. Each failure is called a discrepancy.
I am an exporter. The LC is discrepant. What happens?
This is quite normal.
Some banks, that PrimaDollar works with, are experiencing 100% discrepancy rates on the LCs that they process. The reason is that LCs often have quite complex conditions involving the provision of many documents produced by different parties within short timeframes.
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 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.
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 (click here to read our guide to documentary collections here).
Is a discrepant LC worth anything?
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 LC?
PrimaDollar can provide a cheaper, simpler, quicker alternative that provides the same benefits as the letter of credit.
How can I find out more?
With a global network and global coverage, talk to us.