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Letter of Credit Transactions and Your Business
By Robert Paisola

Two issues ago I talked about the Letter of Credit (L/C) and how it is used as the primary tool to manage the risks inherent in trade finance within the international arena. The L/C serves two purposes: to provide a payment mechanism for merchandise that t has been shipped, and to reduce the risk of the transaction for both the buyer and the seller. This time I'd like to focus on the typical L/C transaction.

Since L/C's and collections entail the transmission and review of documents, the manner in which your bank manages the flow of paperwork affects how you can manage corporate cash flow.

While the basic terms of L/C's have remained unchanged for centuries:

  • Technology has allowed banks to streamline the process and reduce the paperwork involved. Banks that have invested in advanced technology can give their clients quicker service and more management information than banks that have not. Technology also is the key to lower error rates and faster resolution of problems.

  • Payment timing usually is a company's highest priority. "When will I get paid?" is the typical exporter's first question. How quickly your bank handles the document flow in a L/C transaction is critical to how quickly you get your money.

When a transaction is initiated, the bank inputs the data into its computer system, which identifies the payment and tracks items from presentation of documents through the payment of cash proceeds. Up-to-the-minute reports generated by the system allow you to continuously monitor payment of your export receivables.

  • Many banks can monitor how long it takes to process a transaction and can provide you with a track record. Others may even guarantee payments within intervals ranging from five business hours to several days. While most L/C's should be processed on the same day, you should insist that all L/C's be processed within three business days of receipt of documents in conformity with the terms of credit.

If you use L/C's regularly, visit your bank office to see first hand how your L/C's are processed. A quiet, well-organized bank office is one sign that your L/C's are being managed properly. While you're there, ask about of your outstanding L/C's and see how long it takes your banker to come up with this information.

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