Letters of Credit, from the Fundamentals to the Nitty-gritty

In November, U.S. exports grew by more than 14% year-to-date to a hefty $1.7 trillion. The global marketplace has kept the nation afloat, supporting 13.7% of gross domestic product in the third quarter alone. The usual suspects like Canada, Mexico, China and Japan remain the hungriest markets for U.S. goods, but potential free trade partners like Korea, Colombia and Panama have increased exports by 13%. 

For credit managers dealing in international trade, the documentary credit cycle deserves unparalleled importance. Letters of credit (LCs) are what get exporters paid, by enabling an importer to offer secure terms of payment. The process is complex and failure can be rooted in mundane mistakes, even as simple as a missing period or comma, a premature expiration date or the inability to produce a particular document when asked. An estimated 70% of all LCs submitted to banks for payment are initially rejected due to incorrectly issued documentation, meaning payment delays, additional fees and even nonpayment in some cases. Danielle Austin, Export Trade Associates, LLC, said that the discrepancies in LCs typically occur due to a lack of education.

“There is a tremendous gap between beneficiaries—the exporters—banks and freight forwarders,” explained Austin. “The beneficiaries aren’t getting the support they need and the resources are not available in today’s environment.”
The realities are that because there are so many details that must be addressed on the export side prior to shipping, credit managers can no longer afford to “ship and learn” or “ship and pay.” There is simply too much at stake. At NACM’s 113th Credit Congress in Orlando, Florida, Austin will present two sessions: “Letters of Credit 101: The Fundamentals” and “Letters of Credit 102: The Nitty-gritty.” 

“We need the education to help our exporters grow, facilitate trade, get them paid in days—which is possible—without the initial fear and knowledge to take the first step,” stressed Austin. “An LC is still the safest way to do business internationally.” 

Austin has 14 years’ experience specializing in LCs. Her Credit Congress sessions will not only discuss the importance of the fundamentals to avoid costly elementary mistakes, but also the importance of LC instructions, Incoterms and how to read an LC. She will be targeting ways credit managers can get paid in a matter of days versus weeks or months, and how to reduce discrepancies.

“I provide shortcuts and streamline the learning curve,” said Austin. “By the end of my classes, credit managers will be prepared to ship internationally via an LC with the best possible tools to secure payment.” 

Matthew Carr, NACM staff writer

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