Why A Letter of Credit Makes Purchasing Easier
In the last few years, banking regulations have tightened around the world as banks have put in place “Know Your Customer” requirements in an effort to combat fraudulent transactions. While this affects many aspects of banking and payment methods, it is very noticeable when opening and issuing Letters of Credit (L/C’s).
For international customers, L/C’s are a useful tool to finance equipment. L/C’s have a reputation for being a complicated and expensive means of payment, but they provide many protections for the buyer and the seller.
For every Letter of Credit shipment, Insta-Pro will send order-specific instructions for the customer to provide to their bank prior to issuing the L/C. Some of the key information included are the following:
Latest Ship Date: Banks charge fees based on how long an L/C is going to be open so a customer may look at the date on our instructions and ask that it be shortened. However, there are multiple items that factor into that date. The first is based on the Dispatch Date as indicated on the Insta-Pro Purchase Agreement. If we quoted 6-10 weeks, we would start the calculation at 10 weeks. We then add 3 weeks to allow the shipment to make its way from our factory in Iowa to the US or Canadian port. Finally, we add 2-4 weeks providing the customer time to work with their bank to open the L/C.
Confirmation: We require a confirmed Letter of Credit so that the US bank agrees to pay the LC amount in case the foreign bank defaults. Many country changes can occur in the 3-4 months that an L/C is typically open for and we want to be able to supply the order without any disruptions. The US bank should be unrelated to the issuing bank. Contact us with the US bank information in advance as we can then review whether we have an existing relationship with them. Because of the new regulations, many banks will refuse to advise or confirm the Letter of Credit if they don’t know all the parties in the transaction.
Partial Shipments: We ask that partial shipment are “Allowed”. The main reason we ask for the “Allowed” partial shipment is when the order requires more than one container. This allows the containers to travel on different vessels if necessary.
We ask to see a draft version of the L/C before the bank issues it. Along with our bank and freight forwarder, we review it to ensure we can comply with all the requirements. This process goes much more smoothly if the initiating bank has followed the instructions we provided in advance. If changes are required, it is easier to make them at this stage of the process. Once the LC is issued, any changes require an amendment and each bank will charge an amendment fee which is an added expense for the buyer and seller.
Once the confirmed, accepted Letter of Credit is in place, the customer’s work is done. Insta-Pro will initiate the customer order and start building!
As you can see, International Letters of Credit are an involved, but sometimes a necessary process. Our experienced International shipping team can provide you with valuable advice to help guide you step by step.
