Among the issues for parties selling into the international market are how to get paid and how to resolve disputes.
In part one of this series Small Business International Trade: Issues to Consider Part 1 we covered seven high risk items that need to be considered and addressed. This second and final part of our discussion focuses on two issues: Letters of Credit and dispute resolution provisions.
Here are the two parts:
1. How Does One Get Paid?
The most effective way of securing payment is by way of a Letter of Credit or LOC. The advantage to using an LOC is that the seller is guaranteed payment under accepted international trade rules governing these instruments, e.g. The International Chamber of Commerce Uniform Custom and Practice for Documentary Credits.
The alternative approach would be for the seller to have an actual agent in the target market who would be responsible for receiving payment and releasing the goods to the purchaser, but this could also result in the agent pocketing the funds.
The basic framework for an LOC transaction is as follows:
After a purchase order agreement is concluded between the seller and the purchaser, the purchaser would apply to its local bank for an LOC. The terms of the LOC would be worked out between the purchaser and the purchaser’s bank (called the “Issuing Bank”).
LOCs, among other things, require the presentation of certain documents to the Issuing Bank that would confirm that all the conditions of the transaction have been met.
Once the terms and conditions of the LOC have been finalized, the Issuing Bank would transmit the LOC to the seller’s bank in the seller’s own country (the “Advising Bank”) The Advising Bank would review the LOC and approve the LOC for “advice” to the seller.
The Advising Bank would, thereafter, transmit the LOC to the seller for it to confirm that its terms comport with the parties’ sales agreement.
After the LOC has been confirmed by the seller
After the LOC has been confirmed by the seller, and the goods specifically referenced in the LOC have been shipped, the seller would present documents establishing proof of delivery to its Advising Bank.
The Advising Bank would then transmit the documents evidencing proof of delivery as required by the LOC to the Issuing Bank, which would check the documents, again, against the requirements of the LOC.
Upon accepting the requisite documents, the Issuing Bank would honor the seller’s request for payment, deduct the funds from the purchaser’s account, and then remit the documents to the Advising Bank, which would, in turn, credit the seller’s account.
Important to understanding the LOC transaction is that requisite documents need to be precisely drafted and all the documents required to be presented under the terms of the LOC must be presented.
Next- #2 What If There is a Dispute Between a Seller and Purchase? and Takeaway