The paperwork surrounding an international letter of credit is daunting. But the idea is remarkably simple: The money is separate from the deal, and exchanged via you and your foreign partner's respective banks. If all terms in the letter are met (generally, that the goods have been shipped, although the jargon quickly overwhelms), the money moves. It's all about cutting risk.
Start at your local bankMedium-sized U.S. banks in recent years have jumped into international trade finance and letters of credit. They can be more responsive, particularly for an existing customer.
Find a qualified partnerOcean bills of lading are not the same as invoices, which are not the same as packing slips (six copies, please!). The regulations surrounding international letters of credit - essentially diplomatic agreements devised by the International Chamber of Commerce more than seven decades ago - can be complex, although the actual letter is simplicity itself.
Consider a courierAnother key trend in trade has been the rise of couriers from postal workers in nice uniforms to cutting-edge supply-chain providers.
Find a provider who is a good fitAny number of companies sell software that generates export documents. Some offer outsourcing and still others can write software that links your export business right into your company's back office. It all depends on how heavy your export business becomes.
Protect yourselfEven a letter of credit isn't enough if the risk is bigger than you'd like, but the opportunity is bigger still. Export insurance can make a big difference at relatively little cost.
U.S. Export-Import Bank has a database of lenders who work in international trade.
- Experience can vary, so get references from current customers before signing on with a bank or document-handling company.
- Some financial experts consider letters of credit to be sometimes-useful antiques. Instead, couriers can offer foreign-country collect-on-delivery and similar services that can save you from the red tape.
- Make no assumptions about speed. If you are counting on payment in a very short time frame, better to arrange working capital just in case.
- Letters of credit come in two flavors: Revocable and irrevocable. The latter means neither party can alter the contract under any circumstances. Make sure you get the type of instrument that's right for your deal.