Credit Card or Letter of Credit, pros and cons

In a message dated 6/20/03 7:49:59 PM Eastern Daylight Time, wileyccc@aol.com
writes:
> I am sure in retrospect part of my displeasure with credit card int'l
> payments had to do with the fact that I had invested so much time and effort
in
> learning about letters of credit. If credit cards become common in int'l
> trade, then all I know about that topic is obsolete. I hate it when that
happen!

I understand. I had a 3-credit law school course (one semester) on letters of
credit.

I have a great deal of experience with letters of credit (L/C), and I don't
foresee their demise in my lifetime. (I'm currently 44 and all four of my
grandparents passed away at 90+.) L/Cs certainly will never become obsolete for
large transactions. A confirmed L/C assures the seller that the he will be paid
when he satisfies the terms of the letter of credit. L/C terms should be
negotiated between buyer and seller, and it is in everybody's (seller, buyer,
L/C
issuer) best interest that the L/C terms be totally objective so that disputes
do not arise. When terms are totally objective, the institution that issued
the L/C (e.g., bank) pays the seller when the seller presents the
documentation that fulfills the L/C terms. Objective documentation can include
airway
bill, shipment inventory confirmation issued by independent third party,
incoming
customs documentation, and the like. If you are selling, documentation that
can delay your being paid is documentation over which the buyer has control,
regardless of whether the buyer or its agent actually produces the
documentation, e.g., testing certificate signed by buyer, shipment inventory
confirmation
signed by buyer, et cetera. In an ideal L/C, the seller is in complete
control, and the buyer has no control, of when the seller is paid.

For the seller, the best part of the confirmed L/C is that being paid is
completely independent of the satisfaction, mood, whim and fancy of the buyer.
After all, the buyer does not pay the seller, the institution that issued the
L/C pays the seller. To achieve this goal, remember to negotiate L/C terms that
are objective and independent of buyer behavior. Even if the buyer is
scrupulous in A/P, situations can occur that delay payment to sellers (e.g.,
war,
natural disaster, epidemic, loss of key personnel). In addition, buyers have
been known to dispute credit card charges solely because the buyer is unable to
pay the credit card bill, not because the seller has done something wrong.
Even if the seller has perfectly executed the terms and conditions of the
contract, under certain circumstances a buyer may fail to produce L/C-required
documentation. For example, if the buyer miscalculated cash flow and is short
on
funds, or if the buyer wants some leverage over the seller (because of warranty
issues, negotiation of next purchase, et cetera), the seller may not timely
receive that L/C-required documentation over which the buyer has some control.

To benefit the buyer, the L/C can be issued for very little money, the L/C
may not have to be drawn down, and bank loan rates are generally far lower than
credit card interest rates. The bank takes care of all the work involved in
paying the seller, so that the buyer can invest time and effort in other tasks.
Finally, an L/C can act like a reference for a buyer, and there are
situations when a buyer needs that reference. If the buyer is a relatively new
concern and does not have A/P history, or if the buyer has seen hard times and
its
A/P reputation isn't what it used to be (e.g., WorldCom, Enron), by posting an
L/C the buyer can obtain inventory or other goods and services it requires to
earn revenue.

Under certain situations, a seller may never have to draw on the L/C. I have
negotiated many contracts in which the payment terms are (1) the buyer posts
the L/C, (2) the seller fulfills the contract, (3) the seller invoices the
buyer, (4) the buyer pays the seller in accordance with the contract terms, BUT
if the buyer does not so pay the seller can then draw down on the L/C to obtain
payment. In this kind of scenario, the buyer (generally) pays only for the
establishment of the L/C, however I have represented sellers who paid the fee
for establishing the L/C because the cost was minimal, the benefits of having a
confirmed L/C were far greater than those minimal costs, and the seller built
into its price (as part of its G&A) the cost of the L/C.

To quote one of my professors, "Clear as mud?"

Best wishes,

Celeste

Whew! Hope all of you are well,

Celeste

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