Letters of Credit

Letters of credit are used when there are concerns over potential payment especially when dealing with international transactions. They can be an alternative to requirements for requests for advance payments by suppliers. In a letter of credit a Buyer would contact an issuing bank to create the Letter of Credit on Behalf of the Buyer. The bank would reserve money in the Buyer’s accounts to pay for the letter of credit.The supplier who will be the beneficiary of the Letter of Credit will select the advising bank in their location where the funds will be transferred.

One requirement of a letter of credit used with procurement is that it must be irrevocable.That way the supplier knows that the funds will be available when they ship. Buyers place certain requirements that must be met for the payment to be made.These include the date(s) by which the shipments must be made, a requirement for a commercial invoice that complies with the requirements of the agreement as that is needed for import purposes. The bill of lading that describes what was include in the shipment and that it was shipped.It will also include other documents that prove the supplier complied with the contract requirements. Those requirements can include proof of insurance if insurance was required to protect the items during transit or proof of export licenses if the supplier was responsible to obtain the export license.

Letters of credit may be written to be either payment on sight or on specific dates or terms after delivery. Sight means that there will be an immediate payment upon presentation of all the documents that are required by the Letter of Credit. Date or term payments are similar to net terms where payment is made on a specific date or terms after meeting the Letter of Credit obligations. If the supplier fails to meet one of the obligations they do not get paid. If the obligation was for a specific delivery date and the supplier was unable to meet it,the letter of credit would need to be amended for payment to occur.

There are alternative to letters of credit. For the most part they are not balanced. Approaches that are good for the seller have higher risk for the buyer and vice versa. The best way to always protect yourself is do your homework in advance and only deal with business partners that you trust.

There was a post in Linkedin about a company being abused by a Supplier where they had made an advance payment to the Supplier, only had received 20% of the order and the Supplier was demanding a new larger order as a condition of shipping the balance. The question was what would you do and I thought you might enjoy my response which directly ties to this post.

“I would never pay anyone in advance for goods. If the supplier has a concern about your paying them I would provide them with a bank funded letter of credit. Letters of credit protect the Buyer because to collect they would have to meet the requirements of the Letter that require providing proof of shipment of all the materials, not part. If they ship less they don't get paid. If they claim they have shipped all but haven't its then a criminal act of fraud.

For other types of purchases after doing the due diligence they should have done. if I still had any concern before giving them the agreement I would consider requiring a performance bond in the amount to the value of the work. That gives you another party you can go after to complete the performance if they don’t.

Assuming that you made the mistake, I would absolutely never give them any more business or orders as all that they are doing is a form of extortion. I would use the information of their actions to terminate the agreement for cause. I would send them a cure notice. When they fail to deliver, I would then send them a termination notice. Then the decision comes down to whether its economically viable to go against them in court to not just recover the part of the payment that they didn't earn but also to collect any damages you have sustained for the excess cost of re-procurement (cover). If it isn't chalk it up to an expensive lesson on how to not to conduct business.

You could possible assign your rights to a third party that could go after them, That's similar to companies selling their receivables. They would pay you pennies on the dollar but that may be better than nothing.

Lastly, before posting any information about your experience with the company on any websites, I would also talk with your attorneys to coach you on how to do that without being subject to libel or slander claims. Any company that would try to extort you into giving them more business is the same type of company that would come after you claiming libel or slander of their “good” name.