Finance

An IBAN is the International Bank Account Number used as an international bank identifier for client accounts. It is to secure smooth payment and prompt processing of foreign payments by banks overseas. It is not unusual for overseas customers to request this number. If you do not know your IBAN speak to you finance team or contact your bank. 

Generally letters of credit are paid by the bank at sight of compliant documents. A usance credit is not paid at sight but either against acceptance of a bill of exchange payable at a future date to be calculated, eg 30 days from bill of lading date or by a deferred payment term within the letter of credit, eg 45 days from invoice date. Be careful to establish a payment date that is calculable and indisputable, you can even put a specific payment date (eg 4 August 2009), so you are not in dispute with your customer or bank over when payment is due. If you agree to a usance credit you can always negotiate early payment with the bank but they will take a negotiation fee. If you have never dealt with a letter of credit before, ensure you get someone to help you understand how important it is to present documents that are 100% accurate.

There are, inevitably, occasions when despite all an importer’s efforts to ensure that a letter of credit is workable and despite all the beneficiary’s efforts to comply with its requirements, documents are presented which the banks feel are not in conformity with their terms. Sometimes the reasons given may appear trivial, but the banks involved in a letter of credit are in an unenviable position in such circumstances. If your bank (the issuing bank) receives a fax, email or telex message from another bank responsible for payment under the credit your bank is likely to contact you by telephone or fax advising of the discrepancies and asking you for a decision, ie will you accept the discrepancies. Of course, your decision will depend on what the discrepancies are. If they are deemed irrelevant you should be completely safe in authorising the bank to ignore them. If they appear important then refuse to accept the discrepancies without further details – if you are not comfortable with the errors you can refuse acceptance, this will of course mean goods will arrive in the UK without paperwork, leading to potential delays and storage charges. You could talk to the bank about accepting

the discrepancies “under reserve”, which means the paperwork is forwarded to you, the beneficiary is paid but if you have serious problems or concerns then the “under reserve” option permits the bank to recover the money from the beneficiary. Ensure that this guarantee or reserve is extended to the issuing bank and yourself and is not just applicable to the bank outlaying payment. Alternatively, the seller could take the risk of acceptance by instructing the bank to “send the documents forward on collection”. This actually means that the beneficiary has opted to set aside the letter of credit. With the letter of credit closed the only obligation left for the importer is to settle any outstanding bank charges. Paperwork will arrive in the UK and you will be asked to accept the errors or not; payment is not made to the beneficiary until so instructed by the importer.

In international trade, it is very common for overseas buyers to insist on the issuance of a bond or guarantee in their favour as a means of securing the terms of a contract and / or covering the obligations assumed by the seller. The Bond or Guarantee provides the buyer with an element of financial security in the event of failure of the seller to meet their obligations under the contract, thus effectively financially compensating the buyer. Common types of bond or guarantee include:

• Tender Guarantees (or ‘Bid Bonds)
• Advance Payment Guarantees
• Performance Bonds
• Warranty or Maintenance Guarantees

It is more beneficial to the seller if they arrange for the bond or guarantee to be issued directly to the beneficiary by the UK bank subject to English or Scottish Law. The wording will thus include a clear expiry date following which any claims received will be considered ‘null and void’ and / or the bond / guarantee will have no further effect. It is often the case however, that the national law of certain countries determine that bonds or guarantees must be issued by a local bank and be subject to the law of the country concerned. In this case, the seller’s bank will provide a counter-indemnity to the local bank (which may be the beneficiary’s own bank), instructing them to issue the bond or guarantee in the form required. In some countries, the provision of local law may override a specified date of termination referred to within the bond or guarantee, in which case beneficiaries may be able to claim long after expiry. For this reason, UK banks are very cautious in releasing sellers from liability until they have received a firm confirmation from the overseas bank that the beneficiary has either returned the guarantee for cancellation or has indicated that the seller has fulfilled all obligations and may therefore be released from their liability. Until such a confirmation has been received, the bank will continue to record the value of a bond or guarantee within the seller’s facilities and will also continue to levy the periodic charge (usually quarterly). Sellers are therefore advised to track the status of all bonds and guarantees issued subject to overseas law and press the beneficiary for return or confirmation to the bank as soon as possible after expiry. 

A Standby Letter of Credit could, in theory, work well for you, in that in essence a Standby is a guarantee (of payment). Where a Standby differs from a standard Documentary Letter of Credit is that whereas in the case of a Documentary Letter of Credit, payment is made by the issuing bank against delivery of conforming shipping documents (eg: invoices, bills of lading, certificates etc) in the case of a Standby, the bank issuing the Standby Letter of Credit undertakes to pay the beneficiary upon presentation of a document (or a very few documents) which is effectively a demand for payment. The main issue for the applicant (the buyer) is that it is almost impossible to create a Standby Letter of Credit, which affords any protection to the buyer, against an unfair claim. In most instances the only requirements made by the Issuing bank as stated within the terms of the Standby are that the claim must be made within a stipulated date (the expiry date) and the claim must be accompanied by a bill of exchange, a copy of the (unpaid) invoice or invoices and a simple statement that payment has not been received. It is entirely likely that the buyers in the Far East are not comfortable with the risk associated with Standbys and there is also the cost element, as the issuing bank will levy an issuance/risk charge.