Foreign trade letter of credit: how to deal with soft terms and conduct key verifications

In international trade, letters of credit, as an important settlement tool, play a key role in corporate financing and capital turnover. Enterprises can usually borrow money from banks with a valid letter of credit, or discount the money in advance after delivering the documents, which to a certain extent alleviates the financial pressure on exporters. Although letters of credit are extremely valuable, once soft terms appear, the reliability of letters of credit is called into question, and banks are often unwilling to provide loans or discounts.

How to handle soft terms

The presence of soft terms is not an inevitable obstacle in negotiations. Such terms may be amended through negotiation. Usually, customers add soft terms when applying for L/C issuance, often out of considerations of operational convenience and cost savings. In transactions in Japan, South Korea and Southeast Asia, it is not uncommon for the original document to be sent directly to the applicant. Because these areas are relatively close to China, long-term stagnation of goods at the destination port may result in significant expenses and losses for both parties. Therefore, when dealing with soft terms, one should be alert, but also consider the possibility of acceptance and attach appropriate conditions to reduce risks.

For example, if the other party is a well-established firm with good reputation, or the issuing bank is also well-known and reliable, you can consider adding the clause “consignee of the bill of lading designated by the issuing bank” while accepting the soft terms. In this way, even if the customer obtains the original bill of lading, it must be endorsed by the bank to ensure safety.

Key verification clauses of letters of credit

After obtaining a letter of credit, it is important to review the key terms. The following are several terms that need to be checked:

1. Document integrity: When reviewing copies or faxes, make sure that every page of the document is connected properly to avoid missing documents due to copying or fax errors.

2. Name of beneficiary (Article 59): The name must be accurate; an incorrect name may invalidate the entire document.

3. Amount Accuracy (Article 32B): Confirm whether the amount meets the contract requirements.

4. Shipping time (clauses 44C and 31D): The time interval between these two clauses should be no less than 10 days to ensure sufficient time to process relevant documents.

5. Product name description (Clause 45A): This clause must be consistent with the contract to avoid overly general descriptions that may cause problems during the inspection process.

6. Document type requirements (Articles 46A and 47A): Review these core terms verbatim to ensure there are no omissions or misunderstandings, and consult banks or other professionals for advice.

7. Other terms: Check whether the cost sharing is reasonable. For example, it needs to be clear that costs incurred outside the country of the applicant for issuing the certificate will be borne by the beneficiary.

In summary, the review process of the letter of credit is an important step in ensuring the smooth progress of the transaction. Through refined review and reasonable handling of soft terms, exporters can minimize transaction risks and protect their own interests.