Originally, letters of credit are a very good settlement tool and financing means. In many cases, enterprises can rely on a reliable letter of credit to apply for a loan from a bank, or pre-discount the bank before receiving the payment (the bank charges a certain interest and advances part or all of the total amount to the beneficiary in advance), which can greatly alleviate the financial pressure of exporters. However, as long as soft terms appear, the letter of credit is not “reliable”, and banks are mostly unwilling to make loans or discounts.
So, should soft terms be rejected? Not necessarily. “Soft terms” are not dead terms and can be negotiated. Excluding deliberate fraud, when customers apply for a letter of credit, adding soft terms is only for the convenience of operation and cost saving, not malicious. For example, the clause that an original document is sent directly to the applicant for the letter of credit is common in customer transactions in Japan, South Korea and Southeast Asia. Because these regions are very close to China and can be reached by sea in a few days, if the documents are negotiated by the bank normally, then by the time the documents reach the hands of the customer, the goods have been piled up at the destination port for many days, which will cause high costs. Furthermore, some soft terms are formed by customers out of need or trade habits formed over the years. Failure to accept these terms often means having to give up the transaction, which is a loss for both parties.
Therefore, under the premise of determining that it is a soft term and being vigilant and prudent, you can consider accepting it as appropriate, or attaching other terms to restrict it, so as to meet the needs of customers and minimize risks. For example, if the other party is a reputable old-fashioned business, and the issuing bank is also well-known and reliable, you can consider accepting it. For example, the clause of “the original bill of lading shall be delivered directly to the issuing bank” can be accepted while adding a clause to limit the consignee of the bill of lading to “designated by the issuing bank”. In this way, even if the customer obtains the original bill of lading, it must be endorsed by the bank (sign and seal on the back of the bill of lading, indicating that the holder of this bill of lading has obtained the bank’s permission), avoiding the risk of customers bypassing the bank to pick up the goods privately. Or modify it to “the copy of the bill of lading shall be delivered directly to the applicant for the letter of credit”, so that customers can pick up the goods with the copy of the bill of lading if they provide a guarantee, and the guarantee provided also protects the rights and interests of the beneficiary exporter.
Even so, any letter of credit with soft clauses needs to be handled with extreme care, carefully considering the reputation of the applicant and the issuing bank, paying attention to the quality of the goods, carefully preparing the documents, strictly checking them, and trying not to make mistakes even in punctuation, and eliminating all factors that may cause discrepancies in the documents as much as possible.