DOCUMENTARY LETTER OF CREDIT RISK ANALYSIS

There are hundreds of questions potentially necessary to perform a thorough check of a letter of credit, or rather what jolie coined over 30 years ago, the ‘LC Risk Analysis’ before you can approve a Credit Hold Release.

As a standard of our high service level, with every Letter of Credit Document Preparation Service, we will provide you with our highly acclaimed “LC Credit Risk Analysis”. We perform this upon receipt of the Letter of Credit Application, the Draft, the Issuance, and any Amendments that may follow.

letter of credit Risk

The LC must be checked thoroughly for all potential risks. Are the goods described in a way that matches what will be shipped? Is the pricing mentioned as per your quotation and their purchase order? Have the payment terms been defined correctly? Are the INCOTERMS correct? Are all of the Documents required, correct, and feasible?

Have you determined if your inspected Letter of Credit should be “Confirmed”? To determine this, you will need to review your Client, His bank, His Country, the value and complexity of the LC, and maybe even the cost of the Confirmation.

Just remember, that if anything goes wrong throughout this chain of risk, regardless of your Confirmation, should there be a single Discrepancy found in your documents which you cannot fix, it will ultimately lie in the hands of the Buyer and his bank to decide if and when to pay you. That is why Documents being compliant are so important.

Client Risk

If you are a U.S. based company, prior to your concern of the LC Risk, and before even quoting a potential client, you must be sure that they are cleared by all U.S. Government governing bodies of the ‘Know your Client’ program to be certain that you can, in fact, do business with this entity and their employees. Once that point has been cleared and they ask for open terms, you as the Credit Manager have to examine your history with this Buyer just as you would with any potential Buyer in your country. you would go to your preferred Reporting Outlets and inspect their credit status, review independent cases of late payments, write-offs, or any rating that may determine the risk in giving them open terms. If, after this study, it was determined that you would require a Letter of Credit, then further considerations apply, such as determining their Issuing Bank’s Risk.

bank Risk

We know the picture to the left is far fetched and probably unrealistic, but what if it was not too far off from a true depiction of the Issuing Bank’s development? Before you accept the proposed Issuing Bank, you should be very well assured of the Issuing Bank’s standings, ranking, and rating in their country and Global community. The Seller should be certain that the bank not only exists and at what standard, but that they also have a way to effectively wire funds into their bank’s account. Do they have an account with your preferred Confirming Bank so a transfer can be easily made? Who is their corresponding U.S. Bank? How is that Bank Rated? Do they have a well-established Letter of Credit Department? Those are some concerns when reviewing a new client and their LC.

country risk

With the global change going on in the world today, the issuing country must also be inspected for potential risks. Economic, Political, War, and Embargo Risks, etc. What are they today, and what is the possibility of fluctuation during the actual shipment? These first three elements will assist you in determining if you should ‘Confirm’ your Letter of Credit, or if you should ‘Discount’ the LC and if you have made arrangements for these extra costs of doing business included in your quote.