If you’re an entrepreneur who wants to sell your products or services overseas, you may have heard about letter of credit (L/C). But what exactly is L/C? How does it work? And how can you secure one to help your export business grow? Keep reading as we answer all of these questions and more. Read on to learn the steps to get a letter of credit for your export business.
Step 1: Gather Necessary Documents
Start by collecting all documents and information you’ll need to complete your export business letter of credit application. The following are required, but it’s best to have as much documentation as possible before approaching a bank export license; original invoice; commercial invoice; bill of lading; certificate of origin; insurance policy (if applicable); certificate of inspection (if applicable); packing list; CMR or INCO terms and conditions. Make sure to check with your trading partner if any additional paperwork is needed. If they don’t know, contact your local chamber of commerce or embassy in order to find out what they suggest.
The first step in getting an export business letter of credit is gathering all necessary documents.
Step 2: Complete the Application
Some larger banks have trade departments and some importers use established financial institutions such as insurers or finance companies, but many exporters do not have any formalized relationships with financial institutions. Therefore, it is important that you contact your local bank branch and find out who handles international transactions. The branch usually has specialists who know about letter of credit and can also refer you to other international organizations (such as shipping companies) where you will complete additional steps. Banks usually require specific documents for each step of export business letter of credit. You should request from your client all these documents before applying for letter of credit. If you are an importer, then you must provide all required documents at once when applying for letter of credit.
Step 3: Submit Documents to the Bank
Once you’ve completed these steps, you will be ready to submit your documents and payment to your bank. Make sure you have included any details that were listed in Section II of your Letter of Credit application as special requests. The bank will approve or reject your document submission within 24 hours (or less). Once it is approved, you are good to begin exporting goods! Keep in mind that each country has its own laws regarding how long an L/C can remain open; make sure you know how long yours can stay open before submitting payment. If there is no time limit, consider setting up a schedule to submit payments on a monthly basis. This way, if something happens between payments and your client needs to call off an order, you can inform them immediately without having to wait until their next scheduled payment date. It also keeps things organized and allows you to plan ahead with shipments. You should also contact your shipping company directly when opening an L/C so they can give you more information about how they accept L/Cs. Some companies require a letter from your bank stating that they guarantee payment, while others may ask for a copy of your invoice with the L/C number written on it. Ask them what specific documentation they need when opening an export letter of credit so that everything goes smoothly once you start shipping orders overseas.
Step 4: Review and Sign the Contract
Once your prospective export business partner has given you an LOI, he or she will normally request that you sign and return it. Before doing so, take some time to review and make sure that everything is in order. If not, point out any issues before signing. In many cases, if there are major discrepancies or issues with an LOI, it may be best to simply walk away from the deal rather than go through with something that won’t work. This can save both parties from wasting time on a project that won’t get off the ground. However, don’t let minor details stop you from moving forward; most of these can be worked out later as long as both parties are willing to compromise. Finally, remember that once you have signed an LOI, it is binding; therefore, you should only do so after careful consideration and once all terms have been agreed upon by both parties.
Step 5: Pay Fees
You will likely have to pay fees when you apply for a letter of credit. Fees vary depending on which bank you choose and how you choose to apply. Typically, fees range from $200–$2,000. Different banks have different ways of charging these fees—so make sure you ask questions before submitting your application. You can view some typical fees here . You may also need proof that you’re an established business or some form of identification like your passport or driver’s license. If you don’t already have one, you might be required to open a corporate account in order to get your letter of credit. Be prepared for additional fees if you do so.
Step 6: Store Records Securely
If you’re operating internationally, it’s important that you keep detailed records. Most countries require you keep records on hand for at least seven years after you close your business. But even if you don’t operate internationally, keeping accurate documentation about international transactions is an important way to protect yourself from fraud and loss. A few tips on how to store your records: Use secured fireproof safe deposit boxes. Keep copies of all letter of credit in a secure location offsite. This could be with another trusted individual or in a secure storage facility.
Step 7: Keep Inventory Records Current
In order to get an export letter of credit, you need to make sure that your inventory records are current. It’s not uncommon for shipments sent abroad to be held until discrepancies in inventory records can be resolved. To avoid inventory problems and potential delays in getting credit from your exporter, make sure that your records are up-to-date before you begin a new shipment. If you use computerized inventory management software, it should be easy to keep your records updated as products move through various stages of production. If you do business with several different companies (for example, if one company makes all of your products while another ships them), make sure that each party has accurate information about how much product is available at any given time.
Step 8: Track Sales and Payments on Invoices
Invoices are needed by your clients, but you’ll also need them in order to get paid. The invoices that your customers send you should have all of their contact information, as well as itemized lists and quantities. Using these invoices, you can keep track of all payments sent from both domestic and international clients.