In international trade transactions, the emphasis is often around security of payment. However, any company importing from overseas faces the risk that what they have ordered will not be what is delivered. You may have attended a trade fair in China, visited several factories, even been impressed by their ability to produce the particular part or product you require but until the cargo arrives at your premises you will be concerned that it will fit into your product or be the item your clients have long needed.
It may be simple as the cargo being the wrong colour or as complicated as a piston ring incorrectly sized but whatever the issue it is sure that it will cost you time and money in lost production or missed sales.
This issue is rarely caused by any malicious intent but it still needs to be rectified in some way.
When dealing with companies halfway around the world it is never easy to communicate in real time and the delays can simply exacerbate the problem.
The answer as with many things in business is to anticipate the problem and deal with it in advance.
While the documents required under the L/C will provide a superficial description of the goods in the invoice, and the certificate of origin will attest to their manufacture, it is impossible to be certain that what you have ordered is what you will receive. A standby L/C, is possibly the most sensible solution but while their use is becoming more usual, a letter of guarantee may be offered by the supplier. The issue for you will be how actionable the guarantee will be and is it “worth the paper it is written on?”
Bank guarantees can be complicated to issue between firms in different jurisdictions speaking different languages and issues of interpretation are common. The bank guarantee letter is rarely in the form required and banks have great difficulty becoming involved in the “nuts and bolts” of a transaction, particularly when the guarantee covers an issue that is outside their normal experience.
Banks are far more prepared to issue a standby letter of credit as all that is required is for the beneficiary to present a simple document in accordance with the requirements of the L/C to settle the claim. While this could put the shipper at a marginal disadvantage, it is highly unlikely that the beneficiary would submit a false claim given the reputational damage such an action would incur plus the two parties should have completed due diligence on each other prior to entering the relationship and each be satisfied with the others business credentials.
It can never be a certainty that what you order is what you will receive. That is even true down to the retail level and several delivery firms have built a business based on just that occurrence, but in business it pays to have security early on in a relationship. It is a professional way to act for both parties and it is far easier to request a guarantee or standby L/C than it is to try to obtain recompense when your client is 10,000 miles away.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”