The letter of credit (LOC) is one of the most important payment method used in international trade. In brief, an LOC is a letter issued by a bank that authorizes the person named in the letter to draw an amount up to the limit noted in the letter from the bank or any of its correspondents (the usual case), provided that the person performs in accordance with the terms of the letter. The problem is that the terms of the letter must be painfully precise, or the bank or its correspondents will not pay. Some studies show that more than 50% of first time LOC presentations are rejected. This is a major problem for smaller companies that have little experience either in creating or documenting the requirements of an LOC, and can result in major cash flow shortfalls.
A possible solution is to outsource the LOC creation and compliance chore to a third party with greater experience in this area. These firms are far less likely to make documentation mistakes that hold up payment. They typically provide real time, on-line access to all LOC documents, as well as issue notices of changes in the status of each LOC or payment related to it. Some even guarantee a certain number of days within which bank approval of an LOC will occur, as well as the elimination of all LOC discrepancy fees. Companies providing this service include TradeBeam (www.tradebeam.com), Aon (www.aon.com), and Quality Letters of Credit (www.qualitylc.com). Quality Letters of Credit also has a nifty LOC outsourcing cost-benefit analysis page on its web site, located at http://www.qualitylc.com/marketing/analysis/QLC.html.