Creditors’ Rights 27
Q: I’d like to ask my credit customer for a Letter of Credit from their bank, but I want to make sure that I’m properly covered. What should I do to make sure I am?
A: The most common Letter of Credit is the standby letter, a document issued by a bank on behalf of its customer. It provides assurances of the customer’s ability to perform under the terms of a contract with you, the beneficiary. Typically when creditors receive the letter, they treat it like an insurance policy and simply file it. Avoid that misstep and internally circulate the letter among your business associates. Check for discrepancies such as missing documents that are listed in the letter, difference between the invoice amount than the draft amount and inaccurate description of goods.
The customer and the beneficiary do not expect that the letter of credit will ever be enforced. It is a credit safeguard. If the debtor defaults, a standby letter of credit obligates the debtor’s bank to pay the beneficiary of the beneficiary’s bank.
Letters of credit may be required by your credit agreement, but it’s your customer who requests the document from his or her bank. Make sure the terms of the Letter of Credit meet your approval.
Wise creditors accept a standby letter of credit that is irrevocable, dated, numbered, signed, and written on the issuing bank’s stationary and enforceable simply with copies of unpaid invoices.
*Learn more about credit policies and the Payment Gap with Bob Bernstein’s new book, Get P.A.I.D.TM A Guide to Getting Paid Faster (and What to Do if You Don’t!) at www.getpaidsystem.com