1. Risk from the issuing bank
1. The credit standing of the issuing bank is very poor. A letter of credit is a conditional payment guarantee of the issuing bank. After the letter of credit is issued, the issuing bank bears the main responsibility for payment. Therefore, the credit and payment ability of the issuing bank has become a key issue. Not every bank in the world can open a reassuring letter of credit. For some weak banks, or banks in countries with foreign exchange shortage, once the beneficiary accepts the letter of credit, it may face difficulties in collecting foreign exchange. Therefore, it is necessary to know the credit status of the issuing bank.
2. Risks to beneficiaries caused by bankruptcy or insolvency of the issuing bank. Bankruptcy happens from time to time in some countries, even some big banks with a long history are no exception. Among them, the most famous is the collapse of the famous Bahrain Bank in Britain, which is still a typical case of research and citation of banking, academia and related educational content.
Second, the risk of non-payment caused by inconsistent documents.
In all disputes over L/C transactions, more than 50% of the disputes were refused due to inconsistent documents. This phenomenon is actually determined by the characteristics of the letter of credit itself, because the payment condition of the issuing bank is that the documents submitted by the beneficiary should be consistent with the requirements of the letter of credit, that is, the documents are consistent, so the issuing bank no longer guarantees the payment obligation for the inconsistent documents. As for whether the inconsistent documents will be paid in the end, it depends on whether the importer has the will and ability to pay, that is, it depends on the importer's credit standing in the end.
Three. country risk
For exporters, country risk refers to the country risk from importers, which mainly includes: foreign exchange control risk, foreign trade control risk and war or civil strife. Some foreign exchange controls existed before the transaction, and some were sudden. If the trading partner is located in a country that suddenly implements foreign exchange control, the situation is even worse, because once the country announces a total freeze on foreign exchange, the letter of credit issued by the country will also be stopped. Most countries have foreign trade controls, so exporters will inevitably be affected by their new policy adjustments. If they can't adapt quickly, it is likely to bring difficulties to the performance of foreign exchange collection. Obviously, its influence on war or civil strife is multifaceted and the most destructive.
Four. Risks of importers
When the market situation of imported goods changes from best-selling to slow-selling, importers with poor credit often use the characteristics of letter of credit settlement to delay or refuse to pay, which brings risks to exporters. Common methods are as follows:
1. failed to open the letter of credit in strict accordance with the terms of the contract. For example, failure to open the L/C in time (failure to open the L/C at the time stipulated in the contract or failure to open the L/C at the time stipulated in the contract) or attaching some favorable conditions to the terms of the L/C, such as increasing the insurance coverage in the L/C and changing the port of destination, so as to achieve the purpose of changing the contract, so that the beneficiary cannot perform the contract on time and default occurs.
2. Open a letter of credit with soft terms. A "soft clause" letter of credit refers to a letter of credit that seems complete, but stipulates some terms that are difficult for the beneficiary to realize. In most cases, this kind of letter of credit will be invalid because the beneficiary can't meet the requirements of these clauses in the letter of credit. Without receiving the payment seriously, the beneficiary will face a situation of asking for both money and goods, which is very passive. For example, the beneficiary is required to submit a document signed by a specific person that is not easy to obtain in the letter of credit, or indicate the place of shipment of the goods, or explicitly request to apply for negotiation on the basis of the receipt of the insurance company under FOB and CFR conditions (both trade terms are insured by the buyer), and these terms are impossible for the seller as the beneficiary to fulfill or control.
In the face of the above risks, the beneficiaries can take corresponding measures to prevent and strive to minimize the losses:
1. Check the credit status of the issuing bank. Beneficiaries can know the credit status of the issuing bank through the export bank. The bank's credit information to the issuing bank depends on the accumulation of usual data. The credit status of some big banks can be roughly understood from their credit ratings. Every year, the international financial community rates the credit status of the world's major banks, such as the highest rating of AAA and the worst rating of D. If a bank is rated as C or D, its credit status belongs to the poor ranks. If the credit status of the issuing bank is unclear, the letter of credit can only be used after carefully checking its credit status; If the country where the issuing bank is located has no diplomatic relations with the country where the exporter is located, it will generally not be accepted; For a letter of credit issued by a bank with poor credit or a country with tense political situation or fluctuating foreign exchange rate, the beneficiary should be advised to spread the risk as much as possible or ask other banks to confirm the letter of credit.
2. Improve the quality and sense of responsibility of settlement personnel, and strive to make no mistakes or fewer mistakes when making bills in companies or enterprises. In addition, please ask experienced business personnel to train new settlement personnel so that they can fully understand the harm that settlement risks bring to enterprises.
3. Pay attention to the political, economic and legal changes in the country where the importer is located. Take precautions against possible risks as soon as possible, even if the goods are overstocked or the trading conditions are very favorable, it is not easy to sign a contract. However, we should look at affairs from a development perspective and reconsider trading with countries with stable situation and normal domestic construction in all aspects. For example, Angola in Africa experienced rapid economic growth after the end of the civil war in 2002. It is the fastest developing country in Africa and China's main trading partner in Africa at present.
4. Pay attention to investigate the credit status of importers. Credit investigation refers to the investigation and understanding of the funds and credit status of trading customers or cooperative investment partners in a certain way. It can be investigated by domestic and foreign banks or professional consulting and investigation institutions, or by domestic and foreign chambers of commerce or commercial institutions of Chinese embassies and consulates abroad. In short, when doing business, we must have a comprehensive understanding of future partners to reduce the occurrence of trade risks. Keep calm about what has happened. For example, if you encounter a letter of credit with "soft terms", you must first reject it. If you find and confirm the existence of soft terms in the process of reviewing documents, you must resolutely ask the other party to amend it. If the goods are found during shipment, we should also point out the shortcomings of the other party, and at the same time make documents that fully meet the requirements of the letter of credit, so that the other party can not find the omissions and strive to avoid losses to the maximum extent. In addition, there are various forms of soft terms. As a business person, we should pay attention to collecting and sorting out cases and improve our ability to analyze and identify soft terms.
The above are some major and common risks faced by exporters when using letters of credit, and suggestions on how to prevent them. However, international trade has the characteristics of long lines and many links, so various situations will be encountered in trade settlement, and all parties need to consider comprehensively, be flexible and strive for safe foreign exchange collection.