Our CEO is an attorney and always on the lookout for hidden risk. What are the potential particulars to pay attention to in terms of standby letters of credit that we have in place that I inherited when I took on my current role in finance?
Usually it is the release terms, assuming you are the recipient of funds, this is where you need to pay attention. The standby letter of credit is usually going to be specific about the timing of the transaction and timing, details, wording and delivery of documentation. Look to what actions by the buyer can interrupt the LOC, and what failures by you can result in failure to pay.
One example a colleague of mine ran into was he ordered a commodity from vendor A for shipment to buyer B. My colleague was in the middle and released payment to A upon delivery to B. B then rejected payment on the LOC citing that the commodity failed inspection, a right that was in the LOC (a functionally similar, but technically different commodity had been shipped in error). Trans-shipping the commodity was not an option due to expense (and handling penalties imposed by B), so B ended up keeping the goods without paying. As my colleague had already released his LOC, he was without recourse. Oops.
If you are new to the risks of a standby letter of credit, there are some very sharp consultants who can help you identity specific risks by country. Google it !!w
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