Q&A Forum

Keith Perry

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Title: Director of Global Accounting
Company: Agrinos, Inc.

Anon,

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.