Who knows what when preparing a letter of credit

Preparing a letter of credit pulls together people who each hold part of the deal. Procurement knows what was promised to the supplier. Logistics knows what shipping can produce, and treasury knows the bank facility. Trouble starts when the application reflects one view and leaves the others out.

What procurement holds

The buyer's procurement team negotiated the contract. They know the Incoterm, the agreed tolerance on quantity, and the informal promises made on calls that never reached the purchase order. They also know whether this supplier is reliable or tends to ship late and ask for forgiveness.

What they usually lack is a feel for how a bank reads paper. A procurement lead will write a condition such as "goods to be of first class quality" because it matches the contract. To a document checker, that phrase is unverifiable. It either gets ignored or becomes a reason to reject a presentation. The commercial intent was sound. The drafting turned it into a trap.

What logistics and the forwarder know

The people who move the goods know which ports are realistic and whether transhipment is unavoidable on a given route. They know which carriers issue which type of bill of lading, and how long a vessel actually sits before sailing. They know whether the supplier ships everything at once or in parts.

They are often consulted after the application has gone to the bank. By then the latest shipment date has been copied from the contract, partial shipments are prohibited because nobody thought to allow them, and the named port of loading is the supplier's head office city, not the port the goods will leave from. Each of these produces an amendment, and amendments cost fees and goodwill.

What treasury and the trade desk see

Treasury looks at the letter of credit as a credit exposure. They know how much headroom remains on the facility, whether the bank will want cash margin, what the issuance and confirmation charges will be, and which clauses the bank insists on.

They seldom know the commercial background. A request to make the credit transferable, or to accept a third party bill of lading, may look odd from the treasury desk when it is routine in that trade. The reverse also happens: treasury approves wording that suits the bank and quietly shifts risk onto the buyer.

Finance has its own blind spots. The open credit should sit in memorandum accounts as a contingent commitment, and the expected payment needs to appear in the cash forecast. When the trade desk issues credits without telling the people who post journals and build forecasts, the ledger understates commitments. The gap surfaces when an auditor asks for a listing of open credits and nobody can reconcile it to the books.

What the bank knows that the business does not

The issuing bank knows the documentary rules intimately. It knows sanctions lists, country restrictions and which phrases its examiners will treat as discrepancies. It has no idea why the buyer wants a particular clause, and it will not ask. Ambiguity in the application is resolved by the bank's standard wording, which may not match what the buyer meant.

What the supplier knows

The beneficiary knows which documents it can obtain without strain. A certificate of origin from a chamber of commerce may be easy in one country and slow in another. An inspection certificate from a named agency may be impossible if that agency has no office nearby. Suppliers often see the terms for the first time when their own bank advises the credit. If a draft is not shared beforehand, the first sign of a problem is a request to amend.

Where the gaps turn into real problems

Most trouble shows up at presentation. Documents arrive with a discrepancy, the bank refuses or charges a fee, and payment stalls while goods wait at the port without the paper needed to clear them. Demurrage builds. The supplier blames the buyer's wording, the buyer blames the supplier's paperwork, and treasury is asked to approve a waiver without full context.

The other recurring failure is expiry. A credit lapses because shipment slipped and nobody owned the date. Then a new application starts from scratch.

Questions to ask the people who run it

• Who drafts the application, and who reads it before it goes to the bank?
• Does logistics see the shipping terms before submission or after issuance?
• Is a draft shared with the supplier, and who decides when to skip that step?
• Which conditions get copied from the last credit for this supplier without being questioned?
• How do discrepancy notices reach the business, and who decides whether to accept them?
• Who tracks expiry and latest shipment dates, and where?
• When a credit is issued, how does accounting learn of it, and how does the payment reach the cash forecast?
• Which amendments come up again and again, and what would have prevented them?
• What does the bank's relationship manager wish the business did differently?

The answers usually reveal a handoff that exists on a process map but not in practice, often a single person who carries the knowledge in their head and fills the gaps by habit.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.