Prepare letter of credit: where the process breaks

Letter of credit preparation usually breaks at the handoffs between whoever negotiated the trade and whoever drafts the credit, at the bank's draft review, and when documents are presented. Most rework traces back to terms that never matched the contract. Amendments and discrepancy waivers are the visible symptom.

From contract to application

The first handoff is the weakest. A buyer or salesperson agrees on terms with the counterparty. Then treasury or a trade desk receives a request to open a credit. Often that request is an email with a purchase order attached, not the signed contract.

The application gets built from whatever arrived. Shipment windows, Incoterms, the list of required documents and the description of goods are typed in by someone who was not in the negotiation. Small mismatches creep in. A port name is wrong. An inspection certificate the buyer promised to waive is still required.

The sign is amendment requests arriving shortly after issuance, especially ones that touch dates or document lists. If amendments are routine, the problem sits here.

The draft that goes back and forth

Once the application reaches the issuing bank, a draft comes back for review. This loop stalls when nobody owns the review. The trade desk assumes procurement will check the commercial terms. Procurement assumes the trade desk already did.

Watch for drafts sitting unopened in shared inboxes, or for several marked-up versions circulating at once with no clear final copy.

Beneficiary pushback

The supplier or customer on the other side reads the credit for conditions they cannot meet. A latest shipment date their production schedule cannot hit. A certificate from an authority they have no access to. A ban on partial shipments when they planned to ship in lots.

Each objection becomes an amendment, and each amendment costs a bank fee and resets the waiting. Amendment charges showing up repeatedly on bank statements for the same trade lane point straight at this.

Presentation and discrepancies

The credit is prepared well before goods ship, yet its quality is only tested when documents are presented. A misspelled consignee, a bill of lading dated after the latest shipment date, or an invoice description that differs from the credit wording will all trigger a discrepancy.

The applicant is then asked to waive. When waivers become the normal path, the credit is no longer protecting anyone. It has turned into an expensive payment instruction. Count how often discrepancy notices arrive, and whether the same clause keeps causing them.

Facility limits and compliance holds

Two exceptions stop issuance outright. The first is an exhausted or nearly exhausted bank facility. The trade desk discovers this when the bank declines or asks for cash collateral, usually on an urgent request. Frantic calls to the relationship manager are the giveaway.

The second is sanctions or export control screening. A vessel, a port or a party flags, and the credit waits while compliance reviews it. If these holds surprise the business, screening is happening too late in the sequence.

What the ledger and cash forecast miss

An issued credit is a contingent obligation. Many teams never record it in memorandum accounts, so the general ledger shows nothing until payment. Issuance and amendment fees get posted late or coded to the wrong cost centre, which forces manual journal vouchers at month end.

Cash forecasting suffers too. A large payment under a sight credit can land without appearing in the cash projection, because the trade desk and the forecasting team keep separate records. Unexplained bank debits and late adjustments at close are the evidence.

Auditors notice when nobody can produce a complete list of open credits that ties to bank confirmations.

Workarounds that hide the problem

The most common workaround is copying the last credit for a similar trade and editing it. This spreads old errors forward. Clauses written for a different supplier or product survive into new credits.

A close second is the private spreadsheet. Someone on the trade desk tracks expiry dates, amendments and facility usage outside any system. It works until that person is away, and then expiries pass unnoticed.

Waivers approved by email from a buyer, with no record in the payment file, are another quiet workaround. They make the process look smooth while weakening control.

Questions to ask the people who run it

Written procedures for this process tend to describe the bank's workflow, not the internal one. Ask the operators directly.

• Where does the information for a new application actually come from, and is the signed contract ever attached?
• Who reads the bank's draft, and who decides it is final?
• Which clauses do suppliers object to most often?
• When a discrepancy notice arrives, who approves the waiver, and where is that approval kept?
• Is there a template, or is the previous credit reused?
• How does anyone find out how much of the bank facility is left before submitting a request?
• At what point does compliance screening happen, and has a credit ever been held after the supplier was told it was issued?
• Where are open credits recorded, and does the controller's team see that record?
• Who tells the cash forecasting team that a payment under a credit is coming?
• What happens to an unused credit near expiry, and who decides whether to extend or cancel it?

The answers that differ between people in the same team are usually the ones worth fixing first.

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.