Exporting Your Goods

Finalizing a Sale and Letters of Credit

In order to get payment for your goods, it is critical that you do due diligence on foreign customers and complete financing documentation accurately. The following 12 questions and answers can help you manage foreign sales:

What are the key steps in finalizing a sale?
How can we check the references of prospective foreign customers?
How do we confirm the terms of sale?
What is a letter of credit and who prepares it?
Is there a standard format for letters of credit?
What are the main functions of a letter of credit?
What are notable types of letters of credit that are available?
What is our role in the preparation of a letter of credit (L/C)?
What are the important features of a letter of credit?
What other documentation do we need to prepare to accompany the shipment?
What documents does the freight forwarder prepare (with copies to you, your buyer, and your commercial bank)?
What do we need to do in order to receive payment for the sale?

What are the key steps in finalizing a sale?

In large part, these steps are similar to what you would do in Canada. They include:

  • Checking the references of prospective customers
  • Confirming the terms of sale
  • Preparing a letter of credit (L/C)
  • Preparing the other export documentation needed
  • Making arrangements with a freight forwarder
  • Arranging to receive payment

How can we check the references of prospective foreign customers?
  • Verify the prospect’s credit rating
  • Talk to other exporters who have had dealings with the prospect
  • Ask the Canadian Trade Commissioner in your export market to provide you with information on the prospect
  • Verify the prospect’s business profile
  • Use EDC’s Export Check service

How do we confirm the terms of sale?

Once your sales department receives a purchase order from the buyer, confirm the following details:

  • Quantity
  • Price
  • Payment terms
  • Shipping/trade terms
  • Transportation method  

What is a letter of credit and who prepares it?

Known also as a documentary credit, a letter of credit is a promise to pay issued by buyer’s bank. It assures you that payment will be made as long as all of the terms and conditions of the letter of credit are met.

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Is there a standard format for letters of credit?

Usually they are issued subject to the Uniform Customs and Practice (UCP) for Documentary Credits (currently the 1993 Revision, Publication No. 500 of the International Chamber of Commerce). The trade finance department of your bank will have the full text of the UCP.

What are the main functions of a letter of credit?
  • Facilitate payment through the international banking system
  • May include acceptance financing terms that extend the timeline for payment (e.g., “payable 60 days after receipt of shipping documents”)
  • Mitigate risk by replacing the buyer’s payment promise with that of a credible international bank

What are notable types of letters of credit that are available?
  • Revocable vs. Irrevocable: You would want the L/C to be “irrevocable” by the buyer without prior notice or consent.
  • Confirmed: In high risk markets, you may wish to pay a Confirmation fee in return for the bank adding its own commitment to pay.
  • Transferable: You may wish to transfer the performance obligation to another party.
  • Back-to-Back: If you are acting as an intermediary, you may wish independent L/Cs to cover the different stages of the transaction.
  • Assignment of proceeds: This allows you to assign the proceeds to a supplier, though you retain the performance obligation and right to payment.
  • Revolving letter of credit: When you are supplying repeated shipments of the same goods over a specified period of time, you may wish a revolving irrevocable L/C. Note that such an L/C may be issued as “cumulative” (funds not drawn in a particular period carry over to the next period) or “non-cumulative” (funds not drawn in a particular period are no longer available).

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What is our role in the preparation of a letter of credit (L/C)?
  • You provide the buyer with information on your bank.
  • The buyer issues an instruction to their own bank.
  • The buyer’s bank sends your bank the L/C.
  • Your bank sends the L/C to you.

What are the important features of a letter of credit?
  • It must be consistent with your sales agreement.
  • It must include correctly spelled names and addresses, the correct shipping date, and all of the agreed charges.
  • You must comply with all of its provisions.
  • The buyer’s bank pays only upon receipt of correct documents, not upon successful completion of the transaction.

What other documentation do we need to prepare to accompany the shipment?
  • Commercial invoice
  • Packing slip
  • Shipper’s instructions
  • Certificate of origin
  • Standards documentation (if necessary)
  • Health/sanitary certificate (if necessary)

What documents does the freight forwarder prepare (with copies to you, your buyer, and your commercial bank)?
  • Customs invoice
  • Consular invoices (if required)
  • Special packing or marking list
  • Insurance and certificate of insurance
  • Bill of lading

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What do we need to do in order to receive payment for the sale?
  • Ensure that the freight forwarder has presented your bank with the L/C and all accompanying documentation.
  • Present your bank with a sight draft (demand for payment), which will be sent to the buyer's bank with a demand for payment.
  • Receive notification from the buyer’s bank that the documentation has been accepted and the funds will be transferred.
  • Verify that your bank has transferred the funds into your account.