International trade offers a number of advantages and opportunities for growing businesses. The rewards can be great; but you should be aware of the risks and how to minimize them.

The Exporter's Story:

Ron Evanchuck owns a plastics extruding company, Plastics Moulding Inc (a fictional name & company). He has recently been successful in landing two offshore orders for plastic parts required in the automobile and food processing industries. Ron had heard that there are good opportunities for this type of product in Latin America.

Through a lead supplied by his Trade Association, Ron attends a tradeshow in Chicago. There he meets a representative of a Brazilian manufacturer. In due course he decides to ship a trial order of $55,000 to this company. Upon checking (through bank references and other industry contacts) he finds that they are a large company that is reputed to be reliable.

He considers shipping on "open account" terms but after discussing it with his bank decides to go with a letter of credit.

Ron negotiates a sales contract with the Brazilian company that calls for payment by letter of credit on the following terms:

• Payment in USD
• Goods itemized and packed in one container
• Goods delivered FOB
• Shipment by sea by an agreed latest shipment date
• Payment at "sight"

In due course Ron’s bank advises him that it has received a letter of credit issued on behalf of the Brazilian company in Ron’s favor and sends him the original letter of credit for his review and action.

Ron checks the letter of credit to make sure it contains all the terms and conditions as previously agreed in the sales contract.

Satisfied that the letter of credit is in order, Ron arranges for the shipment to take place and then prepares and obtains the necessary documents, including commercial invoice, draft, ocean bill of lading, packing list and others as stipulated by the letter of credit.

Ron subsequently presents the documents to his bank in order to get paid.

Ron’s bank finds the documents in order and forwards them to the issuing bank for payment. (If Ron’s bank had confirmed the letter of credit the confirming bank would then have assumed the risk of the issuing bank, including the political, social and economic risk associated with the country of the issuing bank.)

Ron’s bank receives payment from the Brazilian bank and credits Ron’s account.

After the first successful trial order with this company the next order is for $500,000 in two separate shipments. Now more comfortable with the relationship and the procedures to be followed Ron continues to ship under a letter of credit but as a result of pressure from the Brazilian company he agrees to extend the payment terms to “30 days sight”. He knows that if necessary he can arrange for the term drafts to be discounted by his bank.

Over the next two years the Brazilian company placed several large orders with Ron’s company using letters of credit as the form of payment. All of the transactions were completed to the satisfaction of both the buyer and the supplier.