A documentary letter of credit is the standard way to pay for physical commodities between parties who do not yet know each other. The buyer’s bank promises to pay the seller once the seller presents documents that match the credit exactly. That promise only protects the buyer if the seller, the goods and the documents are real, so the work happens before the credit is opened.
Confirm the seller
Check the company in its home registry, and match the registered name, number and address against the contract and the proforma invoice. Confirm who the directors are and that the person signing has the authority to bind the company. A seller that cannot supply a registry certificate, tax registration and a bank reference is not ready to trade.
Confirm the goods and the title
Ask for evidence that the seller owns or controls the material: a warehouse receipt, a producer allocation letter or a mill contract. For metals, check the brand and the stock location. For agricultural products, check the crop year, the origin and any certificates claimed, such as organic or Fairtrade.
Write the credit around independent inspection
The documents called for in the credit decide what the seller must prove. At a minimum, require an independent inspection certificate of quality and weight issued at loading by a recognised inspection company, alongside the commercial invoice, the bill of lading, the certificate of origin and the packing list.
- Name the inspection company, or a short list acceptable to both sides
- State the specification the inspector must certify against
- Make sure the latest shipment date and the expiry date leave enough time to load and present documents
- Check that the credit is irrevocable and subject to UCP 600
Warning signs
Walk away from any deal that asks the buyer to pay fees before goods are inspected, to issue bank messages or proof of funds to a party it has not checked, or to open a credit before a draft contract and specification exist. Genuine sellers ship against a credit; they do not ask the buyer to prove its money first.
We make these checks on every seller before a position appears on our deal board, and we work through them with buyers on every trade.
