Remove supplier payment delays - shift from Letters of Credit to open account trading

| 0 Comments

 

Trade.jpgA Letter of Credit (LC) is extensively used as a payment method around the world: LCs account for almost 20 to 30% of global payment volumes and account for 48% of the export trade mix and 47% of import trade mix.


However, between 2011 and 2012 there was a drop in commercial LCs from 44% to 39% and in standby LCs from 10% to 8% as companies see the benefits of moving to open account trading, says Emuel Schoeman, director of Propell Supply Chain Finance, in this month’s SmartProcurement.


LCs are advantageous when the buyer and seller are trying to establish a new relationship: the parties don’t know each other and a LC can protect them both. But once a good working relationship has been established between the buyer and seller, moving to open account terms is more appropriate as it has benefits for both, says Schoeman.


Where suppliers push for the use of LCs as negotiable instruments for early payment, the buyer bears the cost. If the buyer refuses to make payment based on missing or incorrect documentation then the supplier bears the cost of fixing a LC.


Costs further escalate when parties use additional banking partners to create a ‘Confirmed LC’ or ‘LC with Silent Confirmation’. Not only does it carry costs, but it is also time-consuming for buyers and suppliers to prepare and review supporting documents and sound LC instructions.


There are numerous potential discrepancies that can delay payment and consume a lot of time. It is estimated that more than 75% of LCs are rejected the first time they are submitted, noted Schoeman.


As soon as a buyer and seller establish a good working relationship, moving to open account terms is an option as it benefits the buyer and the supplier.


The buyer can offer standard terms and parties don’t have to go through all the LC documentary collections and processing. “It is a simpler way to do business, significantly reducing cost and saving time for both parties,” says Schoeman.


Moving from LCs to open account trading using a supply chain finance platform


A Propell global partner implemented a supply chain finance programme that enabled a buying organisation to stop using LCs for its suppliers in Bangladesh and India.


The strategy utilises the buyer’s freight forwarder to review documents and conduct approvals at Freight on Board (FOB) point. The freight forwarder fulfils the role of the confirming bank in an LCs transaction (in that they are aligning documents for approval). As a result, the buyer is now able to conduct approvals four to six weeks prior to the goods actually arriving at their physical location and the supplier can sell an invoice as soon as it’s been approved.


In this process the freight forwarder generally takes around three days to approve invoices that are being shipped Full Container Load and between five and seven days for invoices where goods must be consolidated.


This approach has added significant value for the buyer and supplier.


The supplier saves time and can receive early payment from a multi-national bank without the cost associated with appointing a local confirming bank for the LC. The buyer saves significant time, avoids all the costs associated with a LC and has the ability to remove third party agents from the process, says Schoeman.


“Truly a win-win for both parties.”


To learn more about how Propell can help your business, please contact Emuel Schoeman at Emuel@propell.co.za or scf@propell.co.za.
 

Leave a comment


 

 

Career opportunites

Planner

  • <500 000 Gauteng Operations, Planning & Inventory Supply Chain
Are you looking for new career opportunities as

Procurement Specialist

  • >500 000 Gauteng Procurement Officer / Specialist Strategic Sourcing Supplier / Business Development
As a specialist Supply Chain recruiter, I am

Logistics Controller

  • <500 000 Gauteng Logistics & Warehousing Procurement Officer / Specialist
Seeking dynamic up and coming candidates looking for

Supply Chain Manager

  • >500 000 Permanent Procurement Management Supply Chain Western Cape
As a specialist Supply Chain recruiter, I am

Business Process Specialist

  • <500 000 Gauteng Procurement Consultant Procurement Officer / Specialist Supply Chain
A company within the financial services sector is

LOC Procurement Manager

  • Gauteng Permanent Procurement Management Procurement Officer / Specialist
Your Responsibilities: Job Purpose To be the interface ...More

Account Manager

  • >500 000 Procurement Officer / Specialist Supplier / Business Development Western Cape
Key Performance Areas:• To ensure that all aspects

Consultant

  • >500 000 Gauteng Procurement Consultant Strategic Sourcing Supply Chain
Key Performance Areas:• You'll be concerned primarily with

Commercial Buyer

  • <500 000 Buyer Contracts Procurement Officer / Specialist Western Cape
A well-known Mining company is seeking the services

Technical Buyer

  • <500 000 Buyer Contracts Procurement Officer / Specialist Western Cape
A well-known Mining company is seeking the services

Business Development Executive

  • >500 000 Gauteng Supplier / Business Development
A retail solutions company is seeking a New

Financial Manager

  • >500 000 Contract Operations, Planning & Inventory Procurement Management Western Cape
Looking for an unemployed CA (SA) in Cape

Chief Financial Officer

  • >500 000 Gauteng Operations, Planning & Inventory Procurement Management
An exciting opportunity exists for a CFO with

Procurement Consultant

  • >500 000 Gauteng Procurement Officer / Specialist Strategic Sourcing
Key Performance Areas: A profound knowledge of sourcing

Commodity Specialist: IT

  • >500 000 Commodities Gauteng Procurement Officer / Specialist
Key Performance Areas:• Effectively applies acquired technical/functional skills

Senior Consultant

  • >500 000 Gauteng Projects / Category Management Supplier / Business Development
Key Performance Areas:• Adheres to best practice processes

Logistics Manager

  • >500 000 Gauteng Logistics & Warehousing Operations, Planning & Inventory Procurement Management
Key Performance Areas:• Manage warehousing and distribution 3PL's

Head of Franchise Network

  • >500 000 Contracts Operations, Planning & Inventory Western Cape
The opportunity to work for a multinational retail

National Driver Manager

  • >500 000 Analyst Contracts Logistics & Warehousing Operations, Planning & Inventory Western Cape
The opportunity for an extraordinary individual to join

Commodity Specialist: Industries

  • >500 000 Commodities Gauteng Procurement Officer / Specialist
Key Performance Areas:• Under the guidance of the