Ecommerce and International Letters of Credit

In order to enrich EmergeCounsel’s ability to counsel its ecommerce and other business and IP clients in the international marketplace, I am studying International Trade at the World Trade Center, Denver. In this article, I focus on the nuances of international finance law.

U.S. Congressional findings accent that over 90% of ecommerce goods are imported into the United States. That means unless eCommerce businesses are extremely flush with cash or the organizations, and thus do not need financing, or they are working with a multi-national conglomerate financer, there are some different terms and conditions that importing ecommerce entrepreneurs need to understand.

If you are buying goods on credit, the seller or other creditor may require the buyer to buy a commercial letter of credit. A commercial letter of credit is a letter issued by a merchant back which generally flows as follows:

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While most American eCommerce sellers would rather not pay a bank to issue a letter of credit, there are some advantages that an eCommerce buyer enjoys through this arrangement.  First, the bank can be the buyer’s bad cop, allowing the buyer to stay on the non-confrontational aspects of the transaction. For example, the seller much presents the required documents in the latter of credit to the bank, this will generally be very stringent in determining if the terms have been followed.  So for example, if the letter of credit indicates that the goods much be received in US port by May 3rd, and they don’t get to port until May 5th, the bank would dishonor the presentation. In other words, the bank enforces the terms to assure that the payments are made on the contractual terms.

In summary, especially when working with custom exporters in foreign countries, it is likely that a seller is going to require a letter of credit. It is best for ecommerce sellers to use their own banks for issuance (because a relationship has already been established-your bank knows your finances). Regardless, the bank is going to lack a series of questions about the buyer’s creditworthiness (much like a bank loan) and then will require certain documents like the invoice, a bill of lading (shipping document), an insurance certificate, and a certificate of origin from the foreign government at issue allowing export. 

There are many terms and approaches to a letter of credit. Remember it is not all bad for buyer, and actually have some benefits.  Feel free to call EmergeCounsel to discuss the intricacies and strategies for lines of credit. For example, a revolving letter of credit may be your best friend (because you only have to enter into once) or your worst enemy (because the terms may need to change with the economics and geopolitical issues), but the letter can’t.

Contributing Advisors