1.What is a letter of credit?
A letter of credit refers to a written document issued by a bank to the exporter (seller) at the request of the importer (buyer) to guarantee payment responsibility. It is a common settlement method in international trade.
The Soft Clause of a letter of credit refers to some restrictive clauses or unclear or unclear expressions in the letter of credit, which provide the issuing bank with a basis for exemption at any time and are very unfavorable to the beneficiary.
If these "soft terms" are not detected in a timely manner during a letter of credit transaction, it may face losses of "money and goods being sold out".
2.What are the common "soft terms"?
In international trade, letter of credit fraud often involves adding restrictive clauses set by the buyer (applicant) in the bank payment terms of the letter of credit, known as "soft clauses" in the letter of credit.
In this way, the bank credit guarantee payment terms enjoyed by the seller have been transformed into payment terms determined by the buyer's commercial credit. The soft terms in the letter of credit were originally added by the buyer to prevent fraud by the seller or to prevent the goods provided by the seller from not complying with the contract.
However, once these soft terms are included in the letter of credit, an irrevocable letter of credit becomes a revocable letter of credit, posing great harm to the seller. Our country's export enterprises must attach great importance to the following types of soft clauses in letters of credit.
01 Temporary ineffective clauses
For example, a letter of credit that requires separate notification from the issuing bank, obtaining relevant authorization letters, or requiring approval from local authorities to take effect.
02 Loss of Ownership Clause
For example, 1/3 of the bill of lading is self sent or air waybill.
03 Provisions requiring cooperation from importers or their related parties
For example, unconventional factory inspection reports, quality inspection certificates, and other terms that are subject to payment under other letters of credit.
04 Conditional restrictive clauses
For example, requiring specific routes, vessel age, or submitting specific types of transportation documents.
05 Self contradictory clauses
For example, allowing the submission of through bill of lading while prohibiting transshipment.
How to avoid "soft terms"?
Carefully review the order, identify "soft terms" early on, and promptly request changes.
Choosing a reputable bank often provides greater security for large banks.
Choose a buyer with good credit and use methods such as credit reports to "know oneself and the other".
Source: Souhang Network
