Letter of Credit, a guarantee for turnover growth

Publication evofenedex globe magazine for international entrepreneurship, December 2015 – www.evofenedex.nl

The Letter of Credit is one of the most challenging topics in the export industry. Fortunately, you don’t have to be a specialist: you can also outsource working with L/Cs. On an autumnal day in October, Ralph Teunissen, commercial director of Edel Grass, and Marloes Wittebroek, managing director of Elceco, talk about L/Cs. The two meet in the meeting room of Edel Grass in Genemuiden, which has been transformed into a football arena. The company has been a member of Fenedex for many years and produces artificial grass. Elceco has been handling the letters of credit for Edel Grass for more than ten years. A conversation about the developments within the field.

Edel Grass regularly uses LCs. What are the advantages you see?

Ralph: “It’s clear that when we can deliver on advance payment, or possibly Cash Against Documents with a partial advance payment incorporated, that is our preference. But times are changing. We ourselves, as a company, don’t like to pay in advance, so we realize that our customers don’t prefer that either. The L/C is then a solution. If we hadn’t been able to work with L/Cs, we wouldn’t have been able to achieve the realized turnover growth in various countries. For us, it has proven to be a good way to expand our exports.”

Paying on open account is the customer’s preference. How do you weigh this against the debtor risk and the impact on liquid assets?

“When we look at new countries or customers, creditworthiness is immediately examined. If this is not correct and it turns out that we are running risks, then we go for a range of options from prepayment to an L/C to get payment security. If this doesn’t work, the order simply doesn’t go through. We are a very export-driven organization, with 85% of our turnover coming from outside the Netherlands. With the exception of Australia, our sales market is worldwide with a focus on North Africa, Asia, the Middle East, the Far East and South America. In cultures where you don’t know your way around, an L/C offers many advantages. As long as credit-compliant documents can be provided, we can be virtually certain of receiving our payment.”

Marloes: “You’re talking about ‘virtually certain’ and I understand that. As an exporter, you must always be aware that you are still dealing with the customer’s willingness to accept the documents. In the case of a confirmed L/C, where the payment obligation has been transferred to your own bank, the L/C offers certainty, but when this is not the case, you still depend on your customer somewhere. Finally, you will not receive payment if the customer does not accept the documents. What we also regularly see with customers is that the foreign customer indicates that they will accept deviations in the documents in order to speed up the process and be able to access their goods earlier. These are regularly already waiting at the (air) port of destination, which entails costs. However, this is a solution that does not work. A statement by email or letter from the customer has no value whatsoever for the bank(s) in the verification process. In fact, an original amendment must be drawn up via Swift, i.e. via the banking route. Companies are often aware of this, but because a Swift amendment usually takes quite a lot of time and they want to avoid discussions with the customer, the ‘solution’ with a customer declaration is tried anyway. The disappointment eventually follows anyway, the only thing that really works is to ensure in advance that there are no deviations in the L/C.”

You decided at the time to outsource the L/C-related work. This means you lose (in-depth) knowledge within the organization. What was the reason for doing this anyway?

Ralph: “As a company, you cannot excel in every part of the total business process. We are a relatively small company that serves more than a hundred different countries. It is difficult to accommodate the knowledge of international payment transactions, of which the L/Cs are a part, in an independent position. There is then a high chance of missing things because you are simply not aware of them. Our strength lies in the marketing, distribution, sales and installation of artificial grass systems and not in financial services. That is precisely the main activity of a service provider such as Elceco. They are able to give us a quick response, so that we in turn can also communicate quickly with our customer. We know better than anyone that speed is required in the quotation stage. Elceco acts as a back-up in this. Together with them, we look at how we build an L/C in new emerging markets, such as India, for example. In the quotation stage, we also regularly consult with Elceco about which parts of the quotation may have consequences for the L/C. The practical experience that Elceco has, because they work for many exporters, is valuable to us. Also for the volume we have, we cannot afford a specialist. Moreover, as far as we are concerned: one specialist is no specialist. In case of leave, illness or other unforeseen absence, you then have no continuity. Elceco does offer us this, because several people from the team are aware of our shipments.”

Marloes: “Continuity and continuous follow-up of L/Cs is indeed very important. We register all L/Cs in our customized system, where we are always able to inform our customers about the status of the L/C.”

Of course, outsourcing work involves costs, but what has it yielded, what are the benefits?

Ralph: “All handled L/Cs, more than two hundred by now, have been paid in accordance with the conditions set. For us, they therefore form a guarantee of turnover growth. For us, it has proven to be efficient and cost-effective to outsource it to a specialized party. Incidentally, this naturally applies to various aspects within the organization, such as outsourcing the booking of business trips, for example. We consciously make the choice to purchase services, it is in trusted hands. Both organizations prefer long-term collaborations and given the duration of our collaboration with Elceco, it should be clear that we trust that Elceco is aware of the latest developments in the field of L/Cs. Internal people within our organization are updated annually during an in-company training from Elceco. During these kinds of sessions, the various disciplines such as sales, finance and transport are brought together and the most beautiful and educational discussions arise. It remains an interaction of practice and theory.”