Back when you were negotiating the terms of sale to a new client, you required a Confirmed Letter of Credit (LC) so you would limit your company's risk to within the U.S. By asking for a Confirmed Letter of Credit, you thought you'd have all your bases covered. In anticipation of the LC, you began the initial steps necessary to ship your product overseas.

Finally the Letter of Credit comes in and the advising bank has added their confirmation. With the Confirmed LC in hand, you are ready to ship.

But wait! Who is the advising bank that has added their confirmation? If it's a branch office of the issuing bank that just happens to be located in the U.S., should you be concerned?

Let's step back and re-examine the reasons you wanted a confirmed Letter of Credit in the first place.

You may not have been comfortable with the buyer's country due to political unrest or deteriorating economic conditions. Or maybe you had never heard of the bank that would be issuing the LC for the buyer or, if you know the bank, you weren't comfortable with them due to their financial condition. These are all good reasons to ask for a confirmation.

When a Letter of Credit is issued, it is extremely likely that they will advise the Letter of Credit through their office in the U.S., if they have one. They do this to keep the income stream flowing to their own bank. In addition, if the buyer tells their bank that the seller wants a Confirmed Letter of Credit, the issuing bank will only be too happy to have their office in the U.S. not only advise the LC, but add their confirmation as well.

If this has happened to you, you still have foreign risk despite the fact that you are holding a Confirmed Letter of Credit. The foreign office of the issuing bank located in the U.S. is only as strong as the issuing bank, and the issuing bank is still subject to the political and economic conditions present in their country. In other words, you are paying a confirmation fee-which can be substantial-and not really getting much for it.

So how do you avoid this type of situation?

Back during the negotiation process when you tell the buyer you are going to require a Confirmed Letter of Credit, give the buyer a list of banks located in the U.S. that you would find acceptable as the confirming bank. You should insist that under no circumstances whatsoever would you accept a Letter of Credit confirmed by any office of the issuing bank. You might also tell the buyer that if the Letter of Credit ends up being confirmed by a bank that is not on your approved bank list, the LC may be rejected.

Always remember that just because you have a Letter of Credit in hand, that doesn't mean that payment is automatic. Read the LC. If there is something you are not comfortable with or don't understand, call the bank to which you are going to present documents for advice and clarification.

Keep in mind: Your ability to get paid may well depend on your ability to present compliant documents to a bank that you know and trust.