How Are L/C Fees Split Between Importer and Exporter?
Generally, the fee splitting arrangement under letters of credit is
for the buyer/importer to absorb most of the the costs incurred in
setting-up the L/C. The costs in the beneficiary’s (seller's) country
are usually the responsibility of the beneficiary. Although this is
the typical arrangement, the buyer and seller can arrange to split
letter of credit fees in a variety of ways. For example, the buyer
could absorb all fees both on its end as well as on the beneficiary’s
side. Or, the beneficiary could pay for all the bank fees except for
the reimbursing bank charge (see below).
What fees does the beneficiary normally pay?
Export letter of credit charges include the following:
Advising
Compensates the advising bank for authenticating the L/C,
sending the L/C to the beneficiary, and logging the L/C into the
bank’s liability system.
Payment
Expressed as a percentage of the drawing amount but subject to a
minimum charge. Compensates the bank for examining the
documents compared to the terms and conditions of the letter of
credit.
Discrepancy
Compensates the bank for additional work involved in clearing a
discrepancy or arranging for payment with discrepant documents.
The advising bank charges for discrepancies and increasingly so
does the issuing bank.
Telex or communication charges to buyer’s bank
These are often incurred when there are discrepancies or to follow-
up on a payment. The exporter should try to fax its buyer direclty
to work-out any issues on payment since it is cheaper than using
the bank than an intermediary.
Courier & Postage
For sending documents and drafts to the issuing bank/reimbursing
bank.
Reimbursement bank charge
The issuing bank often selects a reimbursing bank in the seller's
country and the reimbursement charge for L/C drawings is usually
paid by the beneficiary. The total of these charges typically
ranges from $150 to $250 dollars.
Bank-to-Bank reimbursement arrangements
The issuing bank selects which foreign bank will provide the money
for drawings under export letters of credit. This is a specialized
service, which some banks offer foreign banks in order to expedite
payments and ease the foreign bank’s reconcilement work on
export L/C reimbursements. Since the issuing bank is selecting the
reimbursing bank, the issuing bank is aware of the charge being
assessed - usually for the account of the beneficiary/seller.
The exporter should be aware that Article 19 (e) of the UCP 600
states that “the Reimbursing Bank’s charges should be for the
account of the Issuing Bank. However, in cases where the charges
are for the account of another party, it is the responsibility of the
Issuing Bank to so indicate in the original Credit and
Reimbursement Authorization.”
Since the reimbursing bank charge should be for the account of
the Issuing Bank, the exporter should try to have the buyer absorb
that cost. Passing this cost to the account party (buyer) eliminates
one of the more costly L/C charges: typically ranging from $25 to
$150. If the buyer is absorbing the reimbursement cost, the buyer
should have leverage with its bank to reduce that charge.
Controllable Fees
There are two types of fees where the exporter can control its cost:
the advising fees and discrepancy fees. The exporter should
instruct the buyer to have the export letter of credit advised directly
to the bank that they are already using. This will save the exporter
the cost of having the L/C advised through a first advising bank
and then through to the exporter's bank. The bank issuing the L/C
usually has an arrangement with a correspondent bank to have
export letters of credit directed through that correspondent bank,
which in turn gives the issuing bank a rebate. Thus, the exporter
should push for direct advising to their own bank and thus save
money and reduce the number of banks involved in the seller's
country.
There are instances where the issuing bank is small and has a
special arrangement with its preferred correspondent bank for
advising letters of credit. For these cases it may be difficult for the
small foreign bank to advise the L/C directly to any other bank.
Finally, the exporter should read carefully the section on “Payment
and Discrepancies” in order that clean documents are presented,
thereby expediting payment and eliminating discrepancy charges.
Buyer’s Letter of Credit Fees
Exporters often are not fully aware of the credit implications and
cost involved for the buyer in opening a letter of credit. In order for
the buyer to open a letter of credit with its bank, the buyer must
have an appropriate credit facility with the issuing bank. Although
the cost of opening a letter of credit varies from country to country,
as a rule of thumb, the exporter can estimate that in most
developed nations, the percentage cost for opening and paying a
letter of credit will be 3/4% for letters of credit in excess of
$100,000 (minimums will vary from bank to bank); for in
underdeveloped countries, the issuing and negotiation cost can be
upwards of 1.5%.
The cost for the buyer in opening its L/C and for subsequent
negotiation is important information. The exporter should ask the
buyer what the typical charges are in its country and how much its
bank charges for opening and negotiating letters of credit. For the
buyer with scarce credit availability, there is also the cost of using
its credit line for opening a letter of credit. Remember, the buyer
that is having the letter of credit issued must also have the
adequate credit facility with it's issuing bank.
L/C charges should be factored into selling price
It is always important for the exporter to quote its export selling
price knowing all the costs involved: freight, insurance, duty, bank
export L/C charges, and issuing bank opening and payment fees.
Obviously, the export L/C charges may make the deal unprofitable
if the transaction amount is relatively small.
