A Fistful of Yuan: Anatomy of a Letter of Credit

The letter of credit was one of the key factors why Vulcan, a small company, could conduct international business with the reasonable expectation of getting paid. Vulcan required virtually all of its customers outside of the US (even ones with a long-term relationship) to pay via the letter of credit. This was insurance of performance both for Vulcan and its customer.

This page is a step-by-step case history of how the letter of credit works.

On 12 April 1988, Vulcan received a telex from Lu Xiaozhuan of the Equipment Import Division, Bohai Oil Company, as follows:

IT HAS PASSED 5 YEARS SINCE WE MET YOU IN TANGGU. UP TO THIS TIME I GET THE OPPORTUNITY TO SEND YOU MY GREETING. AT PRESENT WE WANT TO BUY SOME SPARE PARTS OF 560 HAMMER AS FOLLOWS:…

YR PROMPT CONFIRMATION TO THE ABOVE WILL BE MUCH APPRECIATED.

The body of the telex contained an extensive list of spare parts.

Things then proceeded as follows:

We furnished them with the quotation they requested on 12 April via telex.
After the usual back and forth re the composition of the parts list, request for discount and confirmation of the terms and conditions, they agree to our revised proposal on 16 April. (Unlike the 1981 and 1983 negotiations, this was done long distance.)
The same day, they prepared and signed the contract for us and mailed it to us. We recieved it, signed it and returned it on 25 April.

As we prepared the parts for shipment, the next step was for Bohai Oil to have a letter of credit opened in Vulcan’s favour. This involved then contacting the Bank of China and committing funds to the bank, either in cash or via a credit facility. The Bank of China issued this letter of credit (shown below) on 6 May 1988:

Bohai-1988-Parts-Order-33 — Note the detailed documentary requirements. The key with a letter of credit (L/C) is that, upon presentation of the proper documents, payment can be effected. Note also the deadline for shipment: in cases where the deadline could not be met, the L/C would have to be amended. Amendment was also necessary if the shipment went past the expiration of the L/C.

The Bank of China’s New York branch sent us an advice of the letter of credit on 17 May 1988.

While preparing the parts, Vulcan also booked the ocean freight. On 20 May 1988 the shipping company (Transoceanic in New Orleans) advised that the ship was booked. Vulcan then had the parts transported via truck to New Orleans to beat the container terminal’s deadline of 26 May 1988. The parts were then loaded on the ship, the ship sailed, and Vulcan could collect the necessary documents to request payment under the L/C.

Those documents were as follows:

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It’s interesting to note that the contract–a very important document, especially with the Chinese–was not necessary for the L/C.

Having assembled all of this, on 9 June Vulcan submitted its sight draft (with required documents) to receive payment under the L/C:

Sometimes some inspiration for the bank to expedite payment is necessary, as evidenced by this:

Although not always the quickest or simplest method of receiving payment, the letter of credit spared Vulcan many of the pitfalls of non-payment that others had experienced in international business.

This page is dedicated to the memory of Barbara Jane Barker, who prepared most of the Vulcan generated documents shown on this page. A delightful person to work with, she handled most of the commercial paperwork (especially for international transactions) without which Vulcan would have never been the successful exporter that it was.