The Letter of Credit (LC), as a trade finance instrument has not fundamentally changed during the past 150 years. LCs have many similarities with bank cheques. However, bank cheques have been phased out and LCs are still being used in today’s trading environment. These physical documents are an anomaly in today’s digital world. Their creation and use involve cumbersome processes, adding extra costs. In particular when the logistics of your product involve several stages (also known as multimodal / transhipment).
The case study below highlights the challenges faced by a company engaged in a project requiring a multimodal transportation effort.
About a month ago we had to deliver several components for a wind farm, about 500km north of Nairobi. It concerned the ‘Lake Turkana wind farm project’. The route from Rotterdam to the place of destination included several hubs over land.
After planning all the legs of the journey meticulously, we requested our bank to issue a Letter of Credit (LC).
Following several days of silence, we were advised that ‘transhipment’ was not included in the template terms and conditions of their LC and that deviations would have to be escalated to senior management. It took us more than two weeks to get a sign-off from our bank. But by that time, we had to replan the entire journey.
We were ‘lost in transhipment’…..what could have been a simple security became a bureaucratic nightmare.
Finally, we decided to use the escrow service of the Baltic Exchange. Relying on a trusted, independent party is a vital component of any transaction. It is essential that both buyer and seller have confidence that the necessary due diligence checks are performed, funds are held securely, and the transaction is settled professionally. The Baltic Exchange has been providing a comprehensive escrow service to its clients for many years, facilitating a wide range of transactions.
Since 2021, the Baltic Exchange is now capable of executing escrow transactions through the Mercurion Trade platform, making the Escrow process fast and user-friendly (like Alibaba’s payment service, Alipay, for retail in China). No more endless calls with our bank. Together with our counterparty, we simply enter the transaction details in the platform. As soon as the cargo has arrived and the proof of delivery has been uploaded, the funds are released: easy, transparent and secure.