After the goods pass inspection or you have agreed to accept the inspection result with minor defects and the factory issues a Letter of Guarantee to you, the next step is asking your inspection company to issue their Inspection Certificate. This automatically releases the goods for shipment. The factory is paid from the L/C when the necessary documentation is presented to the advising bank and after no discrepancies are found with the documentation.
Typical Documentation to Release the L/C
- Bill of Lading
- Commercial Invoice
- The Bill of Exchange/Draft
- Insurance Policy or Certificate
- Inspection Certificate
- Detailed Packing List
- Certificate of Origin
- GSP Forma A Certificate if Applicable
Some countries require additional documents that would have been noted when your home bank opened the L/C.
After shipment and presentation of the clean documentation to the advising bank the exporter is due payment. If the paying bank is the advising bank the exporter can receive payment very quickly. If the opening bank is the paying bank, payment may take a few days. Both importers and exporters may request that the paying bank be in their country to protect their interests.
What happens if the goods are rejected during the inspection? Several possible actions can result.
A first choice is often to have the goods re-worked and re-inspected. In such a case, you can ask the factory to re-work the goods and have them re-inspected. Even when accompanied with a letter of guarantee this may not be the best resolution.
When re-work is not an acceptable solution, the next choice can be to have the factory re-manufacture the complete order again at their own expense. No factory wants this decision and will argue and try to negotiate a less costly solution.
A good question is, what could and will they do with the rejected goods? In some cases, they could sell them at a huge discount to less quality conscious customers but this is not easy because the goods carry your brand name and are packaged to your specifications. This not a good solution because you do not want defective goods with your brand going to the market.
Now is the time to bring in an arbitrator to negotiate with the factory. Their first step should be verifying the problem has not been exaggerated by the inspection company (this also happens sometimes). Inspectors can have a different understanding of quality or performance levels. Because the final decision is not their responsibility, they can note a defect and simply pass the ball to the customer. Our company provides arbitration services with a third party neutral judgment. This is a scenario where a solution from your home country is difficult if a representative is not immediately on the spot.
Another important consideration is the latest payment date documented in the L/C. If goods have to be re-manufactured, that date can expire and the L/C will have to be amended at an additional expense.