Letter of credit process

The Process of Applying for and Operating a Letter of Credit

A letter of credit, also referred to as an “L/C,” is an agreement between a buyer and seller that gives the seller a guaranteed payment for merchandise or services. The buyer’s bank, also known as the “issuing bank”, agrees to pay the seller a certain amount of money if specified conditions are met. The seller, who is called the “beneficiary,” must provide specified documents in order to receive payment.

There are two main aspects to operating a letter of credit. The first is applying for a letter of credit and the second is drawing against the letter of credit. This article will discuss the steps of applying for and operating a letter of credit.

Steps To Applying For a Letter of Credit

There are generally four steps to follow when applying for a letter of credit:

Step 1: A buyer seeking to purchase merchandise from a seller agrees to use a letter of credit as the method of payment.

Step 2: An application for the letter of credit is filled out by the buyer and submitted to the buyer’s bank. The bank reviews and approves the application, and then issues the letter of credit.

Step 3: The issuing bank sends the letter of credit to the seller’s bank (or to the seller directly if the seller does not have a bank).

Step 4: The issuing bank verifies that the documentation presented by the seller meets the specifications of the letter of credit and then sends payment to the seller’s bank. The seller’s bank then deposits the payment into the seller’s account.

Drawing Against the Letter of Credit

Once the letter of credit has been issued, the seller can draw against it by providing the required documents to the issuing bank. The steps involved in this process are as follows:

Step 1: The seller produces and delivers the required documents to the issuing bank.

Step 2: The issuing bank verifies that the documents provided meet the specifications of the letter of credit.

Step 3: The issuing bank pays the seller the agreed upon amount as detailed within the letter of credit.

Step 4: The seller’s bank deposits the payment into the seller’s account.

Conclusion

A letter of credit is a legally-binding agreement between a buyer and seller, which provides the seller with a guaranteed payment for merchandise or services. Applying for and operating a letter of credit requires a clear understanding of the process, which involves several steps. It is important for both the buyer and seller to have a thorough understanding of the process in order to ensure a successful transaction.

Letter of Credit (L/C), also known as Documentary Credit, is a payment term used in international trade to provide an effective payment method.

The process of issuing a Letter of Credit usually involves a buyer (applicant) and sellers (beneficiary) and their banks. The issuing bank (the applicants bank) provides the buyer a guarantee to the seller that if the buyer doesnt fulfill their obligations for the goods or service specified in the sales contract, the issuing bank will pay the seller the funds.

Step 1: Agreement between buyer and seller.

The buyer and seller enter into a sales contract and agree on payment terms, goods to be delivered, delivery dates and other details.

Step 2: Issuance of the letter of credit.

The buyer requests that their bank issues a letter of credit to the seller on behalf of the buyer for a specified amount of goods. The buyers bank reviews the document and then issues the letter of credit.

Step 3: Confirmation of the letter of credit.

The issuing bank may send the letter of credit to the beneficiarys bank (sellers bank) for confirmation. The beneficiarys bank confirms that it will honor the document and pays the beneficiary upon presentation of compliant documents.

Step 4: Documents presented by the beneficiary.

The beneficiary presents the requisite documents, such as a bill of lading, invoice and certificate of origin, to the issuing bank.

Step 5: Payment.

The issuing bank checks the documents and pays the beneficiary if they are in compliance with the letter of credit. The issuing bank then charges the buyer for the amount paid to the beneficiary and the service fee.