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Buyer
and seller agree terms, including means of transport, period of credit offered
(if any), latest date of shipment, Incoterm to be used. |
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Buyer
applies to bank for issue of letter of credit. Bank will evaluate buyer's
credit standing, and may require cash cover and/or reduction of other lending
limits. |
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Issuing
bank issues L/C, sending it to the Advising bank by airmail or (more commonly)
electronic means such as telex or SWIFT. |
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Advising
bank establishes authenticity of the letter of credit using signature books
or test codes, then informs seller (beneficiary). Advising bank MAY confirm
L/C, i.e. add its own payment undertaking. |
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Seller
should now check that L/C matches commercial agreement, and that all its
terms and conditions can be satisfied, (e.g. all documents can be obtained
in good time.) If there is anything that may cause a problem, an AMENDMENT
must be requested. |
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Seller
ships the goods, then assembles the documents called for in the L/C (invoice,
transport document etc.) Before presenting the documents to the bank, the
seller should check them for discrepancies with the L/C,
and correct the documents where necessary. |
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The
documents are presented to a bank, often the Advising bank. The Advising
bank checks the documents against the L/C. If the documents are compliant,
the bank pays the seller and forwards the documents to the Issuing bank. |
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The
Issuing bank now checks the documents itself. If they are in order (and
it is a sight L/C), it reimburses the seller's bank immediately. |
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The
Issuing bank debits the buyer and releases the documents (including transport
document), so that the buyer can claim the goods from the carrier. |
Glossary
of terms |
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