letter of credit process
The process described below is
for a sight letter of credit, with negotiation of documents by the Advising
Settlement procedures in letters of credit can be complex, and there are many
variations on this.
|describes the entire process in more detail.
and seller agree terms, including means of transport, period of credit offered
(if any), latest date of shipment, Incoterm to be used.
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
bank issues L/C, sending it to the Advising bank by airmail or (more commonly)
electronic means such as telex or SWIFT.
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.
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.
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.
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.
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.
Issuing bank debits the buyer and releases the documents (including transport
document), so that the buyer can claim the goods from the carrier.