LC Bytes

Simple L/C Process

1.Buyer and seller agree to terms including means of transport, period of credit offered (if any), and latest date of shipment acceptable.

2.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.

3.Issuing bank issues LC, sending it to the Advising bank by airmail or electronic means such as telex or SWIFT.

4.Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary).

5.Seller should now check that LC matches commercial agreement and that all its terms and conditions can be satisfied.

6.Seller ships the goods, then assembles the documents called for in the LC (invoice, transport document, etc.).

7.The Advising bank checks the documents against the LC. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank.

8.The Issuing bank now checks the documents itself. If they are in order, it reimburses the seller's bank immediately.

9.The Issuing bank debits the buyer and releases the documents (including transport document), so the buyer can claim the goods from the carrier.


Participants in LC Process
______________________________
Buyer
Issuing Bank
Advising Bank
Seller (Beneficiary)

L/C CHECKLIST FOR THE EXPORTER/ Seller

1) Is the Letter of Credit (L/C) irrevocable and issued subject to current International Chamber of Commerce (I.C.C.) rules?

2) Are you satisfied with the bank and country that issued the L/C or do you need it confirmed (guaranteed by a local bank)?

3) Does the expiry date allow sufficient time to present all the requested documentation to the bank indicated?

4) Is the name and address of your company and that of the buyer correct?

5) Is the amount of the credit as agreed? Has the correct tolerance (if any) been applied?

6) Are the payment/credit terms as agreed?

7) Are the goods, their value, unit prices, weight, quantity, quality described correctly?

8) Are all the transport details, such as place and date of shipment, the destination, method of carriage, Incoterm correct?

9) Does the Letter of Credit contain any spelling mistakes?

10) Is the L/C payable/negotiable in XXX Country at the counters of XXX bank?

11) Can the goods be shipped prior to the latest shipment date or in accordance with the shipping schedule outlined in the Letter of Credit?

12) Can the documents required be obtained and produced in the format required by the Letter of Credit?

13) Is transshipment allowed?

14) Is partial shipment allowed, if necessary?

15) Can all the conditions outlined be met?

16) Who pays the various banks’ charges?

Presentation of Documents Under Payment-Sight LC

Negotiation Letter of Credit

Letter of Credit Negotiations

Letter of Credit negotiation is defined within Uniform Customs & Practice for Documentary Credits as the "giving of value". In effect, by negotiating export documents under a Letter of Credit, the nominated Bank will pay the customer and the Exporter, with its own funds, and will rely on the reimbursement by the Issuing Bank at a later date. Letters of Credit that are both available at sight or Usance are capable of being negotiated.

Negotiation of documents under a Letter of Credit can either be with or without recourse to the customer. If the export documents are compliant with the Letter of Credit terms and the Letter of Credit is confirmed by the nominated Bank, then negotiation will be without recourse to the customer. On the other hand, if the Letter of Credit is not confirmed, then negotiation will be with recourse to the customer. 

(What is meant by “with recourse” is that in the event the Issuing Bank refuses to pay or accept documents under the Letter of Credit, the nominated Bank will have the right to claim reimbursement, with interest, on the funds that have been advanced to the customer.).

Benefits

• The customer will be able to receive funds in advance, which can be used to repay the pre-shipment loans that the customer may have taken to produce the goods, pay the suppliers if the customer was an intermediary or fund the working capital requirements. This is especially useful if the customer had granted credit terms to the buyer under the Letter of Credit.

Methods of Trade Settlement | Letter of Credit

Letters of Credit Basics Training