L/C

-> Documents Used in Import – Export <-

Letter of Credit (L/C)

         

There are many methods of payment used in international transactions. Some methods of payment widely used are as follows;

• Payment in Advance
• Open Account
• Cash on Delivery
• Countertrade
• Bill for Collection
• Letter of Credit

A letter of credit is the payment method in which the exporter bears less risk than most of the other types of payment methods. A letter of credit is a written promise to pay. There are several kinds of letters of credit. The most frequently used in international trade is the confirmed irrevocable letter of credit which is a promise of payment that cannot be cancelled without the consent of all parties concerned: banks, the importer and the exporter. This type is considered to be the safest method of payment for the exporter and also for the importer. The exporter can be certain to get payment for the consignment he dispatched and the importer can be sure that he will get goods in time.

          The procedure for payment by a letter of credit is as follows:

Step One:

The importer applies to one of his/her local bank to open an L/C in the exporter’s favor. Then this bank is the issuing bank.

Step Two:

The issuing bank contacts a bank in the exporter’s country. This bank is the advising bank. It is told by the issuing bank that a credit has been opened for the exporter. Then the advising bank notifies the exporter of the letter of credit. The letter of credit lists documents the exporter must give to his bank (advising bank) before he can get paid.

          Usually the required documents for the exporter to get paid are;

• Bill of Lading
• Insurance Certificate
• Commercial Invoice

Sometimes some other documents such as the following are also required;

• Certificate of Origin
• Certificate of Quality

Step Three:

The exporter sends the consignment to the importer. The exporter has to be careful about delivery time. The goods must be dispatched before the letter of credit expires.

Step Four:

          The exporter submits all the required documents (mentioned in Step Two) to the advising bank, depending on the situation. Generally, these documents indicate that the consignment is on the way to the importer.

Step Five:

          The advising bank examines the documents against the letter of credit. If they meet the requirements of the letter of credit, the bank will pay the exporter, according to the terms of the letter of credit.

Step Six:

          The advising bank which receives the documents from the exporter sends the documents to the issuing bank.

Step Seven:

          The issuing banks checks the documents. If the documents are all right, the issuing bank sends the payment as the reimbursement to the advising bank which has paid the exporter.

Step Eight:

          The issuing bank debits the importer’s account for the amount paid to the advising bank.

Step Nine:

          The issuing bank releases the documents to the importer.

Step Ten:

          The importer forwards the transport documents to the agent or the local office of the carrier.

Step Eleven:

          The importer can claim the consignment from the port of discharge.