LETTER OF CREDIT - STEPS

01 The buyer fills out a letter of credit application from the buyer’s bank which satisfies the terms of the purchase agreement plus the requirements of customs law, shipment and document coordination.

02 The issuing bank, usually the buyer’s bank, rechecks the application to ensure that it is complete and workable.

03 The issuing bank transmits the credit to a correspondent bank or the beneficiary’s bank by S.W.I.F.T., telex, or (rarely) airmail and asks it to advise and/or confirm the instrument.

04 The correspondent bank receives the letter of credit, checks authenticity, records, and transmits the instrument to the seller/beneficiary, adding their confirmation if requested and if they agree to do so. Upon receipt of the letter of credit, the seller should carefully review it to determine whether the seller can comply with its performance requirements and whether it is acceptable.

05 Upon determination that the letter of credit is acceptable, the seller should ship the goods precisely pursuant to its terms and conditions.

06 The seller must prepare documents exactly as required and present them to the bank where the LC is available. The proper paying bank may be any bank specified in the credit to accept, pay or negotiate. This may be an advising bank, confirming bank, issuing bank or (on a freely negotiable credit) any bank that is willing to negotiate. 

07 When the bank where presentation is made receives the documents, it will examine them to determine if they are in order pursuant to the credit’s terms and conditions. If in order, the bank may pay, accept, or negotiate as required by the letter of credit. The negotiating bank will transmit the documents to the issuing bank and request reimbursement. Under an LC payable at sight, the issuing bank may effect reimbursement to the seller’s bank by remitting funds directly to the seller’s bank, authorizing the seller’s bank to debit the issuing bank’s account, or by authorizing the seller’s bank to claim from a third bank where the issuing bank maintains an account.

08 Upon receipt of the documents, the issuing bank will examine them to ensure that they are in order as specified and then reimburse the negotiating bank. (For time drafts, reimbursement is made at maturity of the bankers’ acceptance.)

09 Issuing bank debits the buyer’s account and releases documents. (For a time draft, the buyer’s account will be debited at maturity.) The seller’s bank pays the exporter after being reimbursed by the buyer’s bank.

10 The buyer exchanges the shipping documents for the goods.