Process of letter of creditby Ashish Kumar Internet Marketing
A letter of credit is a financial tool used by importers and traders internationally. It is a guarantee by the buyer’s bank to the seller’s bank for the payment in case of default by the buyer under the stated conditions. The steps below will be helpful to understand the process of letter of credit.
1. A sales agreement or contract is signed between the buyer and the seller stating the terms and conditions. A letter of credit however is not to be misunderstood as the sales contract because it is independent from it but may be based upon the sales contract. Thus a tight sales contract acts as a protective measure for the parties involved.
2. Once the agreement is signed the buyer asks its bank in a written application to be issued with a letter of credit. This can be done easily by hiring the services of a good trade finance consultant as they have built over a period of years a good rapport with the international banks or financial institutions.
3. When the buyer’s bank is situated in a different country from that of the seller, the bank sometimes takes the service of another bank to issue the letter of credit for the beneficiary.
4. The terms and conditions of the letter must be examined thoroughly by the buyer. It is advised that he takes the service of good lawyer firm to examine all the points carefully and see if it corresponds to the differing laws in both the countries and is under the stipulations as guided by International Chambers of Commerce.
5. When the transaction of goods is made the seller provides the advisor bank with all the required documents which in turn sends the documents further to the bank of the beneficiary.
6. The documents are then checked by the issuing bank. The latest amendments in the UCP are supposed to be taken into consideration as well while checking the documents and if it still complies then the claim of payment is honoured by the issuing bank.
7. These documents are then forwarded to the buyer or applicant who can use them to get the goods cleared from the customs.
Created on Dec 1st 2016 00:09. Viewed 589 times.
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