The Process Of A Letter Of Credit

A letter of credit is a written document where exporters and importers settle the provisions for the payment of the merchandise. The payment clauses should indicate the amounts and forms that the seller will receive payment. This clause is contained within the letter of credit and it is essential to understand what terms apply to the transaction.

Payment clauses are really important, because they are written based on the following considerations:

One: In order to the importer to be able to pay the exporter, the letter of credit must contain payment information that is accurate. If you are the importer, make sure you create a model with your bank before sending a sample to the exporter.

Banks will use payment clauses and compare them with what is written in the letter of credit. The letter of credit will contain the provisions agreed by the exporter and the importer and which will be later reviewed by the bank.

If you are an exporter, it is essential to request a sample letter of credit that complies with the terms of your contract with the importer. Indeed, the commitment of the bank is defined solely by the terms of the letter of credit. Even if the exporter did not agree with them, he or she could not refuse to contradict what was written in the contract. Letters of credit can generally be modified but only with the consent of the parts involved. Documentary credit is a legal commitment different from the commercial contract that binds the beneficiary (exporter) to the bank and to its customers.

Banks will have pre printed forms for buyer to use. They usually contain the SWIFT encodings. Importers will establish before hand, under what conditions the exporter can be paid by the bank. This information will be sent to the issuing bank by email or mail.

The issuing bank opens the letter of credit by request of the importer. It is the exporter that will receive the payment for the merchandise from the bank. The importer will pay in accordance to what the letter of credit establishes.

Once the exporter receives the notice of credit, it will deliver the goods according to the terms of the letter of credit. Later, the exporter will need to show the issuing bank the bill, the insurance policy and the ticket in order to receive payment.

After examining the documents, the bank should normally proceed to paying the exporter for the merchandise, when the transaction details match what was expected in the letter of credit. The bank will then send the importer all documentation provided by the exporter.