If you’re an importer/exporter dealing in international trade, “letter of credit” is a term you encounter often. It is one of the most trusted trade finance instruments to mitigate risks in global trade transactions. Yet, the term can be confusing for many people, especially those who are seeking secure means of payment in overseas dealings. 

This article discusses some of the most common FAQs you have regarding a letter of credit service. Check out here:

1. What is a Letter of Credit?

The most popular trade finance instrument, letters of credit are the legal documents issued by the buyer’s/importer’s bank in favor of the overseas exporter/seller, guaranteeing an on-time & full-fledged payment for the ordered goods & services. However, if a buyer/importer fails to comply with the terms and conditions or is unable to pay the amount, the issuing bank will pay the exporter instead.

2. How does a Letter of Credit service work?

1. At first, the applicant or buyer/importer must approach an issuing bank to issue an LC in favor of the exporter.

2. Then, the advisory bank (exporter’s bank) receives the letter of credit and further forwards it to the seller after verifying the authenticity and legalities.

3. The seller ships the ordered goods as per the LC agreement and receives a bill of lading as proof of shipped goods.

4. Now, the seller presents the bill of lading to the nominated or negotiating bank. 

5. After checking whether the goods have been delivered or not, the bank pays the seller.

6. The negotiating bank forwards the shipping documents to the issuing bank to release the payment.

7. Then, the issuing bank sends these documents to the buyer and requests approval.

8. The buyer pays the issuing bank, and the bank forwards the amount to the negotiating bank.

Read more: https://www.axioscreditbank.com/blogs/top-most-asked-questions-about-letters-of-credit