Understanding Letter of Credit
So many people know the definition of Letter of credit. However they lack at understanding the process flow involved in it.
Don’t worry, we are here to help. Below is a four step flow of a letter of credit:
Step 1) Step 1 - Issuance of LC
After Importer and exporter agree to use LC, the importer applies to the issuing bank to issue an LC in favor of the exporter. The LC is sent by the issuing bank to the advising bank which is located in Exporter country. The advising bank (confirming bank) verifies the LC and forwards it to the exporter.
Step 2 - Shipping of goods
After receipt of the LC, the exporter is expected to verify the same to their satisfaction and initiate the goods shipping process. Step 3 - Providing Documents to the confirming bank After the goods are shipped, the exporter (either on their own or through the freight forwarder) presents the documents to the advising/confirming bank.
Step 4 - Settlement of payment from importer and possession of goods
The bank, in turn, sends them to the issuing bank and the amount is paid, accepted, or negotiated, as the case may be. The issuing bank verifies the documents and obtains payment from the importer. It sends the documents to the importer, who uses them to get possession of the shipped goods.
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