LC- payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods.
①Your company (Supplier) enters into contract with Buyer and demands L/C terms with confirmation.
②Buyer requests L/C issuance to issuing bank with confirmation as condition.
③L/C issuing bank opens L/C with confirmation required.
④SMBC (name of the Japanese bank) advises L/C with confirmation added.
⑤Supplier ships the goods (and receive Bills of Lading from shipping company).
⑥Supplier presents documents to SMBC
⑦SMBC forwards the documents to L/C issuing bank.
⑧The Buyer makes payments at maturity.
⑨Issuing bank pays to SMBC.
⑩SMBC pays to your company.
Following details are included in a letter of credit:
Applicant (buyer or importer)
Applicant (buyer or importer)
Opening bank
Negotiating bank
Specification and quantity of the goods
Amount of money
Loading port and destination port
Shipment date
Validity date of the L/C
Terms and conditions agreed by both the importer and exporter
Documents required by the importer
The L/C serves as a guarantee to the used car exporters that even if the buyer fails to pay, the exporter will get the payment. In this way, the risk that the buyer will fail to pay is transferred from the exporter to the financial institution who issued letter of credit.
The Letter of Credit payment procedure is usually as follows:
Importer applies to open the L/C to the seller through a bank who can open the L/C in his country.
The opening bank or the issuing bank creates the letter of credit and will inform the negotiating bank that the L/C has been opened; also it takes the responsibility to make the payment on behalf of the Buyer on receiving the documents from the exporter.
The negotiating bank will inform exporter that the L/C has been established.
Exporter will check all the terms and conditions listed in the L/C. If all terms and conditions are acceptable, exporter will arrange the shipment within the time specified in the L/C.
The captain will issue the Bill of Lading to the exporter, once the goods are loaded onto the ship without any damage.
Exporter will submit the BoL and other documents to the negotiating bank to collect the payment. Only with Bill of Lading, one can claim the ownership of the goods.
The negotiating bank will send the clean Bill of Lading and relevant documents to opening bank.
The opening bank will inform importer that all documents are received.
To get Bill of Lading and other necessary documents, used vehicle importer should make all the necessary payment.
With all the relevant documents, importer can clear the Customs smoothly and pick up the goods after they arrive at the destination sea port.
A Letter of Credit is basically a promise to pay. During International or Domestic trade, bank act as an uninterested party between the buyer and the seller and guarantees that a payment will be met if certain criteria is fulfilled. There is no payment method that is perfectly safe to both the importer and exporter at the same time as compared to Letter of credit.