How does Letter of Credit (LC) works?
Letter of Credit (LC) works in a following manner:
1. Agreement: For a specific commercial transaction, the buyer and seller agrees to use a Letter of Credit as a payment method.
2. Issuance: The buyer asks their bank to grant the seller a Letter of Credit. The terms and conditions of the LC are established by the bank once it has evaluated the buyer’s worthiness.
3. LC Terms: Various information will be provided in the Letter of Credit, such as the amount to be paid, the products or services to be supplied, the dates of shipment and payment and any additional relevant information.
4. Presentation of Documents: The seller ships the items and gives their own bank the necessary paperwork such as invoices, bills of lading and inspection certificates after meeting the terms stated in the LC.
5. Examination: To make sure the documents comply to the requirements of the LC, the seller’s bank reviews them. The buyer’s bank receives the documentation if everything is in order.
6. Payment: After checking all the paperwork and confirming that it satisfies the LC’s requirements, the buyer’s bank can transfer funds to the seller’s bank.
7. Release of Goods: The seller may release the goods to the buyer upon receipt of payment or a guarantee of payment from the buyer’s bank.