Description

Letter of Credit (L/C) is a letter made by the importer through the issuing bank and addressed to
the exporter through an advising bank containing a statement that he will pay a sum of money
if the exporter meets the requirements requested by the importer.

The creation of L/C involves four parties, namely importers, exporters, issuing banks , and advising
banks. Importers are parties who buy goods from abroad, while exporters are parties who
sell goods to importers who live in other countries.

When both agree to make a transaction, the importer will appoint a bank in his country as the
opening/issuing bank to make an L/C. Furthermore, the issuing bank will issue an L/C
document addressed to banks connected to its network in the exporting country, hereinafter
referred to as advising banks. These two banks act as intermediaries and guarantors
bridging agreements between importers and exporters.

L/C Issuance and Payment

Try to imagine our position as exporters who send goods abroad. After we send the ordered
goods a full container, it turns out that the importer is unable to pay off the payment or lost
contact. How many millions of losses do we have to bear even though we have produced
and shipped thousands of orders to their countries?

Or imagine our position as importers who order goods from other countries. Already paid
some money, but the exporter did not keep his promises to send the goods according to our
request. As importers we are at risk of bearing a lot of losses because of that problem.
A letter of credit can reduce the risk of such alarming fraud .As a payment method in
international trade, L/C is often used because it is very secure. To get a clear picture, let's look
at the scheme or stages of using L/C in the following chart:

1. Sales of Contract or make a sales contract. The importer places an order on the quantity

of goods purchased, their shape, type, and size. After the exporter declares that he is

able to fulfill the order, both parties will make an agreement in the sales of contract.

2. L/C Application. At this stage, the importer submits a Letter of Credit to the bank in his

country. The bank will ask the importer to fill out a form, provide a deposit with a

certain amount, and provide personal data such as identity cards, account numbers,

and so on.

3. Issuing Letter of Credit. The issuing bank will issue an L/C containing information that the issuing

bank will pay a sum of money to the exporter if it has completed and sent documents

as required by Importer. The issuing bank will appoint one of its network banks in the

exporting country as an L/C intermediary. The role of both banks is as guarantor

and intermediary in the transaction process.

 4. Advising Letter of Credit. The bank acting as an advising bank in the exporting country

will inform the exporter of the L/C and ask the exporter to complete the document

requirements as stated in the L/C.

5. At this stage, the exporter will prepare the delivery of the ordered goods to the importing

country. Shipping companies chosen as transportation media are generally also

required in L/C.

6. Presentation of documents. The exporter will complete the documents requested by the

importer and provided to the advising bank. Then the bank will check the

completeness of the documents and ask the exporter to complete if there is still

something missing.

7. Presentation of documents to Issuing Bank. After obtaining documents from the

exporter, the advising bank will forward the documents to the issuing bank.

8. Document control, payment release at maturity. After the issuing bank obtains complete

documents from the advising bank and ensures that all documents are correct and

appropriate, the issuing bank will provide payment to the advising bank to be

forwarded to the exporter. The importer will receive a notification from the issuing bank

regarding the documents sent by the exporter, and usually the importer can collect the

documents after paying the bill and commission to the issuing bank.

If you pay attention, the L/C procedure is relatively simple and safe to do. Exporters and importers
can focus on the production and delivery process, while the bank will help the process of
checking documents and payments so that transactions are more secure.