LETTER OF CREDIT

1
Buyer and Seller
Exporter and importer agree on
certain terms of transaction including
goods, price, shipping terms and

2 payment conditions.

Issue of LC
Buyer contacts issuing bank and
requests to issue a letter of credit .
The LC is drafted and then sent to
advising bank.
3
Advising Bank
Advising Bank notifies the seller of the
issuance, checks if LC is in line with the
terms and conditions then sends a

4 copy to the seller.

Goods Prepared
Seller prepares goods and
shipping documents such as bill of
lading, commercial invoices etc.

5
Document
Examination
Bank checks if documents are in order if
yes they notify the buyer to make
6 payment.

Payment
Buyer arranges payment to the
bank or accepts the draft issued by
the seller.
Bank gives documents to buyer
once payment is settled. 7
Goods Delivery
Buyer shows shipping docs to
shipping carrier and takes possession
of goods.

8 Buyer clears the goods through

customs and pays any import duties
or taxes (depending on delivery type)
Bank to Bank
Any transactions made throughout
this process are settled between
the banks..

IN THE CASE OF FALL THROUGH.

If a letter of credit (LC) is broken or not fulfilled according to its terms and conditions, it
can have significant implications for the parties involved in the transaction, for
example:
.1. Financial Consequences: If seller does not meet the terms (provides required
documents or fulfilling shipment they may not receive payment. As for buyer if they fail
to make payment they can be charged penalties or even additional costs.
2. Legal Disputes: legal action or arbitration of contract.
3. Damage to Business Relationship as well as Credit.
4. Delayed Shipment or Payment can cause delay in over all business activities.
5. Reputation Impact in trade communities.
6. Breach of Contract (law suits)
To avoid the negative consequences of a broken LC, it is crucial for all parties involved
to carefully review and understand the terms of the LC, communicate effectively, and
ensure compliance with all requirements. If there are issues or potential obstacles, it's
advisable to address them proactively and work towards a resolution to minimize
disruptions and maintain trust in the business relationship.