In our real business transactions, there are too many guys want to use the letter of credit(LOC) payment terms, especially the clients from Bangladesh, required by their government, but the suppliers in China don’t accept this payment terms, so they lose many chances. This post will interpret the process flow of letter of credit using the shear stud as the example. It will be clear for the relation between the letter of credit, goods, and the documents after reading this post.
Step 1: Exporter(Supplier or beneficiary) and importer(Buyer or Applicant) confirmed the sales contract by agreeing to the terms and conditions of the shear studs transaction.
Step 2: Applicant (Buyer or Importer) contacts to the issuing bank(Buyer’s bank) for the issuance of the letter of credit(L/C).
Step 3: Issuing bank(Buyer’s bank) issues the letter of credit(L/C) in swift format and sends it to supplier’s bank(negotiating bank or advising bank).
Step 4: Negotiating bank(Supplier’s bank) advice the letter of credit(L/C) to the exporter(Supplier or beneficiary). Exporter checks the letter of credit(L/C) terms and conditions, the supplier will start the production if acceptable.
Step 5: Exporter(Supplier or beneficiary) ships the shear studs within the validity of the L/C and not later than the latest date of shipment indicated in the L/C.
Step 6: Exporter(Supplier or beneficiary) presents the documents(written in the L/C) to the negotiating bank(Supplier’s bank) within the presentation period allowed under the L/C. Remember if presented documents contain a transport document, the presentation must be completed within 21 days after the date of shipment.
Step 7: Negotiating bank(Supplier’s bank) checks the documents presented by the exporter(Supplier or beneficiary) and advances cash to the exporter if determines that they are compliant. The “negotiation” is effectively the purchase of documents from the exporter at a discount.
Step 8: Negotiating bank(Supplier’s bank) presents the documents to the issuing bank(Buyer’s bank).
Step 9: Issuing bank(Buyer’s bank) checks the documents and, if compliant, accepts them to be paid to the negotiating bank(Supplier’s bank) at maturity. At the same time, issuing bank(Buyer’s bank) gets in touch with the importer(Buyer) and delivers documents to him according to the financial agreement between the issuing bank(Buyer’s bank) and the importer(Buyer).
Benefits of the letter of credit to the exporters(suppliers)
Exporters(Suppliers) can reach payment sooner with the L/C while offering usance terms to the importers(Buyers). With the help of the L/C, exporters (Suppliers) can balance their cash flows, while offering competitive payments terms to the importers(Buyers).
Where does the money come from?
A bank promises to pay on behalf of a customer.
A letter of credit will be issued by the bank only if they are confident that customer will pay and is willing to pay.
Sometimes, customers have to pay the bank up front. But usually, customers could get a line of credit from the bank. ( In other words, bank lend money to customers)