Stages in a Letter of Credit Transaction

A letter of credit transaction involves following number of stages.

Step 1: Buyer and seller conclude the sales contract and agreed to use an LC as the method of payment.

Step 2: Buyer applies to his bank (Issuing Bank) to issue an LC on his behalf in favour of the seller with all the terms and conditions specified.

Step 3: Issuing Bank issues the LC and requests the advising bank (Seller bank) to advise or confirm the credit to the seller. However the issuing bank may advice the seller directly.

Step 4: Advising/confirming bank inform the seller about the opening of the credit and undertakes to pay the amount in bill of exchange to the LC beneficiary.

Step 5: Seller prepares & ships the goods according to the terms of sale agreement and dispatches the goods to the buyer’s country.

Step 6: On shipment the seller will obtain the transport documents e.g.-bill of leading, consignment note & other document as required under the credit. Then the seller presents the documents to the advising bank.

Step 7: Advising bank checks the documents presented against the LC terms and conditions. If documents are free from discrepancies forwards the documents to the Issuing Bank. The bank will effect payment provided the document conforms.

1. Payment at sight.
2. Deferred payment.

Step 8: Issuing Bank checks documents presented against the LC terms and conditions. If documents are free from discrepancies, issuing bank presents documents to the buyer for payment.

Note-Once payment is received from the buyer, issuing bank releases documents to the buyer for the latter to collect his goods.

 Types of bill of lading

 Importance of Bill of Lading

 Endorsement of bill of lading

 Types of Bill of Lading

 What is Bill of Lading? | What is B/L?

 Duties of Charterers

 Who are charterers in Shipping

 Types of letter of credit | Types of L/C

 What is L/C?

 Stages in a Letter of Credit Transaction

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