Credit Letter Mechanism in The International Trade


Today we will try to focus on some useful info and clarify some point regarding the credit letter use and type. Maybe many of you are familiar to this terms and procedure. Our practices in trade show that every day we face many problems with buyer and seller that are not sculled in this type of procedure.
LC (letter of credit) is a common term used in all trade and export import contracts. When talking of LC (letter of credit), there may have many questions among traders, sellers and buyers. Listed blew the most frequent questions.

• What is Letter of Credit?
• How does Letter of Credit work?
• How many types of LC are there?
• How do these types of Letter of Credit work?
• Which type of Letter of credit is safe for Exporter?
• Which type of LC is safe for Importer?
• How to provide credit period to buyer under Letter of Credit?
• Can we get my products immediately up on shipping goods under Letter of Credit?
• What is LC Letter of Credit in export import business?

What is Letter of Credit?
Letter of credit is an assurance given by the buyer’s bank to remit the amount to the seller through seller’s bank on maturity, as per the terms and conditions of document based on the contractual agreement between buyer and seller. Now in simple words, If LC opened on your name as beneficiary, you will receive amount though the buyer’s bank (opening bank) on the agreed time after the performance all requirements listed in the agreement and by the LC(letter of credit ) verbiage . All Letters of Credit for export import trade is handled under the guidelines of Uniform Customs and Practice of Documentary Credit of International Chamber of Commerce (UCP 600). I know, the above explanation about Letter of Credit is not perfect. So I request you to read all articles about Letter of Credit in this web blog.
There are various types of credit letters like Revocable, Irrevocable, Confirmed, Unconfirmed, Clean & Documentary, Fixed, Revolving, Transferable, Back to Back, confirmed etc. the Most common and safe LC is Irrevocable Letter of Credit for both buyer and seller.
You can go through details about all types of LC in another article in our website. Also written a separate article about parties involved in the Letter of credit.
When can exporter get money under LC?
As per the agreed terms between buyer and seller, the period of credit is decided. Based on such period of credit, the time to effect payment by opening bank (buyer’s bank) is determined.
What is Sight LC and how does LC at sight work?
Now let us discuss the working mechanism of LC at sight.

How does sight letter of credit work?
Let’s see one of Procedures to get payment under a Letter of Credit at sight.

Opening a Letter of Credit at sight is common practice in the export business. Under sight LC, the payment of export proceeds sent to seller’s bank by buyer’s bank immediately up on receipt of original shipping documents as per the terms and conditions mentioned on the LC verbiage.
Once after completion of export customs clearance procedures, the exporter prepares all required documents as per the terms and conditions listed in the letter of credit. These documents will be submitted with exporter’s bank, along with the original LC. Bank verifies all documents and make sure, the documentations are in order as per LC conditions. These documents will be sent to buyer’s bank and in turn to the buyer after necessary approval in documentation by seller’s bank. Once the buyer’s bank receives the documents, the export sales amount as per the said documents will be sent to exporter’s bank. However, the documentation of each consignment must be as per the LC conditions at sight and the buyer’s bank has the right to reject payment on any violation of such documentation that not confirm with what was listed in the LC verbiage. This is the procedures under letter of credit at sight.

How long is the Credit period under Letter of Credit?

The credit period of LC can be determined my mutually agreed terms and condition by buyer and seller before sales takes place.
Some time, the foreign buyer may demand credit period of 30 days, 60 days, 90 days, 120 days etc. However as per government regulation, the total period of credit should not exceed more than 180 days.
Normally the credit period is calculated from the date of shipment. The date of shipment is determined on the basis of date of bill of lading or airway bill.

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