In our previous post, we have explained what is letter of credit, (you can read more by clicking the link). In this post, we will be explaining how letter of credit as an international trade document works .
How does Letter of credit works?
Letter of credit works in the following ways:
1) The importer and the exporter strike a bargain and agree at a certain price.
2) The importer and the exporter enters into agreement (on the time the money will be paid and the goods will be delivered).
3) The importer and the exporter who may not have done any transaction before and might have never seen each other goes into a formal and legal binding agreement that brings in financial institution (commercial banks from the two countries )
4) The importer takes the agreement which indicate the order, nature of goods, price, time of delivery and payments to his bank and applied for LETTER OF CREDIT
5) The bank of the buyer (importer) takes a look at the agreement and search to find out the credit worthiness of the buyer.
6) the bank slashes the order where necessary and also takes collateral where applicable
7) the bank takes responsibility and undertakes to pay as soon as the exporter meets the terms of the agreement.
In accepting Letter of credit, an international bank based in the exporter’s country who is familiar with the reliability of the issuing bank (the bank that is undertaking to pay the money ) is required in some cases to assent to the Letter of credit before some potential exporters supplies. Read more….