Letter of Credit: Sequence of Events
The exporter of the goods is the party in whose favour a letter of credit is issued. The advising bank is the bank in the exporter’s country.
The sequence of events for a typical transaction involving a letter of credit is as follows:
- the buyer and the seller agree on a price for goods;
- the seller asks the buyer for a letter of credit to guarantee payment;
- the buyer applies to his bank (the issuing bank) for a letter of credit in favour of the seller; the bank approves the letter of credit application, based on the credit risk of the buyer, and forwards the letter of credit to the advising bank;
- the advising bank authenticates the letter of credit and advises the seller;
- the seller/exporter ships the goods, and complies with any requirements noted in the letter of credit;
- the seller sends any required documents to the advising bank, including a bill of lading, in order that payment for the goods is processed;
- if all is in order, the advising bank will claim the funds from the issuing bank; documents will be forwarded from the advising bank to the issuing bank; and
- the issuing bank will debit the buyer’s account and provide the buyer with any required documents.
The advising bank will provide the issuing bank with the bill of lading. The buyer is provided with a copy of the bill of lading, which they will need in order to take delivery of the goods. To obtain release of the goods at the port of arrival, the original endorsed bill of lading must be presented.
Bill of Lading
A bill of lading is a contract between the carrier and the shipper/exporter to carry goods, and is issued by the carrier to the shipper or exporter;
- can act as a receipt for goods received by the carrier and describes the condition in which the goods were loaded on board;
- contains shipping instructions;
- can be used to support a claim against the carrier for loss or damage; and
- can be used to support a speciﬁc tariﬀ treatment;
Bills of lading are either negotiable (order bill of lading) or non-negotiable (straight bill of lading); a clean bill of lading is one that does not contain any markings or notations indicating damage to the goods;
- a letter of credit is a guarantee of payment to the seller;
- a letter of credit is a commitment by a ﬁnancial institution to pay an agreed amount, under precise terms and conditions;
- the exporter of the goods is the party in whose favour a letter of credit is issued; and
- the buyer is provided with a copy of the bill of lading, which they will need in order to take delivery of the goods.