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Step by Step Process of Letter of Credit

The letter of credit process involves 11 steps: 1) The buyer and seller agree to a letter of credit, where the seller wants payment guaranteed. 2) The buyer applies to their bank for a letter of credit in favor of the seller. 3) The buyer's bank issues the letter of credit and forwards it to an advising bank near the seller. 4) The advising bank authenticates the letter of credit and forwards it to the seller. 5) The seller ships goods and prepares documents required by the letter of credit. 6) The seller presents documents to the advising bank for payment processing. 7) The advising bank examines documents for compliance with the letter of credit terms. 8) If documents comply, the advis

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Dhoni Khan
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125 views

Step by Step Process of Letter of Credit

The letter of credit process involves 11 steps: 1) The buyer and seller agree to a letter of credit, where the seller wants payment guaranteed. 2) The buyer applies to their bank for a letter of credit in favor of the seller. 3) The buyer's bank issues the letter of credit and forwards it to an advising bank near the seller. 4) The advising bank authenticates the letter of credit and forwards it to the seller. 5) The seller ships goods and prepares documents required by the letter of credit. 6) The seller presents documents to the advising bank for payment processing. 7) The advising bank examines documents for compliance with the letter of credit terms. 8) If documents comply, the advis

Uploaded by

Dhoni Khan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Step by Step Process of Letter of Credit

1. Buyer and seller agree to conduct business. The seller wants a letter of credit to
guarantee payment.
2. Buyer applies to his bank for a letter of credit in favor of the seller.
3. Buyer's bank approves the credit risk of the buyer, issues and forwards the credit
to its correspondent bank (advising or confirming). The correspondent bank is
usually located in the same geographical location as the seller (beneficiary).
4. Advising bank will authenticate the credit and forward the original credit to the
seller (beneficiary).
5. Seller (beneficiary) ships the goods, then verifies and develops the documentary
requirements to support the letter of credit. Documentary requirements may vary
greatly depending on the perceived risk involved in dealing with a particular
company.
6. Seller presents the required documents to the advising or confirming bank to be
processed for payment.
7. Advising or confirming bank examines the documents for compliance with the
terms and conditions of the letter of credit.
8. If the documents are correct, the advising or confirming bank will claim the funds
by:
- Debiting the account of the issuing bank.
- Waiting until the issuing bank remits, after receiving the documents.
- Reimburse on another bank as required in the credit.
9. Advising or confirming bank will forward the documents to the issuing bank.
10. Issuing bank will examine the documents for compliance. If they are in order,
the issuing bank will debit the buyer's account.
11. Issuing bank then forwards the documents to the buyer.

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