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BASICS OF INTERNATIONAL LETTERS OF CREDIT

L/Cs SIMPLIFIED

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What Is A Letter of Credit?

A documentary credit, or letter of credit is an undertaking issued by a bank for the account of the buyer (applicant), to pay the seller (beneficiary) provided the terms and conditions of the documentary credit are complied with.

A documentary credit, or L/C, usually satisfies the sellers desire for cash payment and the buyers desire for credit.

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Regulations Governing L/Cs

Documentary credits are governed by the International Chamber of Commerces Uniform Customs and Practice for Documentary Credits (UPC 500). There are two basic types of Documentary Credits: Irrevocable and Revocable. An Irrevocable L/C cannot be cancelled or modified without the express consent of the issuing bank, confirming bank and beneficiary. A Revocable L/C can be cancelled or amended without the beneficiarys consent or prior knowledge.

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Process Flow I
2 3

1 5 7

9 6
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Process Flow II
14 13 12 11

10
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Process Flow Index

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Buyer submits Purchase Order or Contract to Seller. Buyer places application for Letter of Credit with buyers bank. Buyers bank sends confirmation of Letter of Credit to Sellers confirming bank. Confirming bank sends copy of Letter of Credit to Seller. Seller sends order confirmation to Buyer. Seller sends order to freight forwarder. Freight forwarder exports order to Buyer. Freight forwarder sends export documents to Seller Seller presents Letter of Credit and export documentation to confirming bank for settlement. Confirming bank confirms authenticity of Letter of Credit and export documents, pays Seller per terms of the Letter of Credit. Confirming bank forwards export documents to Buyers Bank. Buyers bank presents copies of export documents to Buyer; Buyer pays bank under terms of the Letter of Credit; Buyers bank releases original export documents to Buyer. Buyer presents original export documents to local customs authorities. Customs authorities verify authenticity of documents and release goods to Buyer.

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