Letter of Credit

Methods of payment in Int. transaction

• Payments in Advance
• Open account
• Cash on Delivery (COD)
• Countertrade
• Bill for Collection
• Letter of Credit (L/C)
Letter of credit

•A written promise to pay

• There several kinds of L/C
• Frequently used is Confirmed irrevocable L/C
• It is the safest method.
• It cannot be cancelled without consent of all parties concerned
Parties concerned

• They are
• Bank
• Importer
• exporter
Procedure for payment by L/C
 Step one:

• The importer applies to one of his/her local bank for an L/C

in the exporter’s favor

• This bank is the issuing bank.

 Step two:

• The issuing bank contacts a bank in the exporter’s country.

• This bank is advising bank.
• It is told by the issuing bank that a credit has been opened for the
exporter.
• Advising bank notifies the exporter of L/C
• The credit can guaranteed by this bank if the importer requests this,
and this bank become a confirming bank
• A confirming bank can be another bank which is not the same as the advising
bank.
• The credit become a confirming irrevocable letter of credit.
• The letter of credit lists documents the exporter must give to
his bank (advising bank/confirming bank before he can get
paid.
The documents required in order to enable
the exporter to get paid are:
• 1. commercial Invoice
• 2. Bill of Lading (B/L)
• 3. Certificate of Origin
• 4. Certificate of Quality
• 5. Packing list
• 6. Insurance Certificate
• 7. Draft (Bill of Exchange)
 Step Three:
• The exporter sends the consignment to the importer.
• The exporter has to be careful about delivery time.
• The goods must be dispatched before the letter of credit expires
 Step Four:
• The exporter submits all the required documents (mentioned in step
two) to the confirming bank (or advising bank), depending on the
situation.
• Generally, these documents indicate that the consignment is on the
way to importer.
 Step Five
• The confirming bank (or the advising bank) examines the documents
against the letter of credit.
• If they meet the requirements of the letter of credit, the bank will pay
the exporter, according to the terms of the letter of credit.
 Step six

• The confirming bank ( or the advising bank), which receives the

documents for the exporter, sends the documents to the issuing bank.
 Step seven

• The issuing bank checks the documents. If the

documents are all right, the issuing bank sends the
payment as the reimbursement to the confirming (or
advising bank) which has paid the exporter.

• Reimbursement (synonym) = compensation,

restitution =
• การชำระเงินคืน
 Step Eight:

• The issuing bank debits the importer’s account for the amount paid to
the confirming bank ( or the advising bank)
 Step Nine:

• The issuing bank releases the documents to the importer.

 Step Ten:

• The importer forwards the transport documents to the agent

or the local office of the carrier.
 Step Eleven:

• The importer can claim the consignment from the port of discharge
Recommended websites for more detailed
information:

• Letterofcredit.biz
• http://www.crfonline.org>cro>cro-9-1.html
• Howtoexportimport.com>8-parties-involved