How does a "letter of credit" work?

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Letter of credit is often used in International business. If you are an exporter or an importer of goods then you must know what a letter of credit is. You can easily be scammed or tricked by a person in another country, if you don't use a letter of credit.

If you have ever wondered how businesses trade internationally without getting "ripped-off", then the answer you are looking for is Letter of credit. Letter of credit is an instrument issued by a banker authorizing a person named to make drafts upon the issuer up to an amount specified (dictionary definition). In simple words, a letter of credit provides security to the seller by informing them that the buyer has enough money and is able to make a payment for the goods ordered.

The buyer and seller agree terms, including means of transport, period of credit offered, latest date of shipment and the relevant Inco-term to be used.

The buyer applies to the bank for a letter of credit to be issued. The bank will then evaluate the buyer's credit rating, and may require cash cover and/or reduction of other lending limits. The issuing bank will issue a letter of credit. This will be sent to the advising bank by airmail, telex or SWIFT. The advising bank will establish authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary). The advising bank may confirm the letter of credit, i.e. add its own payment undertaking.

The seller should check that the letter of credit matches the commercial agreement, and that the terms and conditions can be satisfied in goodtime.If there is anything that may cause a problem, an amendment should be requested. The seller ships the goods and gathers together all the documents asked for in the letter of credit including the invoice, bill of lading, insurance policy certificate, as well as the certificates of origin and quality.

Before presenting the documents to the bank, the seller should check them for discrepancies against the letter of credit, and correct the documents where necessary. The documents are presented to one of the banks, usually the advising bank. The advising bank checks the documents against the letter of credit. If the documents are compliant, the bank pays the seller and forwards the documents to the issuing bank. The issuing bank will also check the documents. If they are in order the issuing bank will reimburse the seller's bank immediately. The issuing bank debits the buyer and releases the documents (including transport document), so that the buyer can claim the goods from the carrier.

It should be noted that the letter of credit refers to documents representing the goods, and not the physical goods themselves. The banks do not examine the goods on behalf of their customers but instead only care about the documents representing the goods.

HOW ITS DONE: 

  Irrevocable Letter of Credit

To buy goods using a  letter of credit, the buyer must meet terms and conditions that are acceptable to both parties. Compliance with these terms and conditions will ensure prompt shipment of buyer’s order. Any deviations from the terms and conditions without our agreement may result in additional bank charges and a delay shipment until the Letter of Credit can be amended.

• We require an irrevocable commercial letter of credit with the following as beneficiary:
  Bytrade Co Ltd. china


• Our L/C term is at sight.


• Preferred advising and negotiating banks.
  - Bangkok Bank Public Company Limited
  - Thai Farmers Bank Company Limited


• All bank charges outside Thailand, any discount and acceptance charges are on account of the buyer.


• All documents to be in English. Documents presented within 21 days after B/L date.

• If trade term is CIF basis, you should allow us to select the freight forwarder.


• Usual terms FOB Bangkok.

Unless otherwise stated, the Letter of Credit must be subject to the Uniform Customs and Practice for Documentary Credits.

Opening the Letter of Credit

• Description of goods: The latest shipment date from the opening date of letter of credit as well as the expiration date from the last shipment date are subject to prior negotiation.


• Partial shipment allowed


• Trans-shipment allowed


• Documents:
  -Commercial invoice : 1 original, 2 copies
  -Packing list : 3 copies
  -B/L or Airway Bill : 3 copies to include
  (i) Letter of Credit number
  (ii) Consignment to issuing bank
  (iii) Marked freight collect, notify applicant (if term is F.O.B)


• If required, Certificate of Origin is Thailand

2. Wire transfer

Payment should be made to the address stated on the invoice. We have outlined a  guideline for remittance.

3. Payment in advance

Payment must be received prior to release of shipment. Please remit payment via wire transfer according to our account information stated above.

4. Export Terms: 

Lof C at sight. FOB Bangkok.

The letter of credit also contains the terms and conditions of the trade. If terms and conditions are not met, there is a possibility that both parties will not end up getting the trade. But there is no chance that any one will get scammed. This is why people use letter of credit, so they don't get scammed.

 

 Global B2B buy sell website: http://www.bytrade.com