PAYMENT METHODS: LETTER OF CREDIT

Letters of Credit: Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. LC can be of different types depending on the basis for categorization. However, there are basically two broad classification of LC and these include: Unconfirmed LC and Confirmed LC. Unconfirmed LC involves only one bank giving undertaking to pay under certain documentary terms and conditions while Confirmed LC involves an additional undertaking by a second Bank called the Confirming Bank. This is use to protect the seller against political and economic risk in the destination country.

1. Exporter and Importer sign the purchase contract
2. Importer requests for Letter of credit (LC) and release funds to its Bank
3. Importer’s Bank Issue LC and sends it to the Exporter’s Bank
4. Exporter’s Bank advises the LC the Exporter
5. Exporter ships the goods to the Importer
6. Exporter forwards shipping documents to its Bank
7. Exporter’s Bank forwards shipping documents to the Importer’s Bank
8. Importer’s Bank transfers the funds to the Exporter’s Bank
9. Exporter’s Bank pays the Exporter
10. Importer’s Bank release the shipping documents to the Importer
11. Importer clears its goods using the shipping documents

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1. Exporter and Importer sign the purchase contract
2. Importer requests for Letter of credit (LC) and release funds to its Bank
3. Importer’s Bank Issue LC and sends it to the Confirming Bank
4. Confirming Bank adds its confirmation to the LC and forwards it to the Exporter’s Bank
5. Exporter’s Bank advises the LC the Exporter
6. Exporter ships the goods to the Importer
7. Exporter forwards shipping documents to its Bank
8. Exporter’s Bank forwards shipping documents to the Confirming Bank
9. Confirming Bank transfers the funds to the Exporter’s Bank
10. Exporter’s Bank pays the Exporter
11. Confirming Bank forwards shipping documents to the Importer’s Bank
12. Importer’s Bank release the shipping documents to the Importer
13. Importer clears its goods using the shipping document