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HOW TO OBTAIN A LETTER OF CREDIT
The following procedure explains how to obtain a letter of credit from any banking or financial institution.
It is recommended to request a letter of credit from an institution where you are already a customer since this expedites the process and allows for faster credit checks and verifications.
1. The buyer and
seller agree to the terms and conditions of the transaction, including means of transport, period of credit offered, latest date of shipment and the relevant Incoterm to be used.
2. The buyer submits a request to the bank for a letter of credit.
3. The bank evaluates the buyer's credit rating, and may require a cash cover and/or reduction of other lending limits.
4. The
buyer's bank issues the letter of credit and notifies the advising bank (seller's bank) by airmail, telex or SWIFT.
5. The advising bank establishes the authenticity of the letter of credit using signature
books or test codes, then informs seller (beneficiary) and confirms the letter of credit.
6. The letter of credit becomes the legal agreement between the issuing bank and the designated beneficiary (seller).
7. The seller confirms that the letter of credit matches the commercial agreement, and that the terms and conditions can be satisfied in the allotted time period. If there is anything that may cause a
problem, an amendment should be requested.
8. The seller ships the goods and gathers all the documents requested in the letter of credit, such as the invoice, transport document, bill of lading, insurance,
etc.
9. The documents are presented to a bank, often the advising bank. The advising bank checks the documents against the letter of credit.
10. If the documents comply with requirements, the bank
pays the seller and forwards the documents to the issuing bank.
11. The issuing bank also checks the documents. If they are in order, the issuing bank will reimburse the seller's bank immediately.
12. The issuing bank debits the buyer and releases the documents (including transport document), so that the buyer can claim the goods from the carrier.
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