How does Letter of Credit work?
Wednesday, March 25, 2015     Category : For Beginners

Mechanism of Letter of Credit


LC is a common term used in all trade.    When talking of LC, there may have many questions among traders. What is Letter of Credit? How does Letter of Credit work? How many types of LC are there? How do these types of Letter of Credit work? Which type of Letter of credit is safe for Exporter?  Which type of LC is safe for Importer? How to provide credit period to buyer under Letter of Credit? Can we get my products immediately up on shipping goods under Letter of Credit?


How does Letter of Credit work copy

What is Letter of Credit?


Letter of credit is an assurance given by the buyer’s bank to remit the amount to the seller through seller’s bank on maturity, as per the terms and conditions of document based on the contractual agreement between buyer and seller. Now in simple words, If LC opened on your name as beneficiary, you will receive amount though the buyer’s bank (opening bank)  on the agreed time. All Letters of Credit for export import trade is handled under the guidelines of Uniform Customs and Pracice of Documentary Credit of International Chamber of Commerce (UCP 600).  I know, the above explenation about Letter of Credit is not perfect. So I request you to read all articles about Letter of Credit in this web blog. 

There are various types of letters of credit like Revocable, Irrevocable, Confirmed, Unconfirmed, Clean & Documentary, Fixed, Revolving, Transferable, Back to Back etc. Most common and safe LC is Irrevocable Letter of Credit for both buyer and seller.


You can go through details about all types of LC in another article in same website.  Also written a seperate artilce about parties involved in Letter of credit.


When can exporter get money under LC?


As per the agreed terms between buyer and seller, the period of credit is decided. Based on such period of credit,  the time to effect payment by opening bank (buyer’s bank) is determined.


What is Sight LC and how does LC at sight work?


Now let us discuss the mechanism of working LC at sight.  How does sight letter of credit work?


Procedures to get money under Letter of Credit at sight.


Opening a Letter of Credit at sight is common practice in the export business. Under sight LC, the payment of export proceeds sent to seller’s bank by buyer’s bank immediately up on receipt of original shipping documents as per the terms and conditions mentioned on LC.


Once after completion of export customs clearance procedures, the exporter prepares all required documents as per the terms and conditions of letter of credit. These documents will be submitted with exporter’s bank, along with the original LC. Bank verifies all documents and make sure, the documentation is in order as per LC conditions. These documents will be sent to buyer’s bank and in turn to the buyer after necessary approval in documentation by seller’s bank. Once the buyer’s bank receives the documents, the export sales amount as per the said documents will be sent to exporter’s bank.   However, the documentation of each consignment must be as per the conditions of LC at sight and the buyer’s bank has the right to reject payment on any violation of such documentation.  This is the procedures under letter of credit at sight.



How long is the Credit period under Letter of Credit:


The credit period of LC can be determined my mutually agreed terms and condition by buyer and seller before sales takes place.


Some time, the foreign buyer may demand credit period of  30 days, 60 days, 90 days, 120 days etc. However as per government regulation, the total period of credit should not exceed more than 180 days.


Normally the credit period is calculated from the date of shipment.  The date of shipment is determined on the basis of date of bill of lading or airway bill.  You can alread read about how to open a Letter of Credit in this web blog about international business.


You can also read more information by clicking   What are the advantages of Letter of Credit to Exporter? How LC is benefited to Importer?   Are there any disadvantages to importer for a consignment under Letter of Credit?   What are the disadvantages of LC to an exporter?   Who are the parties involved in Letter of Credit?   How to check authenticity of LC? What is Prime Banker?  Yes, I am sure, once after going through that articles you will have a good knowledge about Letter of Credit.


I hope, I have explained about the mechanism of Letter of Credit.


Share your experience and thoughts about Letter of Credit below:


Other information about Export importt tutorial


Difference between bill discounting and bill negotiation


Disadvantages of LC (letter of Credit) to Importer.


Disadvantages of Letter of credit (LC) for Exporter


Advantages of LC - letter of credit – to Importers.


Advantages of Letter of Credit (LC) for exporters


Is ON BOARD CERTIFICATE required for LC negotiation


Difference between LC expiry and shipment date expiry


Saubhagya Kumar Kar Says :
Thursday, September 19, 2013
The articles on different aspects of export-import trade is very vital and useful for the beginners those who have no prior knowledge in this subject.It is being very useful for me.Many Many thanks to you.
CA.Dinesh Says :
Sunday, October 06, 2013
I thank vrymuch..greatwork,, it will help greatly..such piece art is shown rarely,, thanks again
Denny John Says :
Wednesday, December 11, 2013
Excellent articles sir. Everybody can clear the doubts with this articles.Thanks a lot...
Vishal Says :
Thursday, December 12, 2013
Dear sir, Could you please explain me one thing. If buyer is giving LC to seller, and buyer is giving 180days period and in that 135 days will be bear by buyer and 45 days will be bear by seller. In such case, when the seller get the money through bank and who will bear the discounting charges. It would really help me if you will suggest. Thanks in Advance
sonam Says :
Tuesday, December 24, 2013
Sir can u explain the documentation takes place for opening the lc & clauses of LC and what is the difference between LC & buyers credit, which one good for importer. which type of work involve for importing goods to their clearance
Mythree Silva Says :
Sunday, January 12, 2014
Thanks lot to job is verry help full for me upgrade my carrier thanks again....
Abbas Says :
Wednesday, January 15, 2014
Thnanks for such a great description. in case i exported goods to my foreigner buyer on an agreement of Sight LC, and unfortunately the material got rejected, So will it effect my payment or can he block my payment. KINDLY EXPLAIN...
Muhammad Naveed Kazmi Says :
Thursday, January 16, 2014
Thank you very much for all of them who tried their best and provide the detail & information of letter of credit. I hope I will be better deal with these best suggestions. once again thank you very much.
Muhammad Naveed Kazmi Says :
Thursday, January 16, 2014
Thank you very much for all of them who tried their best and provide the detail & information of letter of credit. I hope I will be better deal with these best suggestions. once again thank you very much.
Muhammad Naveed Kazmi Says :
Thursday, January 16, 2014
I Think these articles about letter of credit is very useful for those people who are beginners and want to start their business import or export. Letter of credit is very useful criteria which safe you money and I congratulate all the people who wrote these articles and provide us useful details and information. once again thank you very much.
Muhammad Naveed Kazmi Says :
Thursday, January 16, 2014
Thank you very much for all of them who tried their best and provide the detail & information of letter of credit. I hope I will be better deal with these best suggestions. once again thank you very much.
P.Krishnamoorthy Says :
Thursday, January 16, 2014
Dear Sir, Hearty congratulations SUCH A WONDERFUL DIAMOND ARTICLES, Thank you very much...... I am in the field for the past 13 years, Never seen this kind of explanations from websites.
hossein shariati Says :
Saturday, February 15, 2014
I appreciate for important information shared with us and thank you very much they are very useful and simple to understand please continue,
S. Saravana Bhavan Says :
Monday, February 17, 2014
Thanks for your valuable & informative details abour LC given in your articles. Also it is very easy to understand clearly about the details provided.
Musthag Says :
Monday, February 17, 2014
These informative articles published by has surely invested so much into my knowledge. Thanks to all the brainy minds involved in this informative group.
Mahendra choudhary Says :
Saturday, August 09, 2014
These information are very useful those who are importing & exporting first time. i have got much information from these articless Thank you very much.
Samer Says :
Tuesday, August 26, 2014
Dear Sir IS there any provision if seller cheat in sending other goods or anything-else instead of that order placed. Regards Sameer
Admin Says :
Tuesday, August 26, 2014
Manikandaselvam Says :
Wednesday, October 08, 2014
Thanks for the information
kumar satyaveer Says :
Sunday, October 26, 2014
The above articles are very significant.It has cleared all my doubts and queries. Thanking you for posting these informative articles. Regards Kumar Satyaveer
NINAD Says :
Friday, October 31, 2014
Very good information and easy to understand. Thanks to the writers.
saubhagya kumar kar Says :
Wednesday, February 18, 2015
Dear Sir, suppose , I am an exporter of a particular good. The buyer in a different country opened a letter of credit in my name In a year I shall send 5 shipments.In the first shipment when I will produce the documents to the bank, You have written that the original lc will be produced to my bank.If in one shipment the lc will be produced for next shipments how it could be possible to produce the original lc. please elaborately explain to me.
Admin Says :
Wednesday, February 18, 2015
saubhagya kumar kar, Original LC can be produced with bank and you can take it back after verifying by producing a copy of Letter of Credit if more than one shipment occurs under an LC
Shwaki Says :
Friday, March 13, 2015
Dear, sirs I have some miss understand for the short cut in the LC CIF, CPT, CFR, FOB, CIP, FCA ....etc

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