Letter of Credit Template

Letter of Credit also known as L/c is a document issued by a bank that guarantees the payment of a customer's draft. Letter of Credit substitutes the bank's credit for the customer's credit

There are only 10 steps in processing an L/c there are :

Step 1 - Negotiation

Buyer and seller needs to negotiate the price first including specification, quality etc, Buyer selects a seller and places order for specified goods

Step 2 - Accepting Orders

Buyer send the order and Seller ready to fullfill the order.

Step 3 - Setting agreements

Buyer and Seller agrees on terms and conditions of the sale. Buyer instructs its bank to open a L/c incorporating previously agreed terms of sale

Step 4 - Buyers Prepares L/c

The buyer's bank prepares a Letter of Credit (L/c), including all instructions to the seller's bank concerning the shipment and sends the L/c to the seller's bank, requesting confirmation. The seller may request confirmation from a confirming bank for added security.

There are often delays at above two steps for various reasons like buyer does not have sufficient funds or seller requests change in L/c terms. Amendments are issued to incorporate changes in L/c terms.

Step 5 - Seller's Prepares letter of confirmation

The Seller's bank prepares a letter of confirmation to forward to the seller along with the L/c. The seller reviews carefully all conditions in the L/c specially shipment schedule in consultation with his freight forwarder.

Step 6 - Seller send the goods

The seller arranges the goods and hand over to freight forwarder for delivery at appropriate port or airport.

Step 7 - Seller show the shipping document to the Bank

Once goods are loaded/shipped, the forwarder completes necessary documentation and hand them over to the seller. The seller then presents the documents to his bank, informing full compliance with terms and conditions of L/c.

Step 8 - Reviews Shipping Docs

The seller's bank reviews the documents. If they are in order, the documents are airmailed to the buyer's bank for review and passing necessary documents to buyer. The buyer gets the documents needed to claim the goods.

Step 9 - Buyer's Bank Pays Seller's Bank

The buyer's bank returns accepted draft and informs buyer. Buyer pays bank.

Step 10 - Seller get paid by the Bank

The seller's bank gets payment and pays seller.

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