LC letter of credit process analysis

In the import and export trade by means of letter of credit settlement accounts for the majority of international trade settlement. So what exactly is a letter of credit? To do what? How to use it? Letter OF CREDIT (L/C) is a guarantee in favor OF the seller made by the issuing bank at the instruction OF the importer upon the seller's fulfilment OF the terms OF the LETTER OF CREDIT, a written commitment to pay a specified amount when delivering a document. 

Note that the beneficiary is required to deliver the documents specified in the letter of credit, not the goods. Therefore, for the seller, the presentation of the documents in accordance with the terms of the letter of credit is"Delivery" for the trade under the letter of credit, you can get the money. In the case of the importer, payment is guaranteed by stating at the time of the application that the documents conforming to the terms of the credit are received, which ensures that the buyer will receive the goods at the time of payment. For the issuing bank: through the opening and payment and other business, you can charge some fees, but also through the opening of the importer at the opening bank deposit as working capital. 

Parties to a letter of credit: 1) APPLICANT (or OPENER) , party applying to a bank for the opening of a letter of credit. In import and export trade is generally the importer. 2) an OPENING BANK (or ISSUING BANK) accepts an application from the applicant for ISSUING a letter of credit to the exporter, usually the BANK of the place of import. It is liable for payment. And acting for the applicant to exercise the right to request the exporter to deliver documents. 3) ADVISING BANK (or NOTIFYING BANK) the BANK, usually the BANK of the place of export, entrusted by the issuing BANK to forward the credit to the exporter. It is required only to certify the authenticity of the credit and assumes no other liability, and the advising BANK is often the CORRESPONDENT BANK of the issuing BANK.4) BENEFICIARY: the person designated on the credit as entitled to use the L/C is usually the exporter. 5) Negotiating Bank: a BANK that buys or discounts documentary bills presented to the beneficiary or that underwrites or negotiates them. The NEGOTIATING BANK is entitled to claim payment from the issuing BANK and has recourse against the beneficiary (the drawer) . The name of the negotiating bank does not appear on the letter of credit under the condition of FREE NEGOTIABLE. On condition that a negotiating BANK is RESTRICTED, the L/C indicates that the drawee named in the L/C is the issuing BANK itself in most cases. If the payment by the issuing BANK itself is not indicated in L/C, if it is made by another BANK, the other BANK is also called PAYING BANK or DRAWEE BANK. Once paid, the paying bank has no recourse against the beneficiary. 7) CONFIRMING BANK if the issuing BANK is not creditworthy and needs to be confirmed by a major BANK, the CONFIRMING BANK is liable for first payment even if the issuing BANK fails or is unable to pay. A confirming bank can be a notifying bank or a third bank. 8) REIMBURSING BANK the issuing BANK authorizes payment to the negotiating BANK or to the BANK that pays it. It does not have a relationship with the beneficiary, does not review documents, and pays only on the basis OF the negotiating BANK's CERTIFICATE OF COMPLIANCE or similar documents. After payment, the amount is deducted from the issuing BANK's deposit with the issuing BANK. If a document is later found to be inconsistent, the issuing BANK will recover from the negotiating BANK, regardless OF the REIMBURSING BANK. 9) ACCEPTING BANK is a BANK that accepts a time bill, separating the document from the bill after acceptance and allowing the holder to discount or make payment at maturity. 10) TRANSFERRING BANK if the credit is transferable, the TRANSFERRING BANK is responsible for the business of TRANSFERRING the credit. The TRANSFERRING BANK may transfer the credit to the second beneficiary at the request of the first beneficiary. If there are more than one second beneficiary, the letter of credit must also be DIVISIABLE (L/C) . In the use of an import and export letter of credit, the above 7,8.9,10 are used less, but not less. The procedure of the L/C: 1) the importing party submits an application for issuance of L/C to the issuing bank, and pays the deposit and the corresponding bank fee; 2) the issuing bank examines the application for issuance of L/C, and if there is any improper place, the issuing bank requests the applicant to check the contract and propose amendments, and then issues the L/C according to the amended application for issuance of L/C. And forward the letter of credit to the advising bank. The advising bank transmits the L/C to the exporter. 4) the beneficiary (the exporter) examines the credit, makes a change if there is a problem, no problem, arranges for the production of the goods, shipment, preparation of documents, bills of exchange, presentation of bills of lading and other shipping documents, and negotiates with the negotiating bank within the period stipulated in the credit and the validity of the credit. 5) the negotiating bank examines the documents, notifies the beneficiary of any changes if there are any problems and, if so, advances the money to the beneficiary. 6) the negotiating bank forwards the draft and documents to the issuing bank or its nominated paying bank. 7) payment to negotiating bank upon examination by issuing bank. The issuing bank notifies the applicant (importer) of the ransom demand note. 9) the applicant pays for the documents to be presented to the carrier (shipping company) for delivery of the goods. PS. CBiBank Fukang Bank has been supporting the letter of credit business, details point head consultation. Letter of credit is classified into different categories according to different classification: 1. Revocable LC: means that the issuing bank can modify the contents of the L/C or cancel the L/C at any time without the consent of the beneficiary and without prior notice to the beneficiary. Since the issuing bank can revoke the letter of credit unilaterally, the revocable letter of credit is only an uncertain promise of payment to the victim, and the beneficiary's interests are not guaranteed, so it is rarely used in international trade at present. 2. Irrevocable LC: an Irrevocable LC means that once opened, the issuing bank can not unilaterally modify or cancel the L/C without the consent of the parties concerned during the validity of the L/c. the issuing bank must pay the beneficiary as long as he performs his obligations under the L/C. For the beneficiary, the irrevocable promise of payment by the issuing bank under such a letter of credit provides him with a guarantee of payment and is therefore most widely used in international trade. The time of payment under the letter of credit is 1. SIGHT LC: a letter of credit in which the beneficiary can draw on a bank for payment by draft at Sight. 2. USANCE LC: the interest on the letter of credit of a letter of credit against which the beneficiary may charge a Usance draft to a bank for payment is normally borne by the exporter. The beneficiary's Usance letter of credit is accepted by the bank first and will be paid when the draft matures. According to the letter of credit is transferable points 1. Transferable LC: A L/C provides that the beneficiary may assign the amount of the L/C in whole or in part to one or more persons (the second beneficiary) for use. 

A transferable letter of credit must be marked"Transferable" on LC. When transferring a letter of credit, the transferring bank has to reissue the letter of credit, the second beneficiary is the beneficiary on the new letter of credit, the first beneficiary is the middleman in the contract agreed with the importer, and the actual supplier is often the second beneficiary. The transfer of the letter of credit is arranged by the first beneficiary, so he is responsible for the cost. When the second beneficiary fulfils the new conditions, he shall obtain payment for the goods. The transferring bank shall notify the first beneficiary of the situation. "Upon receipt of the notification, he shall convert the invoice and the transferring bank shall forward the documents to the issuing bank.". 2. Non-transferable LC: A General L/C is a Non-transferable L/C when it does not state that it is transferable. However, the letter of credit proves that the Third party documents are acceptable so that it is in conformity with the negotiable letter of credit. Four, according to the letter of credit whether confirm points 1. Confirmed L/C: A Confirmed L/C is a guarantee of payment made by a bank other than the issuing bank. A confirmed letter of credit has a double guarantee of payment, but the importer has to pay double for it. Therefore, if the bank credit or the country's external income and expenditure situation is good, generally do not need the other side letter of credit confirmation. Revocable letters of credit are not confirmed. 2. Non-Confirmed L/C is a Non-Confirmed L/C in which the issuing bank guarantees payment to the beneficiary. According to whether the amount of the letter of credit is recyclable points 1. Revolving LC: a letter of credit provides that after the amount of the voucher has been used up, it can be used up again to the original amount several times or to a certain total amount. This letter of credit is some in a longer period of time partial delivery of trade contracts or underwriting, monopoly contracts. Use of revolving credit, you can save a larger deposit and fees. This Letter of credit amounting to HK $50.000.00is automatically revolving for 5 times with the total amount reach HK $250.000.00) . 2. Non-revolving LC: A Letter of credit in which there is no revolving clause means there is no Non-revolving letter of credit. A revolving letter of credit may also cease to circulate when a shipment is rejected for non-conformity with the contractual requirements. Other types of letters of credit 1. Anticipatory LC: after receiving the LC, the beneficiary may, under certain conditions, request the bank of the place of export (usually the notifying bank) to advance part of the amount of the L/C, the beneficiary shall make up the documents after the goods are shipped, and the Anticipatory Bank shall deduct the amount of the Anticipatory LC together with interest. Such letters of credit, also known as Packing letters of credit (Packing LC) , enable the beneficiary to obtain financing for the purchase or Packing of goods. In the past, the terms allowing the beneficiary to make advance payment for the goods were customarily typed in Red letters, hence the term"Red Clause LC". The prepayment terms generally contain the following contents: (1) the maximum amount of prepayment allowed to the beneficiary, which usually accounts for 30-40% of the amount of the letter of credit; (2) the beneficiary must guarantee the timely delivery of documents when the prepayment is made; (3) after the beneficiary has delivered documents, the prepayment bank will deduct the prepayment payment and interest; (4) if the beneficiary fails to submit the shipping documents within the time limit of the payment of the letter of credit, the prepayment bank may claim compensation from the issuing bank. The issuing bank shall reimburse the full amount, interest and other charges advanced by the prepaid bank. An advance letter of credit is issued by the applicant at the request of the person to whom the credit is drawn in the event of a shortage of funds. The importer will bear the risk that the consignee will advance the payment and fail to deliver the documents. Therefore, only the importer is the exporter of long-term trade credit good enterprises, can open an advance letter of credit. 2. Back to Back LC: a letter of credit that achieves the purpose of transferring the credit without exposing the ultimate buyer or seller. The so-called revolving L/C is a L/C opened by the issuing bank, which is independent of the original L/C (i. e. the First L/C) in which another exporter is the beneficiary. The beneficiary of the original certificate is usually a middleman, and it is also the applicant for the opening of a re-opening certificate. Open L/C can be all or part of the original amount, but there are many similarities between the contents of the two, open L/C is generally used in re-export trade.