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How Letter of Credit work

Thuyết trình TACN

Quân Ngô

on 1 October 2012

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Transcript of How Letter of Credit work

Letter of Credit process Buyer and seller agree terms, including means of transport, period of credit offered (if any), latest date of shipment to be used. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer's credit standing, and may require cash cover and/or reduction of other lending limits. Issuing bank issues letter of credit, sending it to the Advising bank by airmail or (more commonly) electronic means such as SWIFT (a Network which helps send and receive information about financial transactions). Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller. Advising bank may confirm letter of credit, i.e. add its own payment undertaking. Seller should now check that letter of credit matches commercial agreement, and that all its terms and conditions can be satisfied. If there is anything that may cause a problem, an amendment must be requested. Seller ships the goods, then assembles the documents called for in the L/C. Before presenting the documents to the bank, the seller should check them for discrepancies with the letter of credit, and correct the documents where necessary. The documents are presented to a bank, often the Advising bank. The Advising bank checks the documents against the L/C. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank. The Issuing bank now checks the documents itself. If they are in order, then (for sight letters of credit) it reimburses the seller's bank immediately. For term letters of credit, settlement will be later. The Issuing bank debits the buyer and releases the documents (including transport document), so that the buyer can claim the goods from the carrier. This diagram will guide you through the 9 basic steps of a Letter of Credit (L/C). Normally, this process involves 4 parties:
- The Buyer
- The Seller
- The Issuing Bank
- The Advising Bank
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