Let us talk now talk about the parties involved in the process of a letter of Credit.
The originator is the causer of the letter of credit. It is the company or individual that is generally importing goods from another country. The originator will request credit from a bank to pay for the merchandise.
There is also an Issuing Bank, which is the financial institution chosen by the importer and it is the entity that will extend a line of credit to the importer and perform the payment if the conditions of the letters of credit are met. The issuing bank is usually in the importer’s country.
The Advising Bank is the correspondent bank that works from the exporter’s country, advising the exporter or the beneficiary that the Letter of Credit has been opened to its favor.
Credit Beneficiary is the last link in the chain. A beneficiary is a person or company that exports the goods to another country and receives a payment through the letter of credit and it accordance to its terms and conditions. The issuing bank will determine when and if the payment will be executed.
When requested by the payer and indicated on the loan, there may also be a Confirming bank which is that works as an intermediary between the issuing bank and the beneficiary. Extending the guarantee of recovery from the beneficiary to assume the same responsibilities as the issuing bank.
A letter should always contain data on the time, the amount of the transaction, and the signature where parties show their agreement.
Procedures for handling a letter of credit are:
Both parties, buyer and seller must enter into a contract of sale and request a form agreeing in general terms of the transaction and payment therefore in a letter of credit.
The importer would then choose a bank, called the issuing bank, in order to make the payments to the exporter.
The issuing bank in turn must ask another correspondent bank in the country to notify the seller or the seller to confirm the claim with the agreed conditions.
A confirming bank would participate in the process if established by the importer.
The beneficiary of the letter of credit would lastly go to the corresponding bank to request the payment for the merchandise sold. The issuing bank then will pay for the merchandise if the exporter met the terms and conditions established in the letter of credit.