Financial Risk Manager

Ways of Financial and Risk Management

Procedures and Document Used to Establish Letter of Credit

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By Ms Shazia - ACMA


  1. After the exporter and customer agree on the terms of a sale, the customer arranges for its bank to open a letter of credit.

  2. The buyer's bank prepares an irrevocable letter of credit, including all instructions to the seller concerning the shipment.

  3. The buyer's bank sends the irrevocable letter of credit to a local bank, requesting confirmation. The exporter may request that a particular bank be the confirming bank, or the foreign bank selects one of its local correspondent banks.

  4. The local bank prepares a letter of confirmation to forward to the exporter along with the irrevocable letter of credit.

  5. The exporter reviews carefully all conditions in the letter of credit. The exporter's freight forwarder should be contacted to make sure that the shipping date can be met. If the exporter cannot comply with one or more of the conditions, the customer should be alerted at once.

  6. The exporter arranges with the freight forwarder to deliver the goods to the appropriate port or airport.

  7. When the goods are loaded, the forwarder completes the necessary documents.

  8. The exporter (or the forwarder) presents to the local bank documents indicating full compliance.

  9. The bank reviews the documents. If they are in order, the documents are airmailed to the buyer's bank for review and transmitted to the buyer.

  10. The buyer (or agent) gets the documents that may be needed to claim the goods.

  11. A draft, which may accompany the letter of credit, is paid by the exporter's bank at the time specified or may be discounted at an earlier date.

Documents


The following documents are commonly used in exporting through LC .

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