Financial Risk Manager

Ways of Financial and Risk Management

Procedures and Document Used to Establish Letter of Credit
Monday, September 21, 2009

By Ms Shazia - ACMA

After the exporter and customer agree on the terms of a sale, the customer arranges for its bank to open a letter of credit.
The buyer's bank prepares an irrevocable letter of credit, including all instructions to the seller concerning the shipment.
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.
The local bank prepares a letter of confirmation to forward to the exporter along with the irrevocable letter of credit.
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.
The exporter arranges with the freight forwarder to deliver the goods to the appropriate port or airport.
When the goods are loaded, the forwarder completes the necessary documents.
The exporter (or the forwarder) presents to the local bank documents indicating full compliance.
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.
The buyer (or agent) gets the documents that may be needed to claim the goods.
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 .

Commercial invoice. As in a domestic transaction, the commercial invoice is a bill for the goods .
Bill of lading. Bills of lading are contracts between the owner of the goods and the carrier .
Certificate of origin. Certain nations require a signed statement as to the origin of the export item.
Inspection certification. Some purchasers and countries may require a certificate of inspection attesting to the specifications of the goods shipped, usually performed by a third party.
Dock receipt and warehouse receipt. These receipts are used to transfer accountability when the export item is moved by the domestic carrier to the port of embarkation and left with the international carrier for export.
Insurance certificate. If the seller provides insurance, the insurance certificate states the type and amount of coverage.
Export packing list. Considerably more detailed and informative than a standard domestic packing list,.