The wholesaler, retailer, or manufacturer, (usually acting as an exporter) will receive payment at the execution of the letter of credit from the issuing bank only after he has submitted all the necessary drafts and documents. The issuing bank usually acts on behalf of its client (acquirer) to ensure that all conditions are met before the L / C is released. After opening the letter of credit and fulfilling the terms of the agreement, the bank must make the payment to the seller on behalf of the buyer. As a rule, after the sale and purchase agreement has been concluded and the buyer and seller have agreed that the letter of credit will be used as a method of payment, the Applicant applies to the bank with a request to open a letter of credit.

Step 4 After receiving the payment insurance from the issuing banks, the seller ships the item to the buyer. After the delivery of the goods, the seller receives the documentation confirming the delivery and the documents are forwarded to the bank. The bank will release funds to the seller only after the seller confirms that the shipment has taken place. Sellers must be confident that the bank issuing the letter of credit is legal and that the bank will pay as agreed. 

If a seller is in doubt, they can use a "verified" letter of credit, which means another (possibly more reliable) bank will guarantee payment. The issuing bank already guarantees the payment, but the recipient may prefer a guarantee from their home bank (which they are more familiar with). It can also be the same bank as the seller and/or confirming bank.

Usually the bank's client is the importer or the buyer of the goods. The buyer (or owner) is responsible for paying the seller (or beneficiary) and the bank intervenes to make the payment only if the buyer cannot. If for any reason the buyer or buyer (also known as the “requester”) cannot find the money, the bank must still pay the guarantee back to the seller.

The obligation of the issuing bank to make payment to the beneficiary of the letter of credit, more generally to the exporter, therefore depends on the delivery of the goods by the exporter, as stated in the letter of credit, as well as in accordance with all other requirements specified in the documentation. credit. The letter of credit provides the exporter with an irrevocable guarantee that, provided that the goods and / or services are delivered to the importer in accordance with the contractual terms and with the relevant documents, they will be paid for by the bank that issued the letter of credit. (importer's bank).

By issuing it, the exporter gains confidence that the issuing bank will make payment to the exporter for international trade between both parties. The beneficiary is the exporter, also known as the seller or supplier of the goods.

A letter of credit is an obligation undertaken by the bank on behalf of the importer (foreign buyer), that is, to pay the beneficiary (exporter) according to the conditions specified in the letter of credit, and confirm it through the provisions of this clause. document. ...Because the letter of credit is a credit tool, the credit of the importer in its bank is used to obtain the letter of credit. A letter of credit is useful when it is difficult to obtain reliable credit information about a foreign buyer, or if the foreign buyer’s credit is unacceptable but the exporter is satisfied with the creditworthiness of the importer’s bank.

If the letter of credit is not confirmed, the exporter bears the payment risk of the foreign bank and the political risk of the importing country. Exporters should consider obtaining a certified letter of credit if they are concerned about the creditworthiness of foreign banks, or operate in high-risk markets where political unrest, economic collapse, devaluation or exchange controls could put the currency at risk of payment.

If you are a seller with customers outside of Canada, they may ask you to provide guarantees before doing business with you. Whereas, both the bank guarantee and the letter of credit are promises from the bank or creditor that guarantee the payment of the debt, regardless of whether the buyer or the debtor can pay. A letter of credit is a contractual payment obligation issued by a financial institution on behalf of the buyer of goods in favor of the seller, covering the amount specified in the letter of credit, the payment of which is conditional on the seller's compliance with the terms of the letter of credit. and documentary requirements over a period of time.

Key points A letter of credit is a document issued by a bank or financial institution to ensure that the seller receives the buyer's payment in full and on time. Other types of letters of credit include revocable letters of credit (which can be changed by the issuing bank), revolving letters of credit (automatically updated regularly to allow recurring transactions between the same buyer and seller), and travel letters of credit (issued by the issuing bank) on behalf of travel customer). A letter of credit is beneficial to both parties because it assures the seller that once the terms of the trade agreement are fulfilled, the seller will receive his funds, and the buyer can give up the credit and agree to a longer payment term, thereby ensuring that the bank returns the payment.

A Letter of Credit (LC), also known as a documentary credit or bank commercial letter of credit or letter of commitment (LoU), is a payment mechanism used in international trade to provide an economic guarantee by a solvent bank to an exporter of goods. In the international banking system, a letter of commitment (LOU) is a temporary bank guarantee through which a bank allows its client to receive money from another foreign branch of the bank in the form of a short-term loan. However, in order to increase the LOU, the customer has to pay the profit margin to the bank that issued the LOU and is therefore granted a credit limit.

The confirming bank guarantees payment under the letter of credit in the event of default by the holder and the issuing bank. Another important difference is that a bank guarantee is considered binding under the contract and is used when one of the parties does not fulfill the terms of the contract. The buyer also receives some protection, such as a guarantee that money does not change hands until the item reaches a certain point in the delivery process. In most cases, this happens when the shipment has arrived at the port of arrival or when the forwarder guarantees that the package is at a certain stage in the delivery process.