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Sujai Adithya
Business Development and Banking & Financial Services Expert
Asked a question 10 months ago

How does the 'Letter of Credit' work?

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Sujai Adithya
Business Development and Banking & Financial Services Expert

Working of the LOC2:

  • The sales contract shall be negotiated between the trading parties and letter of credit would be agreed as a method of payment to the beneficiary (the one who is paid by the nominated bank).
  • Once the contract is finalized, the applicant will ask the bank for a letter of credit to be issued to the beneficiary for the payment of agreed amount on trade.
  • As the beneficiary receives the “LOC” he checks the actual terms of the contract made with the trader on shipment of goods and shipment is made to the applicant.
  • After the shipment of goods, the beneficiary will be presenting the requested documents to the nominated bank for payment.
  • The bank checks for the authenticity as per the contract and shall cancel the “LOC” or can be considered as discrepant if found contradictory with the terms and will ask the beneficiary to submit the corrected documents within the time specified in credit for the payment.

Documents to be presented:

Risk Factors:

  • Frauds through forged documents.
  • High level of regulatory risk because of various government agencies involved in the transaction.
  • Failure of issuing or collecting banks.
  • Beneficiary risks like delayed payments from the nominated or issuing banks.

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