Detailed explanation of letter of credit collection and payment procedures: complete process from application to repayment

The collection and payment procedure of a letter of credit is a crucial link in international trade and involves multiple steps. From application to actual payment, each link is interrelated to ensure the security and credibility of the transaction. The following are the general collection and payment procedures and specific contents of letters of credit for the reference of both import and export parties.

1. Entering into a sales contract

Before conducting transactions, the import and export parties need to conduct full consultations on the relevant conditions for the sale of goods, and conclude an international goods sales contract after finally reaching a consensus.

2. Apply for issuance of certificate

As an applicant for the issuance of a certificate, the importer must submit an application for the issuance of the certificate to the bank where it is located within the time limit specified in the contract, and pay a certain proportion of the deposit, called a deposit or other collateral. The amount of the deposit is usually related to factors such as the issuer’s credit standing and market conditions.

3. Issuance of certificate

After receiving the application for issuance of a letter of credit, the bank needs to issue a letter of credit to the designated beneficiary based on the contents of the application, and notify it by mail or telecom, and forward it to the agent bank (advising bank) at the place of export. Certificate issuance methods include letter issuance and electronic issuance, the latter becoming increasingly popular due to its efficiency.

4. Notification

After confirming that the information in the letter of credit is correct, the advising bank should transfer the certificate to the beneficiary as soon as possible and ensure that the beneficiary confirms the accuracy of the information after receiving it.

5. Certification, presentation, negotiation

After receiving the letter of credit, the beneficiary should review it against the sales contract and the Uniform Customs and Practice for Documentary Letters of Credit. If any discrepancy is found, the issuer must be notified promptly to make corrections. After the review is correct, the exporter ships the goods according to the requirements of the letter of credit, prepares the corresponding documents, and then submits the bill of exchange and other documents to the bank with the right to negotiate for negotiation. After completing the negotiation, the negotiating bank becomes the bona fide holder of the bill of exchange.

6. Claims

After the negotiation is completed, the negotiating bank requests reimbursement from the issuing bank or designated paying bank based on the documents.

7. Reimbursement

After the issuing bank receives the bill of exchange and documents, if they verify that they are correct, the payment to the negotiating bank will be completed. If any discrepancy is found, the issuing bank must notify the negotiating bank of refusal within 5 working days.

8. Payment of redemption order

After fulfilling its repayment obligations, the issuing bank needs to present the documents to the issuer. After the issuer verifies that they are correct, it will decide whether to pay and obtain the transportation documents needed to pick up the goods. If the goods have arrived, the issuer can immediately pick up the goods from the carrier; if they have not yet arrived, they need to pay attention to the arrival date in order to pick up the goods in a timely manner.

Through the above steps, the collection and payment procedure of the letter of credit ensures the legitimate rights and interests of both importers and exporters and reduces the risks in commercial transactions. This process also adapts to the characteristics of different letter of credit types to ensure the flexibility and efficiency of various business operations.