Detailed explanation of letter of credit payment terms and procedures in import and export trade

In international trade, Letter of Credit (L/C), as a written document issued by a bank with a conditional commitment to pay, is widely used in import and export contracts. This article aims to introduce the payment terms of letter of credit and its specific payment process in detail.

Letter of Credit Payment Terms

L/C payment terms at sight

When the import and export contract stipulates that payment shall be made against a letter of credit, the buyer and seller shall clearly stipulate details such as the date of issuance of the letter of credit, type of letter of credit, payment time, amount, validity period and expiry location. For example:

• “The buyer shall open and deliver a negotiable letter of credit at sight to the seller through a bank recognized by the seller xx days before the shipment month, and shall be valid until the 15th day after the shipment date for negotiation in China.”
• “The buyer shall issue an irrevocable deed in favor of the seller (confirmed by xx bank) through the bank before xx, xx, year xx (or within xx days after receiving the seller’s stocking notice or within xx days after signing the contract). (Negotiable) Letter of Credit payable at sight for the entire invoice amount. The validity period of the Letter of Credit is extended to 15 days after the shipment date in China. ”

Usance letter of credit payment terms

For usance letters of credit, the usual terms are as follows:

• “The buyer shall issue an irrevocable (transferable) shipment date xx in favor of the seller through xx bank before xx, month xx, year xx (or within xx days after receiving the seller’s notice or within xx days after signing the contract). Bank acceptance letter of credit is payable within 15 days. The validity period of the letter of credit is extended to 15 days after the above-mentioned shipment date. ”

Revolving Letter of Credit Payment Terms

Revolving letters of credit are suitable for continuous supply:

• “The buyer shall open and deliver to the seller a sight negotiation revolving letter of credit through a bank accepted by the seller xx days before the first shipment month. The letter of credit shall be automatically available to xx ( amount) and remain valid until June 15, 20xx for negotiation in Beijing.”

L/C payment process

Certificate issuance stage

First, the buyer submits a L/C issuance application to the bank and pays a certain deposit or provides a guarantee as required by the bank. The bank will review the applicant’s qualifications, transaction background and the reasonableness of various terms in the application.

Issue letter of credit

Once the review is approved and the deposit is in place, the bank will issue a letter of credit in accordance with the contents of the application and pass it to the seller through the advising bank.

Negotiation stage

After the seller confirms that the contents of the letter of credit are correct, he will ship the goods as agreed and prepare the required documents to apply for negotiation with the negotiating bank. After the negotiation bank verifies that it is correct, it will advance the payment to the seller and send the relevant bills to the issuing bank to request reimbursement.

Payment and Settlement

The issuing bank will verify the documents after receiving them and make payment to the negotiating bank after confirming that they are correct. Subsequently, the issuing bank notifies the buyer to pay the redemption order and completes the entire transaction process.

Through the setting of the above terms and the execution of the process, the letter of credit mechanism effectively protects the interests of both parties in international trade and reduces transaction risks.