Letter of credit operating procedures and reliability measurement standards

In order to ensure payment security in international trade, the International Chamber of Commerce has formulated the Uniform Customs and Practice for Documentary Letters of Credit, or UCP600, to standardize the use of letters of credit and provide a basis for dispute arbitration. A letter of credit is a form of payment guarantee provided by a bank. It involves multiple parties: the applicant (Applicant), the issuing bank (Opening/Issuing Bank), the advising/notifying bank (Advising/Notifying Bank), the beneficiary ( Beneficiary) and Paying/Drawee Bank.

Basic parties to the letter of credit

• Letter-issuing applicant: The importer is the initiator of the L/C transaction.
• Issuing bank: The bank that issues a letter of credit at the request of the applicant and is responsible for guaranteeing payment.
• Advising Bank: The bank that forwards the letter of credit to the exporter, usually only to verify the authenticity of the letter of credit.
• Beneficiary: The payee named in the letter of credit, usually the exporter.
• Paying bank: The paying bank specified on the letter of credit, which in most cases is the issuing bank.

In addition, a Negotiating Bank may also be involved, which is a bank that pays the exporter the payment in advance after the exporter submits the documents.

Operating procedures

1. The exporter will inform the importer of the bank account information.
2. The importer opens a letter of credit through its bank.
3. The domestic bank will notify the exporter after receiving the letter of credit.
4. The exporter prepares the goods and documents according to the requirements of the letter of credit and submits them to the domestic bank within the specified time.
5. After the domestic bank has reviewed the documents, they will be sent to the foreign issuing bank and await review by the issuing bank.
6. After verification, the issuing bank notifies the importer to pay and take away the documents.

The entire process takes approximately 2-3 weeks.

Reliability measures

A reliable letter of credit should meet the following conditions:

1. Issuance by a well-known large bank: Choose a large bank with a good reputation as the issuing bank to ensure that the bank can handle letter of credit affairs fairly and reasonably.
2. Documentary requirements are reasonable and feasible: The documents specified in the letter of credit should be easily accessible and practical.
3. No “soft clauses”: Avoid clauses that may invalidate the letter of credit or impose additional burdens on the exporter.

Understanding these basic concepts and operating procedures will help you make better use of letters of credit as a tool to ensure the safety and smooth progress of international trade.