Related procedures for letter of credit settlement
(1) The applicant fills in the letter of credit application form according to the contract and pays a deposit or provides other guarantees, and asks the issuing bank to issue the letter of credit.
(2) The issuing bank issues a letter of credit to the beneficiary based on the content of the application form and sends it to the notifying bank in the exporter’s location.
(3) After the notifying bank verifies that the seal is correct, it will hand over the letter of credit to the beneficiary.
(4) After the beneficiary reviews the content of the letter of credit and confirms that it is consistent with the contract provisions, it will ship the goods, prepare documents and issue a bill of exchange in accordance with the provisions of the letter of credit, and send it to the negotiating bank for negotiation within the validity period of the letter of credit.
(5) After the negotiating bank verifies the documents according to the terms of the letter of credit and finds that they are correct, it will advance the payment to the beneficiary.
(6) The negotiating bank sends the bill of exchange and shipping documents to the issuing bank or its specified paying bank for reimbursement.
(7) After the issuing bank verifies that the documents are correct, it will pay the negotiating bank.
(8) The issuing bank notifies the issuer to pay the bill.
Risks of using letters of credit
1) Importers do not issue letters of credit in accordance with the contract
The terms of a letter of credit should be strictly consistent with the sales contract, but in reality, due to various reasons, the importer does not issue the letter of credit in accordance with the contract, making it difficult to execute the contract or causing the exporter to suffer additional losses. The most common risks are: the importer does not issue the letter of credit on time or does not issue the letter of credit at all (such as in the case of market changes and strict foreign exchange and import controls); the importer adds some additional terms in the letter of credit that are beneficial to it (such as unilaterally increasing the insurance type, amount, changing the port of destination, changing the packaging, etc.) to achieve the purpose of changing the contract; the importer makes many restrictive provisions in the letter of credit, etc.
2) Importers deliberately set up obstacles
Importers often take advantage of the principle of “strict consistency” in letters of credit and deliberately add some difficult-to-perform conditions to the letter of credit, or set some traps, such as uncertain provisions, typos, and contradictory terms. Typos in letters of credit are not minor flaws. For example, typos in the beneficiary’s name, address, shipping vessel, validity period, etc. will directly affect the documents required to be presented, and may become the reason for the issuing bank to refuse payment. For example, the letter of credit prohibits partial shipment but limits the delivery period for each batch, or allows presentation of combined transport bills of lading but prohibits transshipment, or requires overlapping types of insurance, etc., which are undoubtedly contradictory.
3) Importers forge letters of credit
Importers forge letters of credit, or steal blank letters of credit printed by other banks, or maliciously collude with bank employees of closed or bankrupt banks to issue letters of credit and send them to exporters. If the exporter fails to detect, the exporter will suffer losses in both goods and money.