1. What is a Letter of Credit (LC)?
A **Letter of Credit (LC)** is a financial guarantee issued by a buyer's bank on behalf of the buyer (applicant). It guarantees that payment will be made to the seller (beneficiary) once the seller presents specific complying documents matching the strict conditions of the LC.
LCs are one of the most secure mechanisms for global trade, particularly in the commodities and metal scrap industries where parties may have limited historical trust.
2. Step-by-Step Workflow: How it Works
- Contract Agreement: Buyer and seller agree on a transaction and specify a Letter of Credit as the payment method.
- LC Issuance: The buyer asks their bank (the Issuing Bank) to open a Letter of Credit in favor of the seller.
- Verification & Dispatch: The issuing bank routes the LC to the seller's bank (the Advising Bank) which validates and delivers it to the seller.
- Shipping: The seller ships the goods and collects all requested shipment documents (Bill of Lading, Invoice, etc.).
- Verification & Payment: The seller presents the documents to their bank. If compliant, the banks transfer payment to the seller.
3. Parties Involved
- Applicant (Buyer): The buyer who requests the bank to issue the LC.
- Beneficiary (Seller): The seller who receives payment once complying documents are presented.
- Issuing Bank: The buyer's bank that issues the LC and guarantees payment.
- Advising Bank: The seller's bank that advises/authenticates the LC to the seller.
4. Common Documents Required
To receive payment, the seller must present these standard shipping and commercial documents:
- Commercial Invoice
- Bill of Lading / Airway Bill
- Packing List
- Certificate of Origin
- Insurance Certificate (for CIF deals)
5. Important Precautions
Critical Compliance Reminder:
Banks deal in **documents**, not the actual goods themselves. A minor discrepancy (e.g., spelling errors, conflicting dates) will cause the bank to reject the documents and delay payment. Verify terms and match every character across all documents before submission.
