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The letter of credit procedure involves applying for and obtaining a letter of credit, which is used to purchase goods from international sellers. The process involves evaluating the buyer’s credit rating, issuing the LC, and ensuring it is accepted as security for payment. The seller can then use the LC to obtain advances from their bank to manufacture and ship the order. The process protects the interests of all parties involved and must comply with commercial laws.
Letter of credit procedure is a term used to describe the process used to apply for and obtain a letter of credit, as well as how that letter of credit (LC) is used, especially as the means to purchase goods produced and sold by a seller. or exporter. Typically, this process will involve consideration of the buyer’s credit rating and resources by the issuing bank, working with the seller’s receiving bank, and generally ensuring that the letter of credit is accepted as security for payment and can serve as a basis for allowing the transaction to proceed. Many exporters require this type of financial instrument to be prepared as part of doing business with international buyers, who are generally designated as importers.
The initiation of a letter of credit procedure begins when the buyer makes a formal request for the LC to the bank or financial institution of his choice. As part of evaluating that application, the bank will closely examine the applicant’s financial circumstances, basing the decision on factors such as the total liquid assets in place, the applicant’s credit rating, and the degree of associated risk. with the approval of the application and the issuance of the letter of credit for a specific purchase or even a collection of purchases. Once the bank determines that the applicant is creditworthy, the LC is issued and can be sent to the seller’s bank.
From there, the seller can work with their bank to meet the terms found in the LC, such as advancing funds that can be used to manufacture and ship the order. This phase of the letter of credit procedure focuses on getting the completed order into the hands of the buyer. Upon confirmation of receipt of the order, the issuing bank releases the payment to the receiving bank, and the process is considered complete.
A workable letter of credit procedure helps protect the interests of all parties involved. Buyers do not pay for orders until they are delivered. At the same time, sellers can make use of the letter of credit to obtain advances from the receiving bank to manage the costs of manufacturing the goods associated with the order and to cover shipping costs, instead of using other resources to manage that part of the order fulfillment process. The royal letter of credit procedure must comply with the commercial laws that apply to the nation in which the buyer is located, as well as the country where the seller resides.
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