Letter of Credit Issuance: A Six-Step Process
The process for opening a letter of credit (L/C) for power equipment procurement involves six steps: contract signing → L/C application → securing guarantees → bank issuance → seller notification → document review and confirmation.
Industry experts note that the procedure follows this sequence: applying to the bank after the contract is signed (submitting the application form and contract), securing guarantees (margin deposit or credit line), bank issuance (with the advising bank notifying the seller), and the seller reviewing and confirming the terms (ensuring compliance).
Key points include ensuring terms match the contract (product name, amount, validity period) and confirming issuance fees and margin requirements.
The Six-Step Process
- Step 1: Contract Signing – Signing the sales contract (specifying trade terms and L/C payment method);
- Step 2: L/C Application – Applying to the issuing bank (submitting the application form, contract, and business license);
- Step 3: Securing Guarantees – Arranging the margin deposit (percentage of the L/C amount) or credit line (approved by the bank);
- Step 4: Bank Issuance – The bank issues the L/C (based on application terms) and the advising bank forwards the notification;
- Step 5: Seller Notification – The advising bank notifies the seller (confirming the L/C has arrived);
- Step 6: Review and Confirmation – The seller reviews the L/C (ensuring terms match the contract) and prepares the goods upon confirmation.
Key Points for Issuance
First, consistency of terms.
The L/C terms must align with the contract (product name, amount, shipment period, validity period) to prevent discrepancies.
Second, securing guarantees.
The margin deposit or credit line must be finalized (subject to bank review) as a prerequisite for issuance.
Third, fee confirmation.
Issuance fees (calculated as a percentage of the amount) and the margin deposit ratio must be confirmed for cost accounting purposes.
Fourth, allow sufficient time.
Factor in the time required to issue the letter of credit (1–3 days) and coordinate it with the seller’s preparation of goods.
Pitfalls to Avoid
First, “inconsistent terms.”
If the terms of the letter of credit do not match the contract, the seller may reject it;
ensure terms are aligned. Second, “high security deposits.”
High deposit ratios tie up capital; negotiate credit limits instead.
Third, “misjudging timelines.”
Delays in issuing the letter of credit can postpone shipment;
allow adequate time.
Trends and Reminders
Letters of credit are moving toward “digitalization”: electronic letters of credit and online issuance (via internet banking) improve efficiency, and blockchain-based letters of credit are being piloted.
For buyers, the recommendation is to ensure “consistent terms, secured guarantees, and sufficient time.”
Proper issuance leads to smooth procurement.
