Letter of Credit Process: A Seven-Step Closed Loop
The Letter of Credit (L/C) payment process for complete electrical component sets follows a seven-step closed-loop cycle: application for issuance → notification of issuance → goods preparation and shipment → document submission and negotiation → bank document review → payment or acceptance → receipt of funds.
Industry experts note that the process adheres to standard L/C practices (UCP 600): the buyer’s bank issues the L/C, the seller’s bank provides notification, documents (Bill of Lading, invoice, packing list) are submitted after shipment, and the bank reviews the documents for compliance before making payment.
The L/C is a common form of payment security in exports, where document compliance is critical (discrepancies can lead to deductions or refusal of payment).
The Seven-Step Process
- Step 1: Application for Issuance – The buyer applies to the issuing bank to open the L/C in accordance with contract terms.
- Step 2: Notification of Issuance – The advising bank notifies the seller (document review: ensuring terms match the contract).
- Step 3: Goods Preparation and Shipment – Goods are prepared and shipped according to L/C specifications (within shipment/submission deadlines).
- Step 4: Document Submission and Negotiation – After shipment, documents (Bill of Lading, invoice, packing list, Certificate of Origin) are submitted to the bank.
- Step 5: Bank Document Review – The bank reviews the documents for compliance with L/C terms (adhering to UCP 600 rules).
- Step 6: Payment or Acceptance – Payment is made upon document compliance (sight L/C) or acceptance is granted (deferred payment at maturity for usance L/C).
- Step 7: Receipt of Funds – The seller receives the payment, completing the process loop.
Key Points
First, reviewing the L/C terms is crucial.
Upon receipt of the Letter of Credit (LC), first review the terms to ensure they align with the contract (regarding product description, amount, and validity period);
request amendments if requirements are not met.
Second, ensure document compliance: documents must strictly match LC terms (product description, amount, and dates) to avoid discrepancies.
Third, manage timeframes: strictly monitor shipment and document presentation deadlines (within 21 days) to prevent late submission.
Fourth, select the right banks: consider the issuing bank’s creditworthiness (major banks are reliable) and ensure the advising bank is cooperative.
Pitfalls to Avoid
First, “soft clauses”: LCs containing soft clauses (giving the buyer unilateral control) should be identified and removed during review.
Second, “discrepancies”: non-compliant documents can lead to deductions or refusal of payment;
ensure strict document conformity.
Third, “late presentation”: exceeding the presentation deadline results in bank refusal of payment; manage timeframes carefully.
Trends and Reminders
LCs are moving towards digitalization: electronic LCs (eUCP) and blockchain-based LCs (utilizing smart contracts) enhance efficiency.
Exporters are advised to prioritize “prior review of terms, document compliance, and timeframe management.”
A smooth LC process ensures secure payment.
