The Birth Of A Letter Of Credit
The originator is one of course the first one. This person or company is the one requesting the credit to the bank and who will pay for the merchandise. Usually the originator or a letter of credit is an importer.
The Issuing bank would be the financial institution that supports the importer and extends the lines of credit for him or her. This bank will make the payments to the exporter based on the terms and conditions established in the letter of credit. This bank operates usually from the importer's country.
The Advising Bank is the correspondent bank that works from the exporter's country, advising the exporter or the beneficiary that the Letter of Credit has been opened to its favor.
The other important participant is of course the Credit Beneficiary. This would be the person or company that would receive the payments established in the letter of credit when and if the conditions given by the issuing bank are met.
There may also be a Confirming bank if the importer required it and if it is indicated in the letter of credit. This bank would work as a link between the issuing bank and the exporter and it may also take the responsibilities of the first one
Some the basic information any letter of credit should contain is: identification of time, the amount of the credit, and the signature of the policyholder.
A letter of credit has the following process:
The first step is the creation of the letter of credit. This step is taken by the importer and the exporter when they agree on the terms and conditions of the purchase.
The importer would then choose a bank, called the issuing bank, in order to make the payments to the exporter.
The exporter would then choose an advising bank that would be a correspondent to the issuer bank. The role of this bank is to inform whether the agreement was met based on the expectations of the exporter.
The confirming bank as the case may be, informs the seller about the existence of a credit.
The seller must go to the bank in which credit is available to submit any documentation. This is done in order to verify that the shipment was made pursuant to the terms and to request payment according to the specified deadline.
