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This video outlines the workflow of a Sight Letter of Credit which involves the Importer (Applicant), Issuing Bank, Advising Bank and Exporter (Beneficiary)
Documentary Credit also known as Letter of Credit – comprises of Sight term and Usance term. The video above specifically looks at How a Sight Letter of Credit works in International Trade.
What is a Letter of Credit ?
Letter of Credit (LC) is an undertaking of payment given by the Importer’s Bank to the Exporter for a specified sum provided the Exporter ships out the goods and present the required compliant documents by a predetermined deadline. Hence Letter of Credit is a tool used to reduce the risk of non-payment. Letter of Credit is governed by a set of guidelines called the Uniform Customs and Practice for Documentary Credits (UCP 600), which is issued by the International Chamber of Commerce.
In the video linked above, I talk about How a Sight Letter of Credit works
So What is a Sight Letter of Credit ?
A Sight Letter of Credit is a Letter of Credit that demands payment on the submission of the required documents. The Bank reviews the documents submitted and pays the beneficiary if the documents meet the conditions of the Letter of Credit
Summary of How a Sight Letter of Credit works
- Both Exporter & Importer entered into a contract and whereby they agreed that the method of payment is by Sight Letter of Credit .
- The Importer will apply for the LC from the Issuing Bank.
- The Issuing Bank will issue for the LC and forward it to the Advising Bank
- Advising Bank authenthicates and advices the LC to the Beneficiary.
- So, what is a LC? A LC is an undertaking of payment given by the Importer’s Bank to the Exporter for a specified sum provided that the Exporter ships out the goods and presents the required compliant documents by a predetermined deadline.So once the Exporter has received the LC, the Exporter will check the LC against the Sales Contract.
- Once both of the documents match up, the Exporter will ship out the goods over to the Importer.
- After shipment of the goods, the Exporter will prepare the trade documents and ensure the documents comply with the terms of the LC. the Exporter will submit the documents to the Nominated Bank for negotiation.
- The Advising bank which is the Nominated Bank will examine the documents to check that it is 100% compliant with the terms of the LC.
- If the documents are 100% compliant with the LC, the Advising Bank will subsequently send the documents over with a cover letter to the Issuing Bank.
- The Issuing Bank will examine that the documents are 100 % compliant and make payment direct to the Nominated Bank. Nominated Bank will make payment to the Exporter.
- Meantime the Issuing Bank will inform the Importer that the documents have arrived and that the Issuing Bank have checked to ensure that the documents are ok. Therefore the Issuing Bank will subsequently demand for the Importer to make payment and the Importer will have to pay the Issuing Bank in exchange for the documents.
- Once the Importer has paid the Issuing Bank, the Issuing Bank will release the documents to the Importer so that the Importer will be able to take possession of the goods when the goods have arrived at the port.