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Letters of Credit Collection Procedures

"Steps involved in collecting an exporter's money when goods have been accepted"

 
  1. The exporter and foreign importer agree, as part of the export sales contract, to use, a 90-day irrevocable letter of credit as the method of payment for goods exported.
 

2. The foreign importer requests his bank to issue a letter of credit in favor of the exporter.

# This involves a formal application to the importer's bank and payment to the bank by the foreign importer of the sum involved or, by a satisfactory credit arrangement.

# The application, once signed and thereby accepted by the importer's bank, becomes a contract by which the importer agrees to reimburse his bank for all sums expended under the letter of credit.
 

3. The foreign bank prepares the letter of credit and mails it to its branch or correspondent bank in the city nearest to the exporter's place of business.

# Being irrevocable, it cannot be cancelled by the foreign bank that has issued it without the consent of the beneficiary.
 
 

 

 
 

4. The bank branch or correspondent bank in the exporter's country (called the advising bank) informs the exporter, by means of a written advice, the details of the letter of credit and the conditions of payment.

# If it had been a confirmed letter of credit, the exporter's bank would have added its name to the obligation, thereby guaranteeing payment.
 

5. As soon as the exporter has shipped the goods within the time limit, specified in the letter of credit and has observed all the other conditions.

# Such as shipping date, method of shipment, insurance coverage, etc., it prepares or draws in our example, a 90-day draft on the issuing bank (the foreign bank).

# The exporter then presents the draft, with the required shipping documents attached, to the bank in his own country that has advised the letter of credit.
 


6. The bank then checks very carefully that all the documents are present, including the required number of copies, that the conditions of the letter of credit have been scrupulously met and that the documents have been completed accurately.

# Be aware that any omissions or discrepancies in the documents may be grounds for the foreign bank to refuse payment to the Advising Bank in reimbursement of the funds paid to the exporter. Or the exporter's failure to meet any of the conditions set out in the L.C.

 

 

 
  7. Having satisfied itself as to the accuracy and completeness of the documentation, the exporter's bank then sends the draft, with the documents attached, to the foreign bank for payment, according to whether the letter of credit is for cash or acceptance.

8. In our example, because it involves 90 days' credit, it is sent for acceptance - and is known as an acceptance credit.

9. In the meantime, the goods are being shipped from the exporter's country.

10. The foreign bank, also having carefully checked that the documents are in order, pays the exporter's bank or, as in our example, accepts the 90-day draft.

11. The foreign bank then releases the documents to the foreign importer which is required to sign a receipt acknowledging not only that the importer has received them but also that ownership of the goods remains with the bank until payment for the goods has been made to the bank.

12. At the end of the 90 days, the foreign importer, pays the money owed for the goods to the foreign bank which then converts it into the required foreign currency and remits the proceeds to the exporter's bank to pay the exporter.

# If the letter of credit had been confirmed, the exporter would have received its money even though the foreign importer may have failed to pay the required funds to its bank.

 

 

 
Part 1/ 4
Get Paid for exporting.
No point selling if you are not getting your payment

 
Part 2/4
Bank's collection services are needed because the exporter does not trust the foreign importer

 
Part 3/4 <This Page
Letters of Credit Collection Procedures "steps involved in collecting an exporter's money"

 
Part 4/4
New  Internet eLC technology
 
 
 

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