Currently, the Letter of Credit (L/C) method is a popular tool in international payment activities, ensuring maximum convenience of both sellers and buyers.
1. The typical L/C payment process
- The two parties sign commercial contracts.
- The buyer shall request the bank to open the L/C to the beneficiary who is the seller.
- The L/C open bank opens the L/C at the buyer’s request and transfers the L/C to the notified bank to inform the seller that the letter of credit has been opened.
- The bank notifies L/C of the notice and transfers the original L/C to the seller.
- The seller considers the L/C based on the contract to offer to amend, supplement, adjust or accept delivery.
- The seller makes a set of payment documents after delivery and sends it to the bank to notify them to be paid.
- The bank announces the transfer of the set of documents to the bank opening L/C.
- The Bank opening L/C checks a set of documents. If the documents are suitable for L/C, then proceed to pay the notified bank. If the documents do not match the L/C, refuse to pay and return the documents.
- The bank notifies the credited L/C and notifies the seller.
- The Bank opening L/C deducts the account and reports the debt to the buyer.
- The buyer considers accepting to pay the Bank opening L/C.
- The Bank opening L/C gives the set of documents to the buyer to receive the goods.
2. Notable points in the L/C payment process
- When opening L/C, the buyer must deposit an amount at the bank (up to 100% of the L/C value).
- L/C is not an absolutely safe payment method because banks only work on documents, not the quality of goods.
- The set of documents requesting L/C payment is agreed upon by the parties. The seller must provide all documents and must be in accordance with the L/C to be paid. Common types of documents:
- Bill of Lading – B/L (Bill of Lading);
- Invoice;
- Packing List;
- Certificate of Origin;
- Insurance Certificate;
- Shipping Documents;
- Phytosanitary Certificate;
- Fumigation Certificate;
- Other documents.
3. The Bank’s refusal to pay during document inspection if errors are found in the L/C
This case can be solved as follows:
- The seller verbally commits to the bank for payment. This can only be done if there is trust between the bank and the seller.
- The seller writes a letter committing to compensation.
- The seller of electricity to the issuing bank for payment permission.
- The seller switched to the collection method.
