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.

The article is based on laws applicable at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable laws and the specific cases that the reader may wish to apply may have changed. Therefore, the article is for referencing only.


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