Letter of Credit • An order is sent to the exporter. It is agreed that payment will be by letter of credit (L/C) • Importer sends L/C application to his bank, the issuing bank • Issuing bank (after doing a credit check to determine if importer is creditworthy) opens L/C and requests that a bank in exporter’s country (called the advising bank) advise the exporter of the L/C • Advising bank advises exporter of L/C in the exporter’s favour • The exporter delivers the goods to the point of departure. The freight-forwarder prepares the necessary documentation. These documents represent title to the goods, including the bill of lading • Export documents of title (invoices, bill of lading, insurance certificate etc.) are sent by the exporter to the advising bank. If the exporter has agreed a credit period with the importer then a time draft is attached to the documents. If no credit period is agreed, this document is a sight draft, i.e. a draft payable immediately • Advising bank sends documents to the issuing bank • Either the importer pays immediately and is given the documents of title by the issuing bank (‘documents against payment’) or if there is a credit period involved, the issuing bank accepts the draft for payment at maturity • Importer obtains documents of title • Importer presents the documents to customs to obtain release of the goods • Issuing bank sends payment to the negotiating bank (usually the same bank as the advising bank) that is authorised to make payment to the exporter on behalf of the issuing bank.
Documentary Collection • The importer (buyer) and exporter (seller) agree on the terms of the sale, shipping dates, etc and that payment will be made on a documentary collection basis. Goods are ordered • The exporter, through a freight-forwarder, delivers the goods to the point of departure. The freight-forwarder prepares the necessary documentation based on instructions received from the exporter. These documents represent title to the goods, including the bill of lading • Export documents of title and instructions are delivered to the remitting bank (exporter’s bank in exporter’s country) • Following the instructions of the exporter, the remitting bank processes the documents and forwards them to the collecting bank (bank in the importer’s country) with a cover letter detailing the delivery/payment instructions • The collecting bank, on receipt of documents, contacts the importer and requests payments or acceptance of the trade draft • After payment or acceptance of the draft, documents are released to the importer by the collecting bank • The collecting bank remits funds to the remitting bank or advises that the draft has been accepted • The importer presents the documents to customs to obtain release of the goods • On receipt of good funds, the remitting bank credits the exporter’s account