Letters of credit give you a high level of assurance that you will be paid for the goods you export. Let’s follow 7 steps given below to know the process of letter of credit.
What is Letter of Credit?
A letter of credit is a certificate that your foreign buyer receives from a bank. If, for any reason, the client is unable to pay for the products that you simply export, a letter of credit obligates your buyer's bank to pay you on the buyer's behalf. In alternative words, if your buyer has a letter of credit covering a cargo, a bank has secure that you simply can receive payment for that cargo.
However will a Letter of Credit work?
Step 1: You and your foreign buyer agree during a contract that you will simply export goods to the buyer for a particular price. You ask your buyer to get a letter of credit, which is able to guarantee that you simply receive payment for your exports.
Step 2: Your foreign buyer applies for a Letter of Credit Services through a bank that assesses the buyer's credit risk. The bank approves a letter of credit to the buyer if the bank approves the buyer's credit risk.
Step 3: Now your bank assesses the buyer's letter of credit and forwards it to you.
Step 4: You export the purchased goods or services to the buyer, and you produce documents showing that you simply have sent the goods or services to the buyer as originally agreed in the bond. After that, you submit the documents to your bank as proof that you have provided the products or services to your buyer.
Step 5: Your bank sends the shipping documents to your buyer's bank and waits for your buyer's bank to pay.
Step 6: Your buyer's bank receives the documents, removes cash from the buyer's account therein bank, and sends the cash to your bank.
Finally: Your bank receives the certain cash from your buyer's bank and deposits the funds into your account.
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