If you buy or ship goods overseas, a letter of credit can provide some protection when ytrade business with an unknown party. A letter of credit is a letter from a bank guaranteeing payment from a buyer when certain conditions are met. For a seller or buyer dealing with an unknown party, a letter of credit can provides protection from non-payment of goods delivered or assurance of product delivery. For a seller and a beneficiary to a letter of credit, the instrument is negotiated, or exchanged for value, when you provide proof to the bank that the letter’s terms have been met.
Step 1
Initiate a contract with a buyer for a sale of goods. At this point, the buyer should provide you with a letter of credit. Request from the buyer that the letter of credit clearly state all terms that fulfill the letter’s promise to pay. The letter of credit must include a description of the documents that need to be provided to the bank to receive payment. This can ensure that at time of negotiation, the exchange of value for the documents presented occurs without any or minimal problems for both buyer or seller.
Step 2
Deliver goods according to contract terms. To ensure a smooth transaction, goods delivered to the buyer should be the same goods ordered.
Step 3
Present to the bank the necessary documents required by the letter of credit to transfer payment. Banks typically look for proof of delivery, such as a bill of lading. It’s possible that you may have to show additional documentation. The letter of credit should include details of any additional documents that need to be presented such as, insurance certificate, certificate of origin and notice of inspection.
Step 4
Receive payment from your bank. When all the necessary documents are presented, you, the seller, receive payment from your bank on the goods sold. Afterwards, your bank exchanges the documentation you provided with the buyer’s bank for payment.
Step 5
Provide documentation to buyer, so she can take delivery of the goods ordered. The documentation received by the buyer’s bank to issue payment to the seller’s bank is presented to the buyer so that she can reimburse her bank. Upon payment, the buyer uses the documentation to take delivery of the goods ordered.
Writer Bio
Eileen Rojas holds a bachelor's and master's degree in accounting from Florida International University. She has more than 10 years of combined experience in auditing, accounting, financial analysis and business writing.