1. Negotiation of Terms: The buyer (importer) and seller (exporter) negotiate the terms of the sale, including price, quantity, quality, delivery terms, and payment method. The LC terms should be agreed upon during this negotiation.
2. Opening the Letter of Credit: Once the terms are agreed upon, the buyer applies to their bank (the issuing bank) to open an LC in favor of the seller. The LC specifies the details of the transaction, such as the amount, shipping documents required, expiry date, and beneficiary (seller).
3. Issuing Bank’s Responsibility: The issuing bank, after verifying the buyer’s creditworthiness and authenticity of the transaction, issues the LC to the seller or the seller’s bank (the advising bank).
4. Advising the Letter of Credit: The advising bank notifies the seller of the LC’s existence and terms. The seller confirms the terms and conditions of the LC and may request amendments if necessary.
5. Shipment of Goods: The seller ships the goods to the buyer according to the terms specified in the LC, ensuring that all required documents are prepared as per the LC requirements. These documents typically include the commercial invoice, bill of lading, packing list, certificate of origin, and any other documents specified in the LC.
6. Presentation of Documents: The seller presents the required shipping documents to the negotiating bank (which may be the advising bank or another bank designated by the seller) for payment or acceptance. The documents must strictly conform to the terms and conditions of the LC.
7. Examination of Documents: The negotiating bank examines the documents to ensure they comply with the LC terms. If everything is in order, the bank forwards the documents to the issuing bank.
8. Payment or Acceptance: The issuing bank examines the documents to ensure they comply with the terms of the LC. If the documents are compliant, the issuing bank makes payment to the negotiating bank and releases the documents to the buyer, allowing them to take possession of the goods. Alternatively, if the LC allows for acceptance, the issuing bank accepts the documents and forwards them to the buyer for payment at a later date.
9. Discrepancies: If there are discrepancies in the documents, the issuing bank may reject them, and the seller must rectify the discrepancies or negotiate with the buyer for acceptance of the documents.
10. Settlement: The buyer settles payment with the issuing bank according to the terms of the LC, either immediately upon receipt of the documents or at a later date if the LC allows for acceptance.

By following this procedure, both the buyer and the seller mitigate risks associated with international trade transactions, ensuring that payment is made only when the seller meets the agreed-upon conditions.