Question

Create a flow chart of a letter of credit transaction. There will be a buyer, seller, issuing bank, correspondent bank, foreign freight forwarder, customhouse broker in the buyer’s country and the shipper (air or water). The seller starts by making an offer to a buyer who either accepts the term of sale or asks for different terms. The buyer then goes to the issuing bank and so forth.

Answer 1

1. The buyer agrees to purchase goods from the seller. There is a mutual agreement to use a letter of credit as the method of payment.

2. The buyer applies to his bank for a letter of credit by filling the bank's application form.

3. The issuing bank issues the actual letter of credit after approving the buyer's application and sends it to the seller.

4. The seller prepares the goods, and ships them through a freight forwarder who contracts with a shipper like Maersk to ship the goods.

5. The seller submits relevant documents to the correspondent bank who checks the documents for errors, if none are found then they are forwarded to the issuing bank.

6. The issuing bank checks the documents and informs the buyer to make payment.

7. The buyer makes payment in full plus bank charges to the issuing bank upon which the bank hands over the documents to him.

8. The buyer either himself or through his customhouse broker clears the shipment through the shipping lines using the given documents.

9.The issuing bank transfers the full payment to the correspondent bank who pays the seller after deducting it's fees.