Letter of Credit Flow chart/ LC flow chart / Letter
of credit process / LC process
In this lesion,
we are looking to understand the export LC/ Local LC process in simple language.
Moreover, this discussion will be continuing in layman language which will help
anyone to understand LC process. Furthermore,
we are looking this as a Beneficiary.
There are FOUR
major steps in LC process and/or LC flow chart.
STEP -1 – ISSUE THE LC
In order to
issue the LC, below LC application and or LC swift draft need to verify
according to the sales contract with both parties (Applicant and Beneficiary);
Once below
verification is completed LC can be issued by applicant.
Key points to be considered when verifying a LC
·
Applicant Bank: – Usually, this Bank should be well
credit rated Bank (you may check Moody's, Fitch Ratings, and S&P
Global Ratings while taking your decision). If the Bank is not credit
rated Bank, and there is no any other option for the Applicant to issue the LC,
you may request the applicant to issue the LC by using intermediary Bank. Then
LC can be further advised by Beneficiary’s Bank. You may include a confirmation
if you need more guarantee for the payment.
·
Field 50: Name of the Applicant: – Name of applicant should be the same
with Sales contract and legal registration/ trade license/Commercial license.
·
Filed 31D: LC expiry date and Filed 44C:
Last date of shipment: -
Last date of shipment will depend on the shipment schedule / delivery date and
consider that when you are confirming last date of delivery. In addition, you
have to keep 21 days gap for the expiry date of LC. These 21 days is globally
acceptable period for last date of delivery and LC expiry date. However, this
can be changed according to the situations. Why we keep 21 days is to arrange
the documents may take some time and it is required some time to submit to Bank
·
Shipment from and Shipment to: - This is crucial when arranging Bill of
Lading, and therefore, Correct Port of Loading / place of receipt and Port of
discharge / final place of delivery should be identified.
·
Field 45A: Description of Goods: - Material discerption should be mention
in general and Incoterms should be identified according to the sales contract. As
per my experience, there are some instances where INCOTERM can be mentioned in
wrongly in most of the case, and that is not match with the shipping documents.
Therefore, we need to have extra care in this INCOTERM. According to the
incoterm LC documents can be changed.
Latest List of Incoterm
|
INCOTERM |
DISCERPTION |
|
EXW |
Ex Works (insert place of delivery) |
|
FCA |
Free Carrier (Insert named place of delivery) |
|
CPT
|
Carriage Paid to (insert place of destination) |
|
CIP |
Carriage and Insurance Paid To (insert place of
destination) |
|
DAP |
Delivered at Place (insert named place of destination) |
|
DPU |
Delivered at Place Unloaded (insert of place of
destination) |
|
DDP |
Delivered Duty Paid (Insert place of destination). |
|
FAS |
Free Alongside Ship (insert name of port of loading) |
|
FOB |
Free on Board (insert named port of loading) |
|
CFR |
Cost and Freight (insert named port of destination) |
|
CIF
|
Cost Insurance and Freight (insert named port of destination) |
·
Field
46A: Documents required:
- This is the most important part of the LC. As we need to arrange LC documents
according to this field 46A. And therefore, we need to closely monitor and ask
applicant to remove an unnecessary document to ensure only key documents are
included, (eg. Commercial Invoice, Bill of Lading/Air Way Bill or Delivery
Note, Packing list, Certificate of Origin etc)
·
Field
47A: additional conditions:
This is also need to verify carefully as any other all points can be included
here which may badly affect to the LC.
·
71B:
LC charges: Normal practice
for the LC charges is Applicant Bank charges are applicant’s account and Beneficiary’s
Bank charges are for Beneficiary’s Account. However, this can be change
according to the agreement with applicant and Beneficiary.
·
Field
48: Period for presentation: Usual practice for the period for presentation is 21 days from
delivery date / Bill of Lading date. However, this can be customized according
to the requirement of both parties. However, industrial norm is 21 days.
Under step two
we can confirm the LC draft after carefully verifying to applicant. Accordingly,
they can issue the LC. Once LC is advised by our Bank (beneficiary Bank,
advising Bank) we can confirm the LC to concern department of the Company.
STEP – 2 – DISPATCH / DELIVERY OF GOODS/
SHIPMENT
According to
the confirmation of Treasury/ Finance / Accounts, the concern division can arrange
the shipment/ delivery of goods/ consignment to the applicant as per the agreed
terms and conditions.
Prior to
dispatch the goods, LC documents should be completed.
Below are the key LC documents / what are the main LC
documents
1. Commercial Invoice
2. Bill of Lading, Air way Bill, Delivery
Note
3. Packing List
4. Certificate of Origin
All other
documents are depending on the types of goods, legal requirements, types of
business, Bank specific requirements, attestation requirements. However, above
4 documents are main LC documents in each LC.
Once LC
documents are completed, you can have a pre check of LC
documents with your advising Bank prior to presentation of LC documents,
this requirement is important if you have a doubt in the documents. However,
additional LC charges will be applied in that case.
When all
documents are completed, you can confirm the party who involve in business unit
to dispatch and /or sail the consignment/ goods.
STEP – 3 – DOCUMENTS PRESENTATION TO BANK
After doing
that you can prepare a Proper Cover letter along with Bill of exchange and
arrange company authorized signature as per the Bank mandate. And present the
LC documents within the presentation period.
STEP – 4 – NEGOTIATION/ BANK PAYMENT
Once LC
documents are presented to the Bank, it may take 3-5 working days to very the
documents by advising Bank and will forward the LC documents to Applicant Bank
for the approval,
According to
the verification of LC documents by applicants Bank, they are obligate to issue
the LC acceptance if the documents are clean and
beneficiary will receive the funds on time in the mentioned Bank account.
However, if the
LC documents are not clean and if there is any error within the documents, this
may lead for discrepancy and will not receive
the funds unless;
1. Recall the LC documents and correct the
mistake and re submit. This can be done within the LC presentation period. If the
period was elapsed this will not be an option.
2. Second option is to contact applicant
and ask them to accept the LC documents.
Points to Remember
1. Read each word in the LC swift and
related amendments carefully.
2. Use the highlighter and highlight all
important points in the LC swift i.e. date of expiry, last date of shipments,
presentation period, specific milestone dates if any, etc.
3. When there is an amendment to the LC,
cut down in the main swift itself and write it in the same place by using pencil.
4. Make sure to submit Original LC along
with LC documents.
5. Do an independence check before
presentation of LC documents to Bank.
6. Follow up with Bank after 5 working date
if they did not comeback with any feedback.
7. And don’t forget to record the transaction.
click below link to free download LC flow chart pdf.
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