The LC Process Step-by-Step
The lifecycle of a Letter of Credit involves eight key steps across four parties. Study the process flow diagram carefully.
Step 1: Sales Contract
The buyer and seller agree on trade terms, including that payment will be made by LC. They specify the LC amount, currency, expiry date, port of loading/discharge, and required documents.
Step 2: LC Application
The buyer submits an LC application to their bank (the issuing bank), providing all trade details, document requirements, and payment terms.
Step 3: LC Issuance
The issuing bank evaluates the buyer's creditworthiness and issues the LC, transmitting it via
SWIFT MT700 to the advising bank in the seller's country.
Step 4: LC Advising
The advising bank authenticates the LC and notifies the beneficiary (seller). At this stage, the beneficiary reviews all terms carefully before proceeding with production/shipment.
Step 5: Shipment & Document Collection
The seller ships the goods and collects all required documents:
- Commercial Invoice
- Bill of Lading (or Air Waybill)
- Packing List
- Certificate of Origin
- Insurance Certificate (if CIF/CIP terms)
- Inspection Certificate (if required)
Step 6: Document Presentation
The seller presents the documents to the advising/nominated bank within the LC's presentation period (typically 21 days from shipment, not exceeding the LC expiry).
Step 7: Document Examination & Forwarding
The advising bank examines documents for compliance (5 banking days maximum under UCP 600 Article 14b). If documents are compliant, they are forwarded to the issuing bank.
Step 8: Payment
The issuing bank examines the documents. If compliant, it:
- Releases payment to the advising bank (who pays the beneficiary)
- Delivers documents to the buyer (who uses them to claim the goods)