How to create an irrevocable Letter of Credit

Letter of Credit

Introduction

Creating an irrevocable letter of credit involves a series of steps and requires coordination between the buyer (applicant), the seller (beneficiary), and the issuing bank. Here's a general overview of how to create an irrevocable letter of credit:

1. Agreement between Buyer and Seller:

Before initiating the process, the buyer and seller should reach a mutual agreement on using an irrevocable letter of credit as the method of payment for the international trade transaction.

2. Selection of Banks:

The buyer needs to select a bank to issue the irrevocable letter of credit. This bank is referred to as the issuing bank. The seller may also choose to involve their bank, known as the advising or confirming bank, for added security.

3. Application by the Buyer:

The buyer applies for the irrevocable letter of credit by submitting a written request to the issuing bank. The application should include details such as the amount of the letter of credit, the beneficiary (seller), expiry date, and any specific terms and conditions.

4. Issuance of the Irrevocable Letter of Credit:

Upon approval of the application, the issuing bank issues the irrevocable letter of credit. The letter of credit should clearly state that it is irrevocable and cannot be modified or canceled without the consent of all parties involved.

5. Terms and Conditions:

The irrevocable letter of credit includes specific terms and conditions that the seller must meet to receive payment. These may include the following:

• Amount: The agreed-upon amount for the transaction.

• Expiry Date: The date by which the required documents must be presented for payment.

• Shipping Documents: The list of documents the seller must provide, such as the bill of lading, invoice, packing list, and others.

• Incoterms: The agreed-upon international commercial terms that define the responsibilities of the buyer and seller in terms of shipping and delivery.

6. Advising the Letter of Credit (Optional):

If the seller chooses to involve a confirming bank, the issuing bank sends the letter of credit to the confirming bank for confirmation. The confirming bank adds its confirmation, further assuring the seller of payment.

7. Shipment and Presentation of Documents:

The seller ships the goods and prepares the required documents in accordance with the terms of the letter of credit. It is crucial for the seller to comply precisely with the specified conditions.

8. Presentation to the Issuing Bank:

The seller presents the required documents to the issuing bank within the specified time frame. The bank examines the documents to ensure they conform to the terms of the letter of credit.

9. Payment to the Seller:

If the documents comply with the terms of the letter of credit, the issuing bank makes the agreed-upon payment to the seller.

10. Closure of the Letter of Credit:

Once the payment is made, the letter of credit is considered fulfilled, and the transaction is completed.

Conclusion

It's important to note that the specific procedures and documents required may vary, and parties involved should carefully review and understand the terms outlined in the irrevocable letter of credit. Additionally, seeking advice from trade finance experts or legal professionals familiar with international trade transactions is recommended to ensure compliance with applicable laws and regulations.