Payment Execution in a Letter-of-Credit Transaction
In an LC arrangement, the payment release hinges upon fulfilling specific conditions outlined by the buyer through the issuing bank or third-party financier. These conditions are meticulously detailed in the letter of credit and vary depending on the nature of the transaction. For instance, in international trade deals, the seller might be required to deliver goods to a designated port or shipping facility.
Upon completing the delivery, the seller obtains documents that verify the shipment. These documents, serving as proof of compliance with the letter of credit’s terms, are then presented to the issuing financial institution. The issuing bank’s role is to review these documents before releasing the payment.
Since the issuing bank mainly focuses on the fulfilment of terms rather than the quality of goods, buyers can incorporate inspection criteria into the deal. This ensures that an independent party verifies the shipment’s quality, adding an extra layer of security to the transaction.