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Written by Editor
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Tuesday, 15 November 2005 |
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Page 2 of 3
Let us imagine that a business called Acme Electronics from time to time imports computers from a business called Beijing Computers, which banks with the Shanghai Business Bank. Acme holds an account at Commonwealth Financial. Acme wants to buy £500,000 worth of merchandise from Beijing Computers, who agree to sell the goods and give Acme 60 days to pay for them, on the condition that they are provided with a 90-day LC for the full amount. The steps to get the letter of credit would be as follows:
* Acme goes to Commonwealth Financial and requests a £500,000 letter of credit, with Beijing Computers as the beneficiary.
* Commonwealth Financial can issue an LC either on approval of a standard loan underwriting process, or by Acme funding it directly with a deposit of £500,000 plus fees between 1% and 8%.
* Commonwealth Financial sends a copy of the LC to Shanghai Business Bank, which notifies Beijing Computers that payment is ready and they can ship the merchandise Acme ordered with full assurance of payment.
* On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, Commonwealth Financial transfers the £500,000 to Shanghai Business Bank, which then credits the account of Beijing Computers by that amount.
* Note that banks deal only with documents under the letter of credit and not the underlying transaction.
If the stipulated documents are presented and the terms and conditions of the letter of credit are met, then the issuing bank is obliged to pay under the letter of credit, even if the underlying transaction is not fulfilled.
Also the bank is not required to pay if the stipulated documents are not presented or the terms and conditions of the letter of credit are not met, even if the underlying transaction was fulfilled.
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