Introduction

A letter of credit is the most important document in international trade. It forms the basis of most of the transactions in world trade. A letter of credit is a document of authority for guaranteeing payment by the importer to the exporter by the banking channel. The importer’s bank undertakes the guarantee and if he fails to pay, the bank that has issued a letter of credit will be liable to pay to the exporter.

Here are the 8 major parties involved in the letter of credit process…

  • The applicant of letter of credit: The applicant is the main party of the letter of credit. He is the one who opens a letter of credit. Letter of credit is opened as per his instruction and necessary payment is arranged to open the letter of credit with his bank. The applicant arranges to open a letter of credit with his bank as per the terms and conditions of the purchase order and business contact between buyer and seller. 
  • Letter of credit issuing bank: This bank is the letter of credit provider and is another major party involved in the letter of credit process. The issuing bank is the bank that opens the letter of credit. A letter of credit is created by the issuing bank who is responsible for paying the amount on receipt of documents from the supplier of goods.
  • Beneficiary party: Beneficiary of letter of credit gets the benefit under the letter of credit. The beneficiary is the party under the letter of credit who receives the amount under the letter of credit. The letter is also opened in the beneficiary’s favor. He submits all required documents to the bank.
  • Advising bank: Advising bank is also the main party in the letter of the credit process. It is that part of the letter of credit which takes responsibility to communicate with necessary parties under the letter of credit and other required authorities. The advising bank sends documents under a letter of credit to the opening bank.
  • Confirming bank: Confirming the bank is one of the other parties involved in the letter of credit and is a bank guarantee provider. Confirming bank as a party of letter of credit confirms and guarantees the responsibility of payment under credit.
  • Negotiating bank: Negotiating bank is the bank that negotiates documents delivered to the opening bank by the beneficiary of the letter of the credit process. This bank verifies those documents and confirms the terms and conditions under the letter of credit on behalf of the beneficiary to avoid disturbances in the further process.
  • Reimbursing bank: Reimbursing the bank is one of the parties involved in a letter of credit. It is the party authorized to honor the reimbursement claim of payment and acceptance.
  • Second beneficiary: The second beneficiary represents the first beneficiary when they are absent. As per the terms, the credits are transferable to the original beneficiary though.