How to Handle Letter of Credit

by Business Editor; Updated September 26, 2017

How to Handle Letter of Credit. Letters of credit are parts of agreements between two parties, a buyer and a seller. These are commonly used when a product is exported to another country. Government offices also rely on letters of credit from developers or other commercial parties. A letter of credit is basically to safeguard the interests of both the buyer and the seller; a letter of credit establishes a payment to be made by the buyer's bank to the seller if, and only if, certain documents are presented to that bank. Handling a letter of credit, like other abstract financial transactions, requires professionalism and attention to detail.

Step 1

Set up your terms with your buyer or seller upfront. Be clear about prices and expectations before you write up the letter of credit.

Step 2

When the letter is written up, contact your buyer or seller and go over specifically what documents will be needed for the bank to release payment. Any mistakes or misunderstandings later will cost somebody a lot of money.

Step 3

Double check with the bank on the exact requirements for the documentation. When you have a good understanding between you and the other party about what you both agree upon, make sure that this works for the bank. The bank may or may not check details, but they will insist on documentation that matches what they see in the letter of credit. The letter of credit should function as a rubric that spells out exactly what documents (shipping, banking, etc.) are needed for a release of payment to the seller.

Step 4

Agree on a method of sending the letter of credit between parties. You can use postal methods or an electronic system, but be clear. A lost letter of credit is a serious impediment to the transaction.

Step 5

Know who you are dealing with. All kinds of transactions go better if the parties have some information about each other. Don't go blindly into transactions with foreign parties. Just picking up the phone a few times can make the whole process flow much better.