Generally speaking, a letter of credit means that the buyer and the seller reach an agreement on the terms of the transaction in advance, such as name, quantity, quality standard, price and delivery time. Then the buyer finds a bank (usually the buyer's bank or a bank with a certain guarantee) as a "middleman" and submits these trading conditions to the bank, which will issue documents as the basis for the transaction between the buyer and the seller.

The responsibility of the bank as an intermediary is to supervise the trading behavior. The seller prepares the goods to be shipped according to the documents, and then delivers the full set of documents representing the goods to the bank. After the bank verifies that the documents are correct, it will pay the payment directly.

Extended data:

The most basic letter of credit generally has four sides:

1. importer: the applicant is responsible for applying for opening a letter of credit with his own bank.

2. The importer's bank is responsible for opening letters of credit, examining documents and paying funds, and is called the L/C issuing bank.

The exporter is responsible for the shipment according to the letter of credit, and the payment guaranteed by the letter of credit is called the beneficiary of the letter of credit.

4. The exporter's bank is responsible for receiving the letter of credit, handing over the documents and contacting the issuing bank, which is called the advising bank.

In addition, the bank that is ultimately responsible for the transfer is called the reimbursing bank of the letter of credit, which is generally the issuing bank; It can also be paid in advance by another bank and charged a small fee, which is called the negotiating bank of the letter of credit, usually the advising bank.

Baidu encyclopedia-letter of credit