Rohitashva Singhvi
Here is an explanation of a LC draft shown before with detailed understanding:
Let’s say that a buyer in the United States wants to purchase goods from a seller in China. The buyer and seller agree to use a Letter of Credit to ensure payment.
Step 1: The buyer applies for a Letter of Credit from their bank, the issuing bank. The issuing bank provides the buyer with a Letter of Credit that specifies the terms of the transaction, such as the amount of the payment, the shipment date, and the required documents.
Step 2: The issuing bank sends the Letter of Credit to the seller’s bank, the advising bank. The advising bank checks the Letter of Credit to ensure that it is valid and that the terms of the transaction are acceptable to the seller.
Step 3: The seller ships the goods to the buyer and provides the required documents to the advising bank, such as a bill of lading and an invoice.
Step 4: The advising bank checks the documents to ensure that they comply with the terms of the Letter of Credit. If the documents are in order, the advising bank sends the documents to the issuing bank for payment.
Step 5: The issuing bank reviews the documents and if they are in compliance, it pays the seller the agreed amount, either directly or through the seller’s bank.
Step 6: The issuing bank then sends the LC draft, also known as the LC bill of exchange, to the buyer for payment. The LC draft is a document that orders the buyer to pay the amount specified in the Letter of Credit to the issuing bank or the seller’s bank. The LC draft can be traded or sold to a third party, such as a bank or a factoring company, for cash at a discount.
Step 7: The buyer reviews the LC draft and if the documents are in order, pays the amount specified to the issuing bank or the seller’s bank. Once payment is received, the transaction is complete.
In summary, the LC draft is a document that is used in international trade transactions to ensure payment to the seller. It is a negotiable instrument that can be traded or sold to third parties for cash at a discount. The LC draft is sent to the buyer for payment once the documents are in compliance with the terms of the Letter of Credit.