Letters of credit are forms of documentary credit that connects three main participants of international trade; the importer, the exporter and the banks.
The originator of the letter of credit is involved in two different links:
A link of sale that runs directly between the originator of the letter of credit and the beneficiary.
Two, it functions as a link between the importer and the banks. The importer convenes with the issuing bank to create a letter of credit in order to pay the exporter and which is subject to the terms and conditions of the agreement.
There is always at least one kind of financial institution that functions as the mediator for the payment of the letter of credit. This bank is also the one that coordinates with the originator on the documentary credit. the issuing bank is not the only one involved, there may be other banks that do small or big functions depending on the type or letter of credit.
The Beneficiary (Seller): The exporter who is in favor of issuing the letter of credit. He or she has the right to demand payment after meeting the terms and / or conditions set out therein.
The beneficiary is the person that has to deliver the goods to the port of entry and who would receive payment for it if the transaction goes according to what the letter of credit establishes.
There are many types of banks involved in letters of credit:
Issuing Bank: Gives the letter of credit to the beneficiary on the order of the importer. Acquired responsibility for the payer to notify the seller and pay through our correspondent bank once it has met the terms and conditions set out in the letter of credit.
Confirming Bank: it assumes the obligation against the recipient to make the payments for the amount of the letter of credit or whether it has received no reimbursement from the issuing bank. A confirmed letter of credit carries a commitment to pay against the beneficiary of two banks: the issuer and confirmer.
Notifying bank: whenever the bank has no branch in the country, the beneficiary uses the services of a correspondent bank to notify the recipient of the opening of the letter of credit. The notifying bank may act as a simple to inform the bank without acquiring any obligation to the beneficiary, but is used regularly confirming to the correspondent bank. By doing so, it acquires the responsibility of paying to the beneficiary once he or she has fulfilled the terms and conditions in the letter of credit.
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