Business activities across borders are done through letter of credit. Letter of credit is an instrument issued in the favor of the seller by the buyer bank assuring that payment will be made after certain timer frame depending upon the terms and conditions agreed, it could be either at sight, 30 days from the Bill of Lading or 120 days from the date of bill of lading. Now when the seller receives the letter of credit through bank, seller prepares documents and presents the same to the bank.
The most important element in the same is the bill of exchange which is used to negotiate a letter of credit. Seller discounts that bill of exchange with the bank and gets money. Discounting bill terminology is used for this purpose. Now it is seller’s bank responsibility to send documents and bill of exchange to buyer’s bank for onward forwarding to the buyer for the acceptance and the buyer finally, accepts bill of exchange drawn by the seller on buyer’s bank because he has opened that LC. Buyers bank than get that signed bill of exchange from the buyer as guarantee and release payment to the sellers bank and waits for the time span will buyer will pay the bank against that bill of exchange.
