What is an Import Letter of Credit?
An Import Letter of Credit (L/C) is a financial undertaking issued by an Issuing Bank on behalf of an importer, committing to pay the exporter a specified amount within a set timeframe, provided that the exporter presents a compliant set of shipping and commercial documents in accordance with the terms and conditions stipulated in the L/C. Import L/C are currently one of the most commonly used and secure payment methods in cross-border transactions.

Key Features and Benefits of Import L/C
Import L/Cs offer significant advantages to all parties involved—importers, exporters, and banks—especially in terms of security and credibility. Here are their defining features and benefits:

1. Key Features of Import Letters of Credit
To use an L/C effectively, it is essential to understand its fundamental characteristics:

- Parties involved typically include:

Applicant (the importer/buyer),
Beneficiary (the exporter/seller),
Issuing Bank (the importer's bank),
Advising Bank (usually the exporter's bank),
Negotiating Bank, Confirming Bank (if applicable), and
Reimbursing Bank (responsible for settlement).

- An L/C is an independent payment undertaking, separate from the underlying commercial contract between buyer and seller.

- Banks operate solely based on the documents presented, not the physical goods or services.

- Only licensed credit institutions are authorized to issue and process L/C transactions.

Benefits of Import Letters of Credit
- For the Exporter:

Guaranteed payment from the Issuing Bank, provided documents are in strict compliance, independent of the buyer’s actual payment behavior.
Possibility of documentary discounting to obtain funds in advance, thus improving cash flow.

- For the Importer:

Payment is made only upon receipt of compliant documents, ensuring goods are shipped as agreed.
Enables greater control over the transaction; if documents are non-compliant, the importer may reject payment.
May receive credit or trade finance support from the Issuing Bank to settle the L/C upon maturity.

- For the Bank:

Generates fee-based income from issuance and handling of L/Cs, contributing to revenue from trade finance services.
Enhances relationships with corporate clients and strengthens the bank's presence in international business.

Required Documentation and Procedure for Opening an Import L/C
To open an Import L/C, the following documents and steps are typically required:

Required Documents:

L/C Application Form
Commercial Contract (Sales Agreement)
Insurance Certificate (if applicable)
Import License (if the goods fall under restricted categories requiring a license from the Ministry of Industry and Trade)

Step-by-Step Process:
Step 1: Document Preparation
The importer prepares the full set of documents listed above.

Step 2: Submit Application to the Bank
The importer submits the application and supporting documents to the chosen Issuing Bank. The bank will review the documentation and provide feedback within its standard processing time.

Step 3: Bank Review and Evaluation
The bank assesses the documents to ensure compliance and adequacy. Upon approval, it notifies the client and requests payment of relevant fees and security deposits (if any).

Step 4: Issuance of the Import L/C
Once approved, the Issuing Bank formally issues the L/C, signifying a binding commitment to pay the exporter on behalf of the importer, subject to fulfillment of the L/C terms.

Step 5: Payment of L/C Issuance Fees
The importer pays the L/C issuance fees, which vary depending on the L/C terms and the bank’s fee schedule.

Payment Process under an Import L/C

The payment flow under an Import L/C typically follows these steps:

Step 1: Document Submission by Exporter
The exporter presents the required shipping and commercial documents to the Issuing Bank (via the Advising/Negotiating Bank).

Step 2: Document Examination
The Issuing Bank examines the documents for compliance. If found compliant, the bank notifies the importer and requests payment. If discrepancies are found, the importer is notified and asked whether to accept or reject the documents.

Step 3: Payment Execution
If the documents are compliant or the importer agrees to accept discrepancies, payment is made by the importer to the Issuing Bank. The bank then remits payment to the exporter.

Further Reading: Comparison of current types of Letters of Credit (L/C): Which should businesses choose?

Conclusion

In summary, the Import Letter of Credit is a trusted and widely adopted payment mechanism in international trade. It ensures security, reduces risks, and benefits all parties in the transaction. However, for businesses to fully leverage the advantages of L/Cs, it is crucial to understand the regulatory requirements and procedures involved.

If your company is considering opening an Import L/C, we encourage you to contact SeABank for professional consultation and support. With nearly 30 years of experience in trade finance, SeABank is committed to delivering safe, efficient, and flexible L/C issuance services tailored to your business needs.