Letters of Credit Procedure

The Letters of Credit Procedure develops and builds best practices in processing a letter of credit quickly and efficiently. The procedure allows processing of foreign transactions where a known or unclear level of risk prohibits normal purchasing and sales processes. The procedure applies to Finance, Accounting, Purchasing, and Sales department, or other departments involved in using documentary credit to process transactions. (8 pages, 2046 words)

Letters of Credit Responsibilities:

The CFO (Chief Financial Officer) is responsible for setting and overseeing the process of providing and/or receiving a Letter of Credit, and is responsible for all related bank communication and transactions.

Department Managers are responsible for following the proper procedure for issuing or receiving a Letter of Credit.

Letters of Credit Definitions:

Letter of Credit – Bank monitored/controlled exchange of funds for a product or service, typically used in international trade where performance is considered a risk.

Bill of Lading – Legal document prepared by a carrier, as a contract, accepting goods for transport from the shipping party. It details the type, quantity and destination of the good being carried and serves as a receipt of shipment when the good is delivered. It accompanies the shipped goods, no matter the form of transportation, and must be signed by an authorized representative from the carrier, the shipper and the receiver.

Warranty Title – Legal statement from the seller that the title being conveyed is good and the transfer is legal and rightful.

Letter of Indemnity – Letter typically issued by the issuing bank protecting the buyer in the case the seller fails to deliver the goods/services as promised (fails to perform).

Issuing Bank – Bank selected and used by the buyer to reserve, and then issue funds, after evidence of successful performance by the seller (typically, delivery of required documents including a Bill of Lading from a contracted carrier).

Letters of Credit Procedure Activities

• Letter of Credit Plan
• Executing a Letter of Credit as a Buyer
• Executing a Letter of Credit as a Seller
• Reviewing the Letter of Credit Process
• Improving the Letter of Credit Process

Letters of Credit Procedure Forms

• Letter of Credit Checklist Form