Letter of Credit Requirements

Letters of credit are used in business when a purchaser does not have the cash on hand for products ordered, or does not wish to use the cash it has on hand. Instead of paying in cash, the purchaser asks its bank to issue a letter of credit. This letter of credit indicates the bank is willing to finance the transaction for the purchaser. The recipient of the letter of credit is then entitled to receive the money owed from the bank that issued the letter of credit.

Parties Involved

A letter of credit must indicate all of the parties involved in the transaction. The letter of credit must indicate the individual or company that the bank is issuing the letter of credit for. It must also indicate who the letter of credit is to be received by, which is the company or individual that is owed the money. A letter of credit may be sold, but the original letter of credit must include the original recipient's name. Finally, the lending bank that is issuing the letter of credit must be identified in the letter of credit.

Written Draft Presented

A written draft determines when a letter of credit is paid to the recipient. According to crfonline.com, there are two different types of drafts. One is a sight draft, and the other is a time draft. When a sight draft is presented to the recipient, the issuing bank must pay that recipient immediately, within reasonable bank processing times for the money transfer. If the draft issues is a time draft, that draft indicates at what time the recipient is entitled to receive the amount of money defined in the letter of credit from the issuing bank, within reasonable bank processing times.

Documentation Required

For a letter of credit to be issued, the issuing bank will require several documents to be presented, according to crfonline.com. The bank requires that an invoice has been issued to the individual or company applying for the letter of credit. A bill of lading that indicates what is being shipped by the seller is also required for the letter of credit to be issued. The warranty of title verifies that the seller legally owns the items and can legally sell them to the buyer. An optional document is the letter of indemnity. This guarantees that the documentation involved in the transaction will be presented to the bank in legible and legal condition.