Letters of credit have three main characters, the originator, the beneficiary, and the banks.
The originator’s role in creating the letter of credit is:
One, to function as a link that connects the exporter and the importer for the purpose of carrying out a transaction.
Two, it works as a link between the importer and the banks. The importer meets 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.
A letter of credit must have the participation of at least one financial institution. Banks play a very important role in international trade because they not only give credit to importers and exporters, but also determine if the terms and conditions of the letter of credit have been met by the exporter and therefore proceed to payment.
The Beneficiary (Seller): The exporter who is in favor of issuing the letter of credit. You have the right to demand payment after complying with the terms and / or conditions established therein.
The beneficiary of the letter of credit is the person who has the right to draw against the letter of credit and demand its payment by presenting the documents in it.
The banks most frequently found in letters of credit are:
Issuing bank: Delivers the letter of credit to the beneficiary by order of the importer. Acquired the payment responsibility to notify the seller and pay through our correspondent bank once the terms and conditions established in the letter of credit have been met.
Confirming banks play the other role. They are located in the country of the exporter and are the ones that provide the payment that is given through the letter of credit. These banks respond to issuers and confirmers in confirmed letters of credit.
The notifying bank. If the originator’s bank does not have a branch in the beneficiary’s country, the latter uses a notifying bank. This bank informs the beneficiary if a letter of credit has been opened in their favor. Notifying banks have no obligations to beneficiaries, only in the absence of a confirming bank.