0:00How does a letter of credit work?
0:02A bank makes the promise, not the buyer.
0:06Your bank, the issuing bank,
0:08formally promises on your behalf to pay the seller's bank.
0:12The seller ships the goods
0:14and presents documents proving they were shipped exactly as agreed.
0:18The seller's bank is then paid.
0:20This moves much of the payment risk from the individual buyer and seller onto the
0:25two banks.
0:27That is why letters of credit are common for larger,
0:30first-time or higher-risk transactions.
0:34The most frequent cause of letter of credit problems is not fraud.
0:39It is discrepancy.
0:40A document that does not exactly match the letter of credit's wording,
0:45even over a minor typo,
0:47can allow a bank to refuse payment.
0:51So have your broker or a trade finance specialist
0:55review the documents against the letter of credit's terms before you submit them.
1:00Check every word against the credit.