International Trade Credit Process Diagram

Introduction

In international trade, the use of trade credit is a common practice to facilitate the exchange of goods and services between buyers and sellers. One of the most popular forms of trade credit is a letter of credit, also known as a documentary credit. A letter of credit is a financial instrument issued by a bank that guarantees payment to the seller upon the presentation of specific documents in compliance with the terms and conditions of the credit. This article presents a diagram of the international trade credit process, highlighting the key steps and parties involved.

The Parties Involved

The international trade credit process involves several parties, each with a specific role in the transaction. The diagram below illustrates these parties:

The importer/buyer is the party who requests the issuance of the credit from their bank and is responsible for paying the amount due to the bank. The exporter/seller is the party who receives the credit and is responsible for delivering the goods or services to the importer in compliance with the terms of the credit. The issuing bank is the bank that sends the credit to the advising bank, which in turn informs the seller of the credit's existence. The confirming bank may be used at the seller's request to provide additional assurance to ensure payment.

The Process

The diagram below shows the process of a typical international trade credit transaction:

The process starts with the importer and exporter agreeing on the terms of the contract, including the goods or services to be delivered, the price, and the payment terms. Once the contract is in place, the importer requests their bank (the issuing bank) to issue a letter of credit in favor of the exporter. The issuing bank sends the letter of credit to the advising bank, which is typically located near the exporter's place of business.

The advising bank verifies the authenticity of the letter of credit and informs the exporter of its existence. The exporter then prepares the goods or services for shipment and presents the required documents to their bank (the negotiating bank). The negotiating bank reviews the documents and verifies that they are consistent with the terms of the credit. If the documents are in order, the negotiating bank pays the exporter for the goods or services and sends the documents to the issuing bank.

The issuing bank reviews the documents and pays the negotiating bank for the amount of the credit. The issuing bank then sends the documents to the importer, who reviews them to ensure that they are consistent with the terms and conditions of the credit. If the documents are in order, the importer pays the issuing bank for the amount due.

Conclusion

The use of letters of credit is a widely accepted mechanism for securing payment in international trade. The process involves several parties, including the importer, exporter, issuing bank, advising bank, and negotiating bank. The process is complex and requires careful attention to detail to ensure compliance with the terms of the credit.