Exporting & Letter of Credit (L/C)
Level: Intermediate (B1 English)A Simple Coffee Deal
Scenario: Maria (in Vietnam) sells 500 bags of coffee beans to Alex (in Germany) for $10,000. They do not know each other well, so they use a Letter of Credit (L/C) to stay safe.
1
Contract: Alex and Maria agree to trade using an L/C.
2
Application: Alex asks his bank (Issuing Bank) in Germany to open an L/C for Maria.
3
Shipment: Maria ships the coffee and collects shipping papers like the Bill of Lading (B/L).
4
Payment: Maria gives the exact documents to the bank. The bank checks the papers and pays her.
The 4 Main Parties
Applicant (The Buyer)
Alex in Germany. He imports the goods and asks his bank to open the credit line.
Beneficiary (The Seller)
Maria in Vietnam. She exports the coffee and receives the money.
Issuing Bank (Buyer's Bank)
Guarantees payment to Maria as long as she provides the correct documents.
Advising Bank (Seller's Bank)
Located in Maria's country. It verifies and forwards the official L/C notification to her.
Bill of Lading (B/L) & Crucial Rules
The Bill of Lading is the official receipt issued by the shipping carrier confirming your goods are on board.
- B/L Number: Found in the top-right corner. It is the tracking code used for customs and bank clearance.
- Master B/L: Issued directly by the main shipping line.
- House B/L: Issued by a freight forwarding company.
⚠️ The Golden Rule of L/C: Banks inspect documents, not physical cargo. Every container number, invoice code, and mark must match letter for letter. A single typo is called a discrepancy, and the bank will pause or reject payment!
Quick Check
Question: What does the bank inspect before releasing the payment to the exporter?
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