Letter of Credit(Letter of Credit, LC) is a common financial tool in international trade to protect the interests of both trading parties. Its operational logic can be roughly divided into the following four steps:

I. Issuance of the Letter of Credit:First, both trading parties need to reach a trade contract and agree to use the letter - of - credit payment method. The importer (buyer) applies to its bank (the issuing bank) to open a letter of credit. The letter of credit must clearly specify the beneficiary (i.e., the exporter, the seller) and the payment terms. After the issuing bank opens the letter of credit, it is usually sent to the advising bank (usually the bank where the exporter is located or the exporters bank) electronically or by mail. After receiving the letter of credit, the advising bank verifies its authenticity and notifies the exporter.

II. Goods Transportation:After receiving and verifying that the letter of credit is correct, the exporter starts to prepare and ship the goods. The exporter needs to prepare relevant transportation documents, such as invoices and shipping orders, in strict accordance with the provisions of the letter of credit.

III. Document Delivery:After the goods are shipped, the exporter submits all relevant transportation documents to the advising bank or the confirming bank (if the letter of credit is confirmable). The bank checks the various documents submitted by the exporter to confirm that they are completely consistent with the terms of the letter of credit.

IV. Payment and Goods Pick - up:After confirming that the documents are correct, the advising bank or the confirming bank sends these documents to the issuing bank. After receiving the documents, the issuing bank will check them again. After confirmation, it will make payment to the advising bank or the confirming bank, and then transfer these documents to the importer. After paying the relevant payment for goods, the importer can pick up the goods at the corresponding warehouse or port with these documents.

The above is the basic logic of the operation of the letter of credit. Its purpose is to ensure the rights and interests of both the buyer and the seller through the intervention of the bank. The issuing bank guarantees that as long as the seller delivers the corresponding documents in accordance with the terms of the letter of credit, it can receive payment, while the buyer can ensure that it only needs to pay after receiving the documents that meet the terms of the letter of credit, thus achieving the purpose of a fair transaction.