Imagine that a business called the WAPRO from time to time imports steel from a business called MIL, which banks with the ABC Bank. WAPRO holds an account at the Commonwealth Financials. WAPRO wants to buy $500,000 worth of merchandise from MIL, who agrees to sell the goods and give WAPRO 60 days to pay for them, on the condition that they are provided with a 90-day LC for the full amount. The steps to get the letter of credit would be as follows:

• WAPRO goes to The Commonwealth Financials and requests a $500,000 letter of credit, with MIL as the beneficiary.
• The Commonwealth Financials can issue an LC either on approval of a standard loanunderwriting process or by WAPRO funding it directly with a deposit of $500,000 plus fees which are typically between 1% and 8% of the face value of the LC.
• The Commonwealth Financials sends a copy of the LC to the ABC Bank, which notifies the MIL that payment is available and they can ship the merchandise WAPRO has ordered with the full assurance of payment to them.
• On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, the Commonwealth Financials transfers the $500,000 to the ABC Bank, which then credits the account to the MIL for that amount.
• Note that banks deal only with documents required in the letter of credit and not the underlying transaction.
• Many exporters have mistakenly understood that the payment is guaranteed after receiving the LC. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented and the terms and conditions of the letter of credit have been met.