What is required to draw funds under a letter of credit if a draft is necessary?

When it comes to drawing funds under a letter of credit, the correct approach is to ensure that the draft is drawn on the issuing bank. This is because a letter of credit is a financial instrument that provides a guarantee from the buyer’s bank (the issuing bank) to pay the seller (beneficiary) upon the presentation of documents specified in the letter of credit. The issuing bank is responsible for making the payment as long as the terms and conditions of the letter of credit are fulfilled.

Drawing the draft on the issuing bank ensures that the seller can receive payment as per the agreement, as the issuing bank has directly committed to the payment. It creates a clear and reliable process for the beneficiary, who can present their documents to the issuing bank for payment.

In contrast, drawing on any bank or a third-party bank can complicate the process, as those banks may not have the same commitment or obligation implied in the letter of credit as the issuing bank does. Therefore, the procedure outlined for drawing funds under a letter of credit emphasizes the need for the draft to be presented to the issuing bank to fulfill the contractual obligations of the letter of credit.