The most common method of payment in international business is the letter of credit. It is the safest method because it guarantees that the money for payment is ready to be paid as soon as the shipping procedures are correctly completed. The procedure begins when the buyer and seller have agreed on terms.
The buyer goes to his local bank (opening bank) and applies for a letter of credit. The application will usually be a form in which you only need fill in blank spaces. The bank will then check the buyer's credit rating and decide if his credit is good or not. If it is, the bank will accept the application. A letter will be issued to the seller, through his local bank, which promises him that the bank will pay for the merchandise when the seller presents the bank with all the required documents, which prove that the shipment has been made as the parties agreed.
The buyer's bank will make arrangements to transfer the amount agreed upon to the seller's bank, or transfer the funds into a special account which is owned by the seller's bank (negotiation bank). When the merchandise is ready to be shipped, the seller will prepare all documents and a draft. All of this will then be presented to the negotiation bank . If the negotiation bank finds all the documents in order, it will release the money. Then the bank has now become owner of the merchandise. It will turn the papers over to the buyer when all of the bank's requirements for payment have been met.