Negotiation, also known as settlement of foreign exchange by bill payment, means that the negotiating bank purchases the beneficiary's bills and documents according to the terms of the letter of credit, deducts the interest from the negotiation date to the expected date of receipt of the bill from the par value, and converts the balance into RMB at the foreign exchange rate on the negotiation date and withdraws it from the foreign trade company. After the negotiating bank advances funds to the beneficiary to purchase the documentary bill, it becomes the holder and can claim the fare from the paying bank on the basis of the bill. Banks do export bills to finance foreign trade companies, which is conducive to the capital turnover of foreign trade companies.

Letter of credit refers to the written certificate issued by the bank to the exporter (seller) at the request of the importer (buyer) to guarantee payment for the goods. In the letter of credit, the bank authorizes the exporter to draw a draft drawn on the bank or its designated bank, attach the shipping documents as required, and pick up the goods at the designated place on schedule under the conditions stipulated in the letter of credit. In international trade activities, buyers and sellers may distrust each other, and after the buyer is worried about the advance payment, the seller will not deliver the goods according to the contract requirements; The seller is also worried that the buyer will not pay after delivery or submission of shipping documents. Therefore, two banks are needed as guarantors of buyers and sellers, collecting payment documents on their behalf, and replacing commercial credit with bank credit. The instrument used by banks in this activity is the letter of credit.

The general procedure for payment by letter of credit is as follows: (1) Both the importer and the exporter should clearly agree to pay by letter of credit in the sales contract. (2) The importer applies to the local bank to open a letter of credit, fills in the letter of credit application form, pays a certain deposit for opening a letter of credit or provides other guarantees, and requires the bank (issuing bank) to open a letter of credit to the exporter. (3) The issuing bank shall open a letter of credit in favor of the exporter according to the contents of the application, and notify the exporter through the correspondent bank or correspondent bank where the exporter is located (collectively referred to as the advising bank). (4) After the exporter has shipped the goods and obtained the shipping documents required by the letter of credit, he should negotiate the payment with his local bank (advising bank or other bank) according to the provisions of the letter of credit. (5) The negotiating bank shall indicate the negotiation amount on the back of the letter of credit immediately after negotiating the payment.

Letter of credit has three characteristics: first, letter of credit is a self-sufficient tool. The letter of credit is not attached to the sales contract, and the bank emphasizes the written authentication of the separation of the letter of credit and the basic trade when examining the documents; Second, the letter of credit is a pure documentary transaction. A letter of credit is to pay cash against documents and is not restricted by goods. As long as the documents are consistent, the issuing bank should pay unconditionally; Third, the issuing bank bears the main responsibility for payment. Letter of credit is a kind of bank credit, it is a kind of guarantee document of the bank, and the issuing bank is mainly responsible for payment.