An advising bank is a used when a letter of credit is issued to a party by a party in a different country. In this case, the advising bank is the bank that advises, or notifies, the receiving party that the letter of credit is available. Since the chief purpose of the bank is letting the exporter know the letter was issued, these banks are often called notifying banks instead. This system is a common way for people in different countries to ship goods across borders by ensuring both parties that the other side with follow through.
International shipping can be very complex, but by using a letter of credit system, it is vastly simplified. In almost every case, an advising bank is used in a sales agreement between parties in other countries. The process begins when an importer purchases goods outside of his country. In order to make sure the money is available, the exporter requires the importer to issue a letter of credit to his bank. When the issuing bank sends word to the exporter’s advising bank that the money is ready, the goods ship out.
By using this process, the two parties can deal in safety, even when purchase and sales laws are different between their countries. The letter signifies that the money exists and will be paid, but the payment doesn’t happen until the product arrives. Until then, the money exists in limbo; the issuing bank keeps it separate from both parties. If there is a dispute, neither party can claim the money until the problem is settled.
In most cases, the exporter chooses the advising bank. This bank is usually one that the exporter has a relationship with, such as the business’s primary bank. The advising bank will often limit the importer to a select number of banks in his country. This often means that the importer has to use a bank that he does not have a personal relationship with. This will often cause a slight bias is the procedure towards the exporter.
The relationship between the exporter and the advising bank often means that it often plays additional roles as well. By confirming that the letter of credit exists, not just relaying what the issuing bank says, it is also the confirming bank. If the bill of sale confirming receipt passes through that bank, then it is the accepting bank. Lastly, if it gives the exporter the money designated by the letter of credit, then it is also the paying bank.