Documentary credit transactions involve at least three parties:

* the buyer, generally known as the principal or applicant
* the issuing bank
* the seller, usually known as the beneficiary

In practice, however, nearly all documentary credits involve at least two banks. The second bank, known as the advising bank, is usually located in the exporter's country.

1. The buyer and the seller conclude a sale contract. One of the clauses of the contract stipulates that the contract will not become effective until the buyer has had a documentary credit issued in favour of the seller. The clause stipulates whether the documentary credit is irrevocable, available at sight or by deferred payment, etc. It also describes the documents which must be presented to obtain payment.

2. The buyer (applicant) contacts his bank and gives it a duly completed and signed "documentary credit application form". In this form, the buyer should take great care to list the conditions in detail, particularly the documents he requires.
This form also contains a pledging clause: by signing the form, the buyer acknowledges that the goods are pledged in favour of the issuing bank.

3. The bank issues the documentary credit in favour of the seller and either forwards it to the bank indicated by the applicant or to its correspondent (= advising bank). The reason is that the issuing bank can only send a documentary credit to a bank which has a list of its specimen signatures and its telegraphic keys.

4. The advising bank notifies the documentary credit to the seller after ensuring that the message received is to all appearances genuine: by checking the telegraphic or SWIFT key or signatures.

5. The seller accepts the documentary credit and dispatches the goods within the deadline(s) specified in the credit.

6. The seller remits the necessary documents to the advising bank, which checks if they comply with the terms and conditions of the credit. If this is the case, the advising bank pays the seller as provided for in the credit.

7. The advising bank sends the documents to the issuing bank, which once again checks the documents presented. If the documents appear to comply with the terms of the credit, it pays the advising bank as provided for in the credit.

8. The issuing bank remits the documents to the buyer and debits him with the amount paid to the advising bank.