1. The buyer and seller enter into an agreement for the supply of goods or services.
2. The buyer applies to its bank for a letter of credit in favour of the seller.
3. The buyer's bank issues the letter of credit, which specifies payment terms and other details.
4. The seller receives the letter of credit and delivers the goods or services in accordance with the terms of the contract.
5. After fulfilling the terms of the transaction, the seller submits its documents to the bank confirming that the terms have been met.
6. The buyer's bank pays the seller in accordance with the terms of the letter of credit.

Letters of credit allow the contracting parties to avoid the risk of default and provide security in international trade.