Documentary letter of credit

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Characteristic of a documentary letter of credit

The documentary letter of credit is a sophisticated payment security instrument, which offers high-quality payment security for both parties of the business transaction, i.e., for the seller and the purchaser

The documentary letter of credit is a written obligation of the bank toward the seller (issued at the purchaser's request) regarding payment of a certain amount if the terms of the letter of credit determined by the purchaser are met within a certain time limit.

Types of letters of credit

import x export
revocable x irrevocable
advised x confirmed
transferable, revolving, standby L/C

Chart

1	a purchase contract is concluded between the exporter/seller and the importer/purchaser
2	based on the purchase contract, the importer shall ask his bank to issue a letter of credit
3a	the exporter ships the goods

3b	the exporter collects documents as per L/C terms and sends the documents via his bank to the importer's bank, which shall check the documents and if they meet the terms shall deliver them to the importer
4	the importer's bank (issuing bank) shall pay the letter of credit to the exporter and debit the importer's account

Benefits of a documentary letter of credit

for the importer / purchaser

assurance that the goods have been sent prior to his payment
minimizing business risk by appropriate L/C terms and getting better price terms thanks to granting high-quality payment security to his business partner
the purchaser develops substantial pressure on the seller so that the deliver is carried out within the determined time limit and in accordance with L/C terms

for the exporter / seller

assurance of payment for supply of goods or services upon the fulfillment of L/C terms
assurance that the payment of the amount agreed in advance is bound to the fulfillment of the terms known to him in advance - the transaction may be effected without fear that the purchaser will not accept the ordered goods
improving his liquidity - a possibility to obtain funds immediately if he sells his receivable to the bank (in the case of deferred payment)
a high-quality letter of credit may be used as a security for his suppliers

This is one of the most important and sofistic payment security instrument, which is frequently used in international and also domestic trade. It ensures to the purchaser that a certain amount will not be paid if the seller fails to fulfill the terms set by the purchaser, and to the seller that if he fulfills the L/C terms, he will receive payment.

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