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Documentary Letter of Credit
Documentary Letter of Credit is designed for
clients dealing with business transactions.
Documentary Letter of Credit characteristics
Documentary Letter of Credit is a written obligation of a bank to pay a given amount — if Letter of Credit conditions are met within a certain period. This obligation towards the seller is accepted by the bank upon the buyer’s request. Different types of Letters of Credit can be obtained according to particular transaction needs:
- Import, export (buyer, supplier)
- Revocable, irrevocable
- Adviced, confirmed
- Transferable, revolving, standby Letter of Credit
Documentary Letter of Credit is one of the most elaborated payment instrument frequently used in both international and domestic trade. The buyer enjoys a security that a payment of a certain amount will not be carried out until the seller meets conditions defined by the buyer. At the same time it is a seller’s security that if Letter of Credit conditions are met he will receive a payment for his goods.
The following charts shows the functioning of a Letter of Credit:
1 - Between the exporter (the seller) and the importer (the buyer) signign of commercial contract is concluded
2 - On the basis of the commercial contract and its conditions the importer asks its bank for opening the Letter of Credit
3a - The exporter sends the goods
3b - The exporter collects the documents in line with the Letter of Credit conditions and sends them through its bank
to the importer’s bank, which checks them and in case the conditions are fulfilled sumbits them to the importer
4 - Importer’s bank (the issuing bank)pays out the Letter of Credit to the exporter
and debits importer’s account
For Letter of Credit applicant (the buyer):
- An option to reduce business risk to a minimum by setting the Letter of Credit conditions and obtain more favourable price terms through payment security provided to your business partners.
- Motivating the seller to perform delivery in an agreed time and according to the Letter of Credit conditions.
For beneficiary (the seller):
- A security concerning payment for delivery of goods or services when the Letter of Credit conditions are met
- An awareness that the payment of an agreed amount is fixed to meeting previously agreed conditions – the transaction can be carried out without concerns that the buyer will not take over the ordered goods
- A better liquidity – the seller can receive his money immediately, if he sells his receivable to the bank (for transactions with deferred payment)
- An option to use a high quality Letter of Credit as a guarantee toward his suppliers
Documentary Letter of Credit will allow you
A documentary Letter of Credit is a sophisticated payment security instrument offering high quality payment security to a business transaction for both parties – the seller and the buyer. The seller can rely that he will receive payment for his goods if he meets all conditions prescribed by the Letter of Credit. The buyer can rely that the payment will be forwarded only after the Letter of Credit conditions are met. Both parties can be assured that an appropriate Letter of Credit type has been chosen and issued by a bank with high credibility.
