Documentary letter of credit
What is a letter of credit?
The letter of credit is an internationally recognised payment instrument which represents an abstract obligation of a bank to make payment when presented with certain documents required by the letter of credit.
Important documents under a letter of credit can include invoices, transport documents, insurance documents, certificates of origin or certificates of quality providing evidence of a certain thing. A transport document (e.g. forwarding agent certificate) is evidence that the goods have been shipped.
As an exporter, a documentary letter of credit ensures that once the terms of the letter of credit have been met, you will receive payment for the goods or services provided based on the payment obligation of the issuing bank. In addition, your house bank will also be able to assume the economic and the political risk of the issuing bank with a letter of credit confirmation.
As an importer, a documentary letter of credit ensures that, based on presentation of the documents required by the letter of credit, the exporter has actually made delivery – although this is no guarantee that the delivery is as stipulated in the terms of the contract. It also ensures that your house bank will make payment only upon presentation of the documents required by the letter of credit.
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