Documentary Letters of Credit
A Documentary Letter of Credit is a bank mechanism that allows importers to offer secure terms to exporters.
A Documentary Letter of Credit is a written undertaking, given by a bank on behalf of the importer to pay the exporter an amount of money within a specified period time provided the exporter presents documents which conform with the terms laid down in the letter of credit.
The Letter of Credit specifies when the payment is to be made.
The issuing bank gives a binding undertaking to the seller that if compliant documents are presented, the bank will pay the seller the amount due. This offers security to the seller - the bank says, in effect, "We will pay you if you present the required documents".
The issuing bank examines the documents and pays only if they comply with the terms and conditions set out in the Letter of Credit. This protects the buyer's interests. In effect the bank says, "We will only pay your supplier on your behalf only if they present the documents that you have asked for".
Letters of Credit deal in documents, not goods. Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill, and an insurance document.
Documentary Letters of Credit are issued in accordance with ICC 500.
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