Documentary Letter of Credit

What is a Documentary Letter of Credit?

International Funding Partners specialise in providing third party Documentary Letter of Credit, which is a written undertaking given by a bank, financial institution or issuer of financial instruments on behalf of an importer to pay the exporter a given sum of money within a specified time, providing that the exporter presents documents which comply with the terms laid down in the Letter of Credit.

A Letter of Credit can be for any amount, in any freely traded currency, and, subject to the presentation of compliant documents, may be payable:

  • At sight, which means as soon as a compliant set of documents are presented to the paying bank, financial institution or issuer of the Letter of Credit
  • After a specified term, e.g. at 30, 60, 90 or 180 days of sight or Bill of Lading date

If the documents are not presented exactly as specified in the Letter of Credit, payment will not be made unless the Importer gives their authority to waive or amend the specified condition.

A fundamental principle of Letters of Credit is that the bank, financial institution, or issuer of the Letter of Credit, deals with documents and not with the goods to which the documents refer.

For example, if the importer is unhappy with the quality of the goods but the documents comply with the terms and conditions of the Letter of Credit, the importer's bank, financial institution, or issuer of the Letter of Credit is obliged to pay the Exporter.

Parties Involved In A Letter Of Credit Transaction

In the process of a Letter of Credit transaction, there are essentially four parties involved. These parties can be referred to by a number of terms, outlined below.

  1. 'Buyer' meaning Importer, Applicant, Accountee or Accreditor. In this guide we use the term 'Importer'
  2. Seller meaning Exporter or Beneficiary; here we use the term 'Exporter'
  3. The 'Issuing Financial Institution' or 'Opening Bank' (Importers Bank)
  4. The 'Advising/Confirming Bank' - usually a bank in the Exporters country which may or may not be the Exporters Bank.