What is a documentary credit?

A documentary credit constitutes a commitment by a bank on behalf of the buyer (the principal/importer) to pay the seller of goods or services (the beneficiary/exporter) a specified amount immediately (sight) or at a later date (forward) subject to the presentation of stipulated documents within a prescribed period of time. The documentary credit is both a flexible means of effecting payment and a short-term financing instrument.

What parties are involved in a documentary credit transaction?

  • Applicant = buyer/importer
    Instructs his bank to issue a documentary credit.
  • Issuing bank = the buyer's bank
    The bank instructed to issue a documentary credit and which assumes a payment obligation on the buyer's behalf.
  • Advising/confirming bank = bank of the beneficiary
    Advises or confirms the documentary credit to the beneficiary on the instructions of the issuing bank.
  • Beneficiary = seller/exporter
    Receives the documentary credit issued in his favour.

Are there differences between the terms

These terms all refer to the same product. L/C is the abbreviation for "Letter of Credit" and has become rather obsolete. The customary term nowadays is "D/C" = "Documentary Credit".

Can the documentary credit replace a sales contract?

No. Documentary credits, by their nature, are separate transactions from the sales or other contracts on which they may be based (UCP Art. 4). Any complaints or disputes therefore have to be settled directly between the buyer and the seller outside the documentary credit. The documentary credit is an instrument designed to reflect the payment and delivery terms specified in the sales contract.

Isn't a documentary credit an expensive and complicated way of doing business?

Compared with a delivery on open account or a down payment, it is more time and cost intensive. On the other hand, the fact that delivery and payment occur concurrently offers the exporter and the importer maximum security.
The proper handling of documentary credits is time-consuming and labour-intensive for the banks involved. However, these costs have to be seen in relation to the resulting benefits and security.

Does the documentary credit also cover the quality of the merchandise?

No. In documentary credit operations all parties concerned deal with documents and not with goods, services and/or other performances to which the documents may relate (UCP Art. 5). To ensure goods are of the required quality, arrangements can be made for them to be inspected before despatch by an independent agency. The terms of the documentary credit may stipulate the provision of an inspection certificate.

What is the maximum size letter of credit that you open?

We are able to open letters of credit of almost any size. We consider the complexity of the transaction; the goods that are being trades; and, other factors having to do with the parties to the transactions and where they take place.

Can I cancel my letter of credit after it has been opened?

All of the instruments that we issue are irrevocable and cannot be cancelled except by the beneficiary.

For what type of goods do you open letter of credit?

We can open letters of credit for any type of goods provided they fall into our ethical and legal criteria. That said, we will not get involved in transactions involving weaponry or ammunition under any circumstances.