Documentary credits

Documentary credits, which are also known as letters of credit, make import-export transactions easier and limit the risks relating to international trade.

Highlights

  • If you are a seller, you can be sure that you will be fully paid once the goods have been shipped.
  • If you are a buyer, you will receive your goods even before you make the payment. You will also have the guarantee that certain conditions set out in the documentary credit will be met.

How it works

  1. The buyer and seller enter into a contract stipulating that payment will be made by letter of credit.
  2. The buyer then asks his bank to issue a letter of credit in favor of the seller, who is known as the beneficiary.
  3. The issuing bank then asks another bank, generally one in the seller's country, to notify the seller of the letter of credit and, in some cases, to confirm it.
  4. That bank informs the seller that a letter of credit has been issued.

Different types of documentary credit

Irrevocable

Regardless of the client's situation, the bank cannot revoke its commitment without the consent of all parties involved.

Confirmed

The commitment by the issuing bank is confirmed by a bank in the seller's country. As long as the seller fulfills his commitments, he is sure to be paid.

Red clause

This is a letter of credit with an advance, which means that the seller receives an advance before delivery of the goods.

Back-to-back letters of credit

Here, two letters of credit are used together. The beneficiary of the first is the initial seller, while the beneficiary of the second is the supplier of the raw materials, or subcontractor for services, needed to make the final product.

 

For more information, see

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