The commercial documentary credit or Letter of Credit is an undertaking issued by a bank for the account of the buyer (the Applicant) to pay the supplier (the Beneficiary) the value of the Draft and/or Documents provided that the terms and conditions of the Documentary Credit are complied with.
How does it work?
The contractual arrangement is triangular between the buyer, seller and the bank. It is evidenced by a Pro-Forma Invoice established by the seller which should feature:
- goods specifications
- currency and amount payable
- payment terms (sight or term)
- shipment / delivery terms (CIF, FOB, etc)
- mode of transport
- latest shipment date
- type of insurance (all risks, etc) (in case goods are insured by the supplier)
- supplier's bank details
- for whose account are overseas bank charges (buyer or seller)
- whether the documentary credit needs to be confirmed by an overseas bank
There are two types of commercial documentary credits. You may either opt for:
- irrevocable documentary credit
- revocable documentary credit
An irrevocable documentary credit
Constitutes a definite undertaking of the Issuing Bank, provided that the required documents as well as the terms and conditions of the documentary credit are compliant. It cannot be amended, revoked or cancelled without the beneficiary's and/or the negotiating/confirming banks consent.
- facilitates financing
- provides legal protection
- assures expert examination of documents