Documentary Letter Of Credit
L/C is opened in order to guarantee that a supplier/exporter (beneficiary) receives payment against the commercial documents which confirm the correct delivery of goods/services.
LCs mitigate trade risk
- The supplier (beneficiary) who has received an L/C enjoys a promise of payment by the bank which has opened it.
- For the beneficiary, the confirmation of an L/C by the beneficiary’s bank operates as additional security of payment.
- The payer (L/C’s applicant) has assurance, in accordance with the L/C terms and conditions, that goods characterized by certain specifications, volume and quality will be delivered in due time.
- Properly defined documents which should be presented by the beneficiary are the proof that the
goodsexist and have been shipped to the payer.
DLC as settlement
- The payment due to the beneficiary is made after the beneficiary has provided the commercial documents which confirm delivery of the goods.
- The LC is a conditional payment form – commercial documents must be in compliance with the LC terms and conditions.
- The date of payment to the beneficiary is determined according to the LC terms and conditions ordered by the applicant.
- Payment may be made either after the documents are submitted and verified (at sight) or on a deferred payment term.
- The applicant refunds the Bank the amount due on the same day on which the Bank made payment to the beneficiary (down payment LC).
- When requesting for a pre-paid LC the applicant transfers funds to the Bank on the LC opening date, irrespective of the payment term in favor of the beneficiary.
DLC as payment date management tool
- The beneficiary may receive payment earlier than specified in the LC after presenting necessary documents (after delivery).
- The applicant may refund the LC amount to the Bank at the later date than the date of payment in favor of the beneficiary (prolongation).
- With prolongation, the applicant can freely manage funds allocated to LCs payments.
A documentary letter of credit is a pecuniary liability of the bank to pay a certain amount stipulated by the agreement to the seller for the goods upon presentation of the documents confirming dispatch of the goods and compliance with the mutual agreement between the seller and the buyer. The bank issuing such
To perform a letter of credit transaction, the client, as a rule, has to secure the letter of credit with the help of a cash deposit or other collateral.
For a buyer, documentary letters of credit are beneficial due to the fact that the buyer can set the terms to the seller and reduce the risk of non-performance of the goods supply liabilities by the supplier to the minimum. Besides, the buyer acquires goods using the extensive experience of the bank in such transactions. The seller can also be sure that upon dispatch of the goods and presentation of all documents in accordance with the letter of credit terms the seller will receive the payment regardless of the
Letters of credit are divided into the following categories:
Revocable / irrevocableLC;
- Confirmed / non-confirmed LC;
- Transferable / non-transferable LC
Confirmed letter of credit means the payment liabilities are borne not only by the buyer’s
Transferable letter of credit means the order of an intermediary (the first beneficiary) can be transferred by the bank in favour of the supplier (the second beneficiary). When a letter of credit is transferred, the first beneficiary can only introduce changes in the following clauses of the letter of credit:
- The price and the corresponding amount of the letter of credit (downwards)
- The dispatch terms and the letter of credit expiry (downwards)
Non-transferable letter of credit cannot be transferred.
In international settlements, the application of documentary letters of credit is regulated by a special document – Uniform Customs and Practice for Documentary Credits UCP-600, developed by the International Chamber of Commerce (ICC) in Paris.
Rietumu Bank secures the performance of both export (when the client is a seller) and import (when the client is a buyer) letters of credit for selling and buying goods from a business partner abroad.
In such international sale-purchase transactions, the bank undertakes the function of the seller’s agent, receiving money from the buyer in its domicile.
What is Documentary Collection?
Documentary collection is the amount collected by a bank from the buyer’s account at a specified time against financial and trade documents or only trade ones. The exporter submits shipment documents (most often when freight is delivered by sea) to the bank, for instance: the invoice, the bill of lading, the packing list, the certificates of origin and quality, and instructs the bank to send the documents to the buyer’s bank, authorising the bank to issue documents to the buyer only following the payment remittance in favour of the exporter or acceptance of the promissory note.
The transaction is performed at the instruction of the exporter who determines the collection conditions and presents the documents to its bank pursuant to which the payment has to be made. Both banks performing the collection are intermediaries and they bear no responsibility for non-payment or non-acceptance of the documents. Their obligations are limited to the
Benefits of Documentary Collection
Documentary collection is beneficial to the exporter due to the fact that the bank protects its right to the goods until the time of payment against the documents. The importer is granted the right to the goods by the documents of title which he receives upon remittance or performing other conditions of the collection. The collection form of settlements is beneficial to the importer due to the fact that it anticipates payment for the de facto supplied goods.
Is Documentary Collection Reliable?
Documentary collection is a reliable and internationally accepted payment type, which is regulated by the Uniform Rules for Collections (URC), ICC publication No. 522, developed by the International Chamber of Commerce (1995 Edition).
The seller must be aware that such a form of settlements does not guarantee payment pursuant to the documents when the buyer cannot or does not want to pay; therefore, such a form is expedient only when the buyer and the seller have been collaborating since long trust each other.
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