Letter of Credit
A documentary letter of credit is a written obligation of the to pay a certain amount according to the conditions defined in the letter of credit. Unlike the bank guarantee, the letter of credit provides not only a security but it is also a payment instrument. It is issued upon request of the client (applicant, buyer) in favour of the beneficiary/seller. Payment is made upon presentation of complying documents as per the terms and conditions of the letter of credit. Because of the many functions embedded, such instruments provide significant advantages for both the seller and the buyer.
Benefits for the beneficiary of the letter of credit (seller)
- the seller has an outstanding receivable towards the bank and not towards the buyer
- the receivable under the letter of credit can be purchased/negotiated, to obtain the funds in advance
- the seller can obtain financing from its bank, subject to the purchase of the goods secured by the letter of credit
- the seller can mitigate the payment, commercial and country risks
Benefits for the applicant of the letter of credit (buyer)
- the seller can be certain that as the payment will be made only if the stipulated in the letter of credit conditions are met
- Buyer may be able to negotiate more favorable payment terms in case the payment is secured by letter of credit
- Buyer is able to demonstrate trust and raliability
- A documentary letter of credit is governed by the uniform customs and practice for documentary credits of the International Chamber of Commerce, UCP600.
