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Documentary Letter of Credit

A documentary letter of credit is a guarantee that provides assurance to the beneficiary that he will get the payment which has been mentioned in the documentary letter of credit. There is a condition that the compliant presentation should be under the documentary letter of credit. This documentary letter of credit is commonly used for international transactions where both the buyer and the supplier have a new relationship and operate from different countries.

A documentary letter of credit is a really crucial financial instrument for meeting the short-term needs. It enables the recipients for obtaining the important credit for financing the project. The recipients hope of getting sufficient return for settling the due amount in the provided time frame.

The documentary letter of credit showcases the documents and information that are needed by the beneficiary on presentation which includes the expiry information like date and time of the letter. The compliant presentation is a kind of guarantee given to the beneficiary by the documentary letter of credit for in order to get paid. The only criterion is that the delivery conditions should be met.

It is the responsibility of the bank that writes the letter of credit on the applicant’s behalf to ensure that the terms and conditions which are required for documentation purposes under the credit are met duly before any amount is paid to the supplier. Documentary letter of credits come under the governance of the International Chamber of Commerce (ICC) rules. These rules for the letter of credit are known as Uniform Customs and practice for documentary Credit (UCP). The current version which is in effect is the UCP600 from July 1st, 2007. The concerned parties to a documentary letter of credit are the issuing bank and the beneficiary.

In these cases the credit worthiness of the issuer stands in place of the credit worthiness of the buyer – giving the supplier greater comfort that he will be paid.

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