Documentary letter of credit
- documentary payment and securing instrument
- a written obligation of the bank issued at the client’s request (in trade relations,
the buyer's request) to pay a certain sum after the fulfilment of the conditions stipulated
in a letter of credit
- the banks involved examine only documents, not goods or services
Advantages for the seller (recipient of the letter of credit)
- the seller’s claim is against the bank rather than a claim against the buyer
- if he fulfils the conditions of the letter of credit, he can be certain that payment will be made by the bank, he can use the letter of credit as a guaranty vis-a-vis his own suppliers
- he can obtain funds immediately if he sells his receivable from the bank pursuant to the letter of credit
- based on a high quality export letter of credit, he can obtain a loan from his bank
Advantages for the buyer (principal of the letter of credit)
- the letter of credit creates considerable pressure on the seller to supply the goods by the stipulated time limit and with the required quality
- he has certainty that he will pay only after the stipulated conditions are met
- he can obtain more advantageous price conditions thanks to the increased certainty of the seller to receive payment when fulfilling the stipulated conditions
