More about documentary credits
More about documentary credits
Documentary credit gives exporters the conditional payment guarantee of the importer’s bank via the exporters bank. The role of banks is mainly of an intermediary nature. They only check the conformity of documents with the conditions specified in the letter of credit. They are not held responsible for the storage, transport, origin etc. of the goods, nor for accuracy, lawfulness or genuineness of the documents submitted to them.
Using documentary credits when you export goods or services means that the importer's bank commits itself to paying you when the conditions of the credit have been met. This offers a number of advantages:
- Payment guaranteed by the importer's bank prior to shipment
- Enhanced security of payment at the agreed time
- Enhanced security that the order received will not be cancelled or changed without your agreement
- Improved liquidity as payment often can be made shortly after shipment
- Possibility of extending security to subcontractors through the documentary credit
- The possibility of financing
It is important to note that the importer's bank will make payment only after you have complied with all its requirements and conditions. You should therefore examine the documentary credit carefully when you receive it.
When you import goods or services, using documentary credits as your method of payment offers several advantages.
These are some of the benefits of documentary credit for importers:
- No obligation to pay unless all the conditions of the documentary credit are fulfilled
- Using documentary credits with extended credit terms may be an alternative to traditional forms of bank finance such as overdrafts
- A possible discount from the exporter because of secure and fast payment
- Multiple payments can be made under a documentary credit
- Your credit reputation is enhanced by providing suppliers with documentary credits
- Improved security for prompt shipment of goods
Standby documentary credit
A conventional documentary credit is issued to provide the seller with an undertaking of payment upon the seller's submission of documents in accordance with the terms and conditions of the credit after shipment has taken place.
A standby documentary credit, on the other hand, is an undertaking which is activated only if something goes wrong between the buyer and the seller and the expected payment does not take place. It therefore allows the seller to enforce a claim.
A standby documentary credit acts as a bank guarantee and is subject to international documentary credit rules and standby rules.
International rules for documentary credits
Documentary credits are subject to a set of international rules entitled Uniform Customs and Practice for Documentary Credits (UCP), ICC Publication No. 600.
The rules are set forth by the International Chamber of Commerce (ICC) in Paris and are used by most banks worldwide.
In May 2000, the ICC appointed a task force to streamline international banking practice for documentary credit practitioners when checking documents.
The resulting guidelines - International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP) - were intended to reduce the number of documents being rejected dramatically by encouraging a uniformity of practice worldwide. The ISBP was approved in 2002 and revised in 2007, making the documentary credit process easier and even more secure.
Standby letters of credit are usually subject to the same rules as commercial documentary credits, that is, UCP 600. But a growing number of standby documentary credits are subject to a newer set of rules, known as ISP98, which deals solely with this type of documentary credit.
You might also like
Documentary collection is a method of payment commonly used in foreign trade transactions in addition to letters of credit and open accounts. A collection transaction involves the purchaser's bank handing over commercial documents to the purchaser in exchange for a payment, a fixed-term payment obligation or a bill of exchange as laid down in the collection terms and conditions.
Guarantees help to control and manage risks arising from business activity. Guarantees aim to offer the holder a sense of security and financial compensation if their contractual partner fails to fulfil their obligations.
Factoring provides companies with flexible supplementary financing that corresponds to their actual sales volume. This way, companies can take advantage of unexpected sales opportunities that they would not normally be able to finance with their own funds.