Documentary credit / Letter of credit / L/C

In international trade, the most secure payment technique is the letter of letter of credit. This is a paper-based or electronic bank form letter on which a reliable bank promises to pay the exporter on its behalf, instead of the buyer, if certain conditions are met. Its usual abbreviation is L/C.

The letter of letter of credit is a widely used payment technique mainly in overseas trade. Its popularity is explained by its safety. As an exporter, it is advisable to use it in all cases when we do not know the creditworthiness of our foreign customer, or our experience is not clearly positive.

The security of the letter of letter of credit can be explained, on the one hand, by the internationally known and accepted international convention of the ICC (International Chamber of Commerce) (UCP 600). In addition, the special role of the bank participating in the export or import transaction guarantees security. Here, the bank not only mediates the exchange of money and documents, but also forwards to the buyer the seller's documents confirming the delivery of the goods and to the exporter the consideration for his goods. 

With the agreement of the contracting parties, the bank requested by the customer is a substantial contributor to the payment technique. The bank promises payment to the seller in its own name. As an exporter, we can be sure that we will definitely receive the value of the goods if we meet the requirements of the letter of letter of credit. Fulfillment is independent of what happened to our customer in the meantime. 

The characteristics of the payment method are recorded in the sales contract. The contract also includes the characteristics of the delivery of goods. In accordance with the contract, in a letter of letter of credit opening order, the buyer requests a bank to open the letter of credit, in addition to transferring or blocking the consideration to the bank. This is the collateral of the letter of letter of credit. In a form, the opening bank commits itself to an irrevocable payment to us, listing our contractual obligations, the fulfillment of which we must prove to the bank with documents within the expiry of the letter of letter of credit. 

After reviewing the documents, the opening bank fulfills its obligation in the letter of credit if they are presented flawlessly and within the deadline, and honors the documents even if our customer changes his mind in the meantime.

The honoring of the documents may depend on the type of letter of credit 

• spot payment, 
• in case of sale on credit, the specified later payment (deferred payment letter of credit),
• acceptance of acceptance of a bill of exchange of exchange by the bank, 
• purchase of the documents with another bank (negotiation).

It is important that the created letter of letter of credit is independent of the foreign trade transaction behind it, and all its participants are bound only by the text of the letter of letter of credit. The letter of credit transaction has at least three parties: 

• buyer (principal), 
• opening bank
• seller (beneficiary). 

The range of participants is usually expanded with a second bank. It could be the bank 

• notifying bank, 
• certifying bank (certified letter of credit), 
• paying bank, 
• negotiating bank.

International business practice knows many versions of the letter of letter of credit. The commercial letter of credit (CLC) is widespread in Anglo-Saxon areas.

By choosing a letter of credit payment method, as an as an exporter, we only have to take into account the risks arising from our own faulty performance. This could be, for example, incorrect or late presentation of documents. As an importer, it is advantageous that the purchase price is the lowest here, and we cannot be out of possession either, since the seller will only receive our money if he has verified the performance according to the contract with a multitude of documents. 

However, the disadvantage is that we tie up the money months before the delivery of the goods (a letter of letter of credit is valid for two to three months) and we cannot use it for other purposes until the letter of credit expires. We also have to take into account that, according to the custom, bank charges are borne by the customer.