Documentary Letters of Credit

Documentary Letters of Credit are a cornerstone of international trade. They offer a high degree of security, especially when you and your customers have not yet built a strong relationship.

If your customer can produce a Letter of Credit they are likely to be a good trade prospect. This is because a Letter of Credit is a guarantee from their bank that they will pay your bills on your customer’s behalf (as long as you’ve complied with the agreed terms and conditions of the credit).

Documentary Letters of Credit offer three important benefits:

• You reduce you risks because you’re guaranteed payment by your customer’s bank. You don’t have to rely on your customer’s ability or willingness to pay.
• They are internationally recognized so you can often set up discounting or loan arrangements to cover you for the shipment period or a customer’s request for extended terms. (With discounting you sell or discount the bill to your bank, which collects the payment when it’s due).
• You can request ‘confirmation’ of Letter of Credit. Confirmations are idea if you have concerns over the overseas bank’s creditworthiness or the country you are exporting to, you bank can guarantee payment should problems arise with the buyer’s bank or the overseas country which prevent payment being made to you.

If you are considering a Letter of Credit, read it carefully so that you understand all the terms and conditions. Talk it over with your bank, and make sure that:

• You can meet all the requirements it specifies before you go ahead with shipment
• All your documents (including any accompanying request for payment, acceptance or negotiation) align with every detail on the Letter of Credit’s terms.