Documentary Letter of Credit

Documentary letter of credit (often abbreviated as LC or L/C) is a contract-like commercial instrument whereby the bank, according to your request and instructions, takes the commitment to pay the seller (beneficiary) upon a due-time presentation of the required shipping (title) documents, or undertakes to hand over the documents to your business partner, thus assuring you’ll receive a predetermined amount of money.

L/C is an often used payment method and provides a higher level of assurance of a guaranteed payment as compared to the delivery versus payment (DVP) method. The bank acts as a guarantor of a successful outcome of the entire transaction. The bank will have control over compliance with the terms and conditions and ensure that the buyer receives a bank-guaranteed payment. The L/Cs are governed by the International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits and therefore provide a high degree of legal protection. The terms of the UCP are legally binding upon all banks worldwide.

L/C advantages to the exporter

• Minimisation of non-payment risk
• Reduces manufacturing risk if the buyer cancels or unilaterally changes his order
• Possibility of optimising the delivery schedule
• Provides assurance that the buyer may not refuse to pay, claiming non-conformity (defects) of the goods received because all claims must be notified by the importer separately without regard to the L/C and the payment.

L/C advantages to the importer

• Is a tool used to remove the risk of non-delivery. Assures that payment to the seller is only done against the proof of delivery and/or other shipping documents
• Assures the pre-agreed quality and quantity of the goods received and the delivery within a particular timeframe, as specified in the L/C
• Possibility of negotiating lower purchase prices and a longer postponement period before payment is made
• A significant downsizing of advance payment under the import purchase contract
• Possibility of simplifying the scheme of payments, taking into account the importer’s interests

L/C creates a separate contractual arrangement that is completely distinct from the sales contract on which it is based. All parties involved deal only with the documents representing the goods (services) cover by the contract and not in the goods (services) themselves.

Upon request and on behalf of our importing customer, Baltic International Bank issues an import L/C to its correspondent bank serving the supplier. The L/C provides deferment (postponement) of payment for a specified time. After shipment, the supplier routes to the bank a full set of documentation (invoice, packing list, certificate of quality and the CMR waybill). After a certain time frame, Baltic International Bank pays to the supplier the invoice amount. Thus, the supplier is enabled to minimise the risk of non-payments (the L/C issued by Baltic International Bank helps the supplier obtain pre-export financing from a bank servicing the supplier), while our customer is not required to make advance payment and avails of lower purchase prices.

• Irrevocable Letter of Credit

  All letters of credit dealt with by Baltic International Bank are irrevocable. An irrevocable letter of credit may not be modified or revoked without the prior consent of all the parties concerned.

• Confirmed Irrevocable Letter of Credit (CILC)

  As a rule, the CILC may be confirmed by a third-party bank, often specified as a prime bank. The confirmation means that the bank adds its guarantee to pay the seller. Thus, the seller enjoys double level protection.

• Transferable Letter of Credit

  Transferable L/C is often used in transit trade, when the exporter is the importer’s agent or a middleman between the supplier and the importer and not the actual supplier of goods. Under the credit, the exporter can transfer his right to receive payment to another supplier or to several suppliers (the second beneficiary).

  Transferable L/C gives the opportunity not to use own money when paying suppliers. The middleman, who lacks money to purchase goods from the supplier, is allowed to offer the supplier to use a portion of the credit to secure the payment owed to the supplier.

• Standby Letter of Credit

  Standby Letter of Credit serves as a guarantee (a secondary payment mechanism) by the issuing bank rather than a source of payment. A bank will issue a standby letter of credit on behalf of its customer to provide assurances of payment to the seller (exporter) in the event the buyer (importer) does not or is unable to pay for goods against presentation of specified shipping documents.