What Is a Documentary Letter of Credit?
A Documentary Letter of Credit is a bank’s international payment instrument by means of which a certain amount of money is made available to a Beneficiary (Seller) by an Applicant (Buyer) through a Bank that becomes payable after certain terms have been met.
Documentary Letter of Credit:
- Applicant (Buyer) – goods/services at disposal as set out in the Letter of Credit
- Beneficiary (Seller) – payment of the Letter of Credit amount after evidence has been presented by it to the Bank confirming that it has met its obligations under the Letter of Credit
Who Are the Parties Involved in a Documentary Letter of Credit?
Buyer of goods/services at whose request a Letter of Credit is opened
Seller of goods/services to whose benefit a Letter of Credit is opened
- Issuing Bank
Bank that opens a Letter of Credit at the request of the Applicant (Buyer)
- Advising Bank (Paying Bank)
Bank that is authorised to pay the Letter of Credit amount in favour of the Beneficiary (Seller) in accordance with the order of the Issuing Bank
How Does a Documentary Letter of Credit Function in Practice?