Documentary Credit (Letter of Credit - LC)

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As indicated below, the seller may receive payment in advance or ship the goods on the mare promise of the buyer to pay either at the time of delivery or at a certain future date after delivery of the goods.

To ensure a better arrangement of payment, the seller may request the buyer to make payment through a documentary credit.

A documentary credit also known as a letter of credit or L/C, is an undertaking in writing given by the buyer's bank in which the buyer's bank guarantees payment to the beneficiary seller on condition that the beneficiary seller presents the stipulated documents and strictly complies with the terms and conditions mentioned in the documentary credit.

We will discuss in greater details on the advantages and disadvantages of a documentary credit, how its works and the various types of documentary credit in the next chapter.

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Definition, nature and purpose of a Documentary Credit

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Article 2 of the Uniform Custom and Practice for Documentary Credit defines a documentary credit as: "For the purpose of these articles, the expression documentary credits and standby letters of credit (hereinafter referred to as credits ) means any arrangements, however named or described, whereby a bank (the issuing bank) acting on request and on the instructions of a customer (the applicant) or on its own behalf: is to make a payment to or to the order of a third party (the beneficiary) or is to accept and pay bills of exchange (drafts) drawn by the beneficiary, or, authorizes another the bank to effect such payment or to accept and pay such bills of exchange (drafts) or, authorizes another bank to negotiate, against stipulated documents, provided that the terms and conditions of the credit are adhered with". In a layman language, a documentary credit may be describe as a legal undertaking in writing. It is issued by the customer's bank (also known as the issuing ba
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