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Letter of credit

The Documentary letter of credit is intended for:

  • clients who deal in commercial transactions

Characteristics of the Documentary letter of credit:

  • a written obligation on the part of the bank to pay a specified amount to the seller subject to meeting of the conditions as stipulated in the letter of credit
  • the bank assumes the obligation towards the seller on the basis of request by the buyer
  • an irrevocable obligation
  • various types of letters of credit:
    • import, export (buyer, seller)
    • advised, confirmed
    • transferable, revolving, standby letter of credit
  • one of the most important and most sophisticated payment instruments
  • used in international and domestic trade
  • certainty for the buyer that payment from the letter of credit will not be made until the seller meets the conditions agreed in advance
  • certainty for the seller that he or she will be paid for the goods after the conditions of the letter of credit are met

  • 1.  A purchase contract is concluded between the exporter (seller) and the importer (buyer).
  • 2.  On the basis of the purchase contract and its conditions, the importer asks his or her bank to open a letter of credit.
  • 3a  The exporter sends the goods.
  • 3b  The exporter completes the documents according to the conditions of the letter of credit and sends these to the importer’s bank via his or her bank. The importer’s bank releases these to the importer if the conditions of the letter of credit are met.
  • 4.  The importer’s bank (issuing bank) effects payment under the letter of credit in favour of the exporter and debits the importer’s account.

Advantages of the Documentary letter of credit:

  • Advantages for the buyer:
    • Certainty that the goods were sent before payment
    • Possibility of decreasing commercial risk to the minimum by formulating the conditions of the letter of credit in an appropriate manner
    • Possibility of gaining more favourable pricing conditions from your partner thanks to provision of a high quality payment and security instrument
    • Motivation for the seller to perform delivery by the agreed deadlines and in line with the conditions of the letter of credit
  • Advantages for the seller:
    • Certainty of payment for delivery of goods/services once the conditions of the letter of credit are met
    • Certainty that payment of the agreed amount is bound to meeting of conditions which are known in advance
    • Improvement of liquidity – the seller can gain funds immediately if he or she sells his or her receivable to the bank (for transactions with deferred maturity)
    • Possibility of using a high quality letter of credit as a guarantee towards the seller’s own suppliers

The Documentary letter of credit allows :

  • high quality payment security for both parties to the commercial transaction

How to establish/arrange the product :

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