Documentary Letter of Credit

Last Updated: Jun 7, 2019

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A Documentary Letter of Credit is a written obligation of a bank, issued at a client's request, to pay a certain sum after the fulfillment of the conditions stipulated in the letter of credit. The banks involved examine only the documents, not goods or services. Per Citibank's website, below are the advantages of a Documentary Letter of Credit.

Advantages for the seller (recipient of the letter of credit)

• the seller’s claim is against the bank rather than a claim against the buyer
• if he fulfills the conditions of the letter of credit, he can be certain that payment will be made by the bank, he can use the letter of credit as a guaranty vis-a-vis his own suppliers
• he can obtain funds immediately if he sells his receivable from the bank pursuant to the letter of credit
• based on a high quality export letter of credit, he can obtain a loan from his bank

Advantages for the buyer (principal of the letter of credit)

• the letter of credit creates considerable pressure on the seller to supply the goods by the stipulated time limit and with the required quality
• he has certainty that he will pay only after the stipulated conditions are met
• he can obtain more advantageous price conditions thanks to the increased certainty of the seller to receive payment when fulfilling the stipulated conditions