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What is a Documentary Letter of Credit?

A Documentary letter of credit is issued by the bank acting on behalf of the importer, guaranteeing payment to an exporter. Learn more about its process and uses.

A Documentary Letter of Credit is an essential document required in an export-import transaction. Since it guarantees payment from an importer to an exporter, it helps reduce the element of risk and certainty to the trade agreement. There are various types of Documentary Letters of Credit – each with its unique set of features.

What is a Documentary Letter of Credit (DLC)?

A Documentary Letter of Credit or Documentary LC is issued by the bank acting on behalf of the importer, guaranteeing payment to a third party (usually an exporter) by a given date subject to the fulfillment of conditions mentioned in the signed document.

Uses of a Documentary Letter of Credit

Documentary LC in international trade brings two parties together for a business transaction, while also helping to avoid international disputes. It provides confidence to both the parties with a guarantee of payment from credit-worthy financial institutions.

How does a Documentary Letter of Credit work?

A Documentary Letter of Credit usually includes instructions from the importer with conditions under which he/she is willing to pay the exporter. The conditions include description of goods, quantity and other documentary requirements. After all details about the product, transportation and involved costs have been clarified, the Documentary LC is issued to the exporter and the respective bank. After confirmation, the exporter ensures that goods are ready for shipment. Once the shipment has been completed, the exporter presents all the documents, including a Bill of Lading, to the bank for payment. While banks do not track the movement of goods, they verify the documents for authenticity. Once the bank is certain that all conditions have been met, the exporter receives the agreed payment from the bank. Once the funds have been received, the issuing bank shares the Bill of Lading with the importer so the shipment can be released.

What are the benefits of a Documentary Letter of Credit?

The key benefits of a Documentary Letter of Credit are:

Security

The presence of a Documentary Letter of Credit between the parties in an import-export transaction ensures security, especially for the exporter. As both parties belong to different countries, a Documentary Letter of Credit helps bring some level of certainty to the business in terms of payment.

Cash flow management

The Documentary Letter of Credit helps importers and exporters manage their cash flow efficiently. As both parties have adequate visibility into payments to be made or received, it helps in planning other business activities.

Solvency

A Documentary Letter of Credit helps prove an importer's solvency to the exporter. As a result, an importer can negotiate for better terms by opting for a Documentary Letter of Credit.

Customizable

The key benefit of a Documentary LC is that it is flexible and can be customized as per the requirements of the parties – whether it is payment terms, product specifications, delivery terms or transportation costs.

Quick to secure

Applying for a Documentary Letter of Credit can be done quickly to secure the deal between the two parties. While a business will need to submit some documents to get a Documentary LC from the bank, the process has been made seamless by many financial institutions.

What are the types of Rubber Board licenses?

There are various types of Letters of Credit, like Documentary and Standby Letter of Credit, among others. The key difference between them lies in the documentation and presentation requirements at the time of delivery. A Documentary Letter of Credit requires supporting documents to be submitted along with the payment request. In contrast, a Standby Letter of Credit does not need documents from the exporter for payment requests.

Conclusion

A Documentary Letter of Credit is a document used effectively by businesses to reduce the risk of defaults on payments and bring stability to businesses. As transactions include shipment of goods from one country to another, it provides assurance to the exporter for payment upon meeting the agreed conditions. With e-commerce exports, reaching international customers and receiving payments is easy and simple. Amazon Global Selling not just enables you to sell across 200+ countries and territories but also receive payments directly in your bank in INR or other currency of your choice.

Easy e-commerce exports with Amazon
Global Selling

With the growing demand for Indian products in international marketplaces, exporters and Indian sellers are keen to expand their businesses to the world. Amazon Global Selling is an e-commerce exports program that enables exporters and MSMEs to start and grow their export business in 200+ countries and territories. The exporter can simply register with the program in four simple steps and reach millions of customers shopping on 18+ Amazon international marketplaces.

More blogs on Letter of Credit

1. Letter of Credit at Sight: Meaning, process and its benefits

2. What is a Transferable Letter of Credit?

3. Irrevocable Letter of Credit: Meaning, process and benefits

4. Green Clause Letter of Credit: Definition, example and features

5. What is a Letter of Credit?

6. Revocable Letter of Credit: Everything you need to know about its uses

7. Red Clause Letter of Credit: Meaning, example and types

8. Standby Letter of Credit (SBLC): Overview, process and types

9. Usance Letter of Credit: Overview, meaning and process

10. Revolving Letter of Credit: Overview, meaning and process

11. Back to Back Letter of Credit: Overview, meaning and process

Published on November 30, 2022.

Sources:
https://www.investopedia.com/terms/f/ffdlc.asp
2. https://www.dripcapital.com/en-us/resources/blog/documentary-collection-process
3. https://www.relinvestmentsgroup.com/en/instrumenty/stati/dokumentarnyi-akkreditiv-lc_-dlc.htm
4. https://content.next.westlaw.com/practical-law/document/If39cb8f1ff8f11e79bf099c0ee06c731/Documentary-letters-of-credit?viewType=FullText&ppcid=facb8a6aab374d778d02538804e92199&originationContext=knowHow&transitionType=KnowHowItem&contextData=(sc.RelatedInfo)&firstPage=true
5. https://www.hbor.hr/en/letters-of-credit/

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