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What is documentary letter of credit? Types, usage, benefits and example
Documentary letter of credit is issued by the bank acting on behalf of the importer, guaranteeing payment to an exporter. Learn more about its working in blog.
Cross-border trade involves numerous risks, particularly when it comes to securing payments between parties who may have never conducted business together before. Documentary letter of credit (DLC) is a crucial financial instrument that helps mitigate these risks while facilitating smooth international transactions.
For businesses venturing into global markets, understanding documentary letter of credit is essential as it is a secure payment mechanism backed by banking institutions. This payment method has become increasingly important in today's interconnected global marketplace, where businesses need reliable ways to conduct international trade with confidence.
For businesses venturing into global markets, understanding documentary letter of credit is essential as it is a secure payment mechanism backed by banking institutions. This payment method has become increasingly important in today's interconnected global marketplace, where businesses need reliable ways to conduct international trade with confidence.
What is documentary letter of credit (DLC)?
A documentary letter of credit (DLC) is a written commitment issued by a bank on behalf of the importer (buyer) that guarantees payment to the exporter (seller) once specific conditions and documentation requirements are met. This financial instrument acts as an intermediary mechanism where banks facilitate secure payment between trading parties, effectively reducing the risks associated with international trade.i
The bank assumes responsibility for payment, provided the exporter presents compliant documents within the specified timeframe. These documents typically prove that the goods have been shipped according to the agreed terms.
The bank assumes responsibility for payment, provided the exporter presents compliant documents within the specified timeframe. These documents typically prove that the goods have been shipped according to the agreed terms.
Example of documentary letter of credit
Consider a transaction between an Indian textile manufacturer and a US retailer for cotton shirts. The US retailer's bank issues a documentary letter of credit specifying conditions like shipping documents, certificates, and quality requirements. Once the Indian manufacturer ships the goods and presents all required documents to their bank, the payment is processed through the banking channels. This secure payment method ensures the Indian manufacturer receives payment only after fulfilling all specified conditions, while the US retailer is assured of receiving goods as per specifications before payment is released.
Usage of documentary letter of credit
International merchandise trade
Commonly used for import-export transactions involving physical goods, especially in industries like manufacturing, commodities, and bulk goods where substantial monetary values are involved.
Project finance
Utilized in large infrastructure or development projects where multiple parties, payments, and deliverables are involved across different countries.
Supply chain operations
Facilitates complex supply chain transactions involving multiple suppliers, intermediaries, and buyers across different geographical locations.
Government contracts
Used in international government procurement and contracts where regulatory compliance and structured payment mechanisms are mandatory.ii
Types of documentary letters of credit
1. Revocable letter of credit
This type can be modified or cancelled by the issuing bank without prior notice to the beneficiary. Due to the high risk and lack of payment security, these are rarely used in modern international trade transactions.
2. Irrevocable letter of credit
The most common type in international trade, this cannot be modified or cancelled without the agreement of all parties involved. It provides guaranteed payment terms and strong commitment from the issuing bank, offering enhanced security for all parties.
3. Confirmed letter of credit
This type adds an additional layer of security through a second bank's guarantee. It's particularly useful when dealing with high-risk markets or when the exporter requires additional payment security.iii
How documentary letter of credit works
● Initial agreement phase
The buyer and seller agree on trade terms and decide to use documentary credit as the payment method. They establish key terms and conditions and define required documents.
● Letter of credit application
The importer applies to their bank for the letter of credit, submitting necessary documentation. The bank assesses the importer's creditworthiness and finalizes terms.
● Letter of credit issuance
The issuing bank creates the LC and transmits it to the advising bank, which verifies authenticity and notifies the exporter.
● Shipment and documentation
The exporter reviews LC terms, prepares and ships the goods, and collects all required documents as specified in the LC.
● Document presentation
The exporter presents documents to the advising bank, which checks for compliance before forwarding them to the issuing bank for review.
● Payment processing
Upon verification of compliant documents, the issuing bank processes payment, transferring funds through the advising bank to the exporter.
Need assistance with export documentation?
Looking for the right documents for your shipment? Visit Amazon Export Navigator, your one-stop dashboard for guidance on six key areas of export compliance, including shipping documentation. Understand documentation requirements, view self-registration steps, or connect with third-party service providers who can help you obtain your documents.
Benefits of documentary letter of credit
1. Payment security
Exporters receive guaranteed payment from a creditworthy bank, eliminating the risk of payment default and ensuring financial protection regardless of the buyer's financial situation.
2. Risk mitigation
Both parties gain protection through bank intermediation, reducing concerns about unfamiliar trading partners and new market entry. The bank's involvement provides a trusted verification mechanism for documentation and compliance.
3. Working capital management
Businesses can leverage documentary credits to access better financing options and maintain healthy cash flow. Banks often provide preferential financing terms when transactions are backed by LCs.
4. Global market access
Enables businesses to confidently enter new international markets and establish trading relationships with unknown partners, supported by a standardized, globally recognized payment system.
5. Regulatory compliance
Helps businesses meet international trade regulations and foreign exchange requirements, as banks ensure all transactions comply with local and international laws.v
Conclusion
Documentary letters of credit remain a cornerstone of international trade finance, providing security and facilitating global commerce. While the process may seem complex, understanding its mechanisms and benefits can help businesses expand their global reach with confidence.
Amazon Global Selling: Easy e-commerce exports and hassle-free shipping
If you are a business owner and you want to sell your products to the world, Amazon Global Selling enables you to list and sell ‘Made in India’ products on 18 Amazon global marketplaces. As an e-commerce export program, Amazon Global Selling provides support and guidance at every step of your export journey, connecting you to Amazon’s Service Provider Network for tailored compliance, payments, and logistics support.
Registered sellers can choose to ship their products by themselves through Merchant Fulfilled Network (MFN) or they can opt for Fulfillment by Amazon (FBA) and outsource order fulfillment to Amazon including packing, storage, delivery, and returns. Amazon Global Selling simplifies the process of international shipping to the world, helping businesses navigate customs and reach a vast audience.
Registered sellers can choose to ship their products by themselves through Merchant Fulfilled Network (MFN) or they can opt for Fulfillment by Amazon (FBA) and outsource order fulfillment to Amazon including packing, storage, delivery, and returns. Amazon Global Selling simplifies the process of international shipping to the world, helping businesses navigate customs and reach a vast audience.
Frequently Asked Questions
1. Is documentary credit and documentary letter of credit the same?
Yes, documentary credit and documentary letter of credit refer to the same financial instrument. Both terms describe a bank's written commitment to pay a seller upon presentation of specified documents.
2. What is the difference between LC and documentary LC?
While a letter of credit (LC) is a broader term, a documentary LC specifically requires the presentation of shipping documents and other trade-related documentation for payment to be made.
3. Who issues documentary credit?
Documentary credits are issued by banks on behalf of their customers (importers). The issuing bank is responsible for paying the beneficiary (exporter) upon presentation of compliant documents.
Published on July 2, 2025
Sources:
i. https://uk.practicallaw.thomsonreuters.com/w-011-5742?transitionType=Default&contextData=(sc.Default)&firstPage=true#:~:text=letter%20of%20credit-,Related%20Content,of%20payment%20in%20international%20trade.
ii. https://www.tradefinance.training/blog/articles/benefits-of-documentary-credits-from-a-corporate-perspective/
iii. https://www.cgaa.org/article/documentary-credit
iv. https://danskeci.com/-/media/pdf/danskeci-com/trade-finance/internationaldocumentarycredits.pdf?rev=dfb4135fc8144147ba95366d1f9160e2&hash=DF5DA4940333BA173AE2E44F0BFB01DD
v. https://www.vaia.com/en-us/explanations/law/international-and-humanitarian-law/letters-of-credit-in-international-trade/
Sources:
i. https://uk.practicallaw.thomsonreuters.com/w-011-5742?transitionType=Default&contextData=(sc.Default)&firstPage=true#:~:text=letter%20of%20credit-,Related%20Content,of%20payment%20in%20international%20trade.
ii. https://www.tradefinance.training/blog/articles/benefits-of-documentary-credits-from-a-corporate-perspective/
iii. https://www.cgaa.org/article/documentary-credit
iv. https://danskeci.com/-/media/pdf/danskeci-com/trade-finance/internationaldocumentarycredits.pdf?rev=dfb4135fc8144147ba95366d1f9160e2&hash=DF5DA4940333BA173AE2E44F0BFB01DD
v. https://www.vaia.com/en-us/explanations/law/international-and-humanitarian-law/letters-of-credit-in-international-trade/
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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
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