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Documentary letters of credit

A documentary letter of credit is an agreement, which includes an obligation of the issuer bank to transfer a payment on behalf of the client (the letter of credit applicant) or on its own behalf, to a beneficiary, or assigns another bank to issue that payment, against the documents according to the letter of credit terms. A letter of credit is a separate deal from the purchase/sale agreement or another document with the effect of an agreement it is based on.


Benefits of using the letter of credit payment form for the buyer:

  • The payment is issued only after the buyer fully completes his obligation in shipment of goods/ work delivery/ provision of service;
  • A letter of credit allows the buyer to avoid advance payments;
  • A thorough check of all shipment documents is guaranteed by the bank;
  • An opportunity to prove the buyers ability to meet payments to the seller, which is important for closing deals with new partners;
  • A guarantee that the seller will not receive the payment before he fully meets his obligations under the agreement for shipment of goods/ work delivery/ provision of service.

Benefits of using the letter of credit payment form for the seller:

  • Guarantee of payment, since the obligation to pay lies on the seller’s bank, not the seller;
  • The payment is issued at once after submission to the bank of the documents according to the letter of credit;
  • Assurance of receiving the payment regardless of the buyer, if the seller meets his obligations under the letter of credit;
  • In agency transactions, a transferable letter of credit simplifies delivery logistics.

Types of documentary letters of credit:

Secured – a letter of credit, under which the payer’s funds for execution of payments are reserved in advance in full amount on a separate account in either the issuer or executor bank.

Unsecured – a letter of credit, under which the payment is guaranteed by the issuer bank by extending a credit loan (due to temporary lack of funds on the buyer’s account). Issuance of this kind of letter of credit is possible only after the applicant provides the bank with adequate liquid collateral.

Irrevocable letter of credit – the one which cannot be revoked or changed by the issuer bank without confirmation of the confirming bank (if there is any) and the beneficiary.

Revocable letter of credit – the one which can be revoked or changed by the issuer bank without giving notice to the beneficiary.

Guarantee letter of credit – the one which is executed only in the case if the applicant does not meet his obligation under the contract assigned in the application for the letter of credit;

Transferable letter of credit – the one under which the beneficiary (the first beneficiary) has a right to request the paying bank to transfer part of the payment amount to another beneficiary (other beneficiaries). The letter of credit may be transferable only if it is directly indicated by the issuer bank as “Transferable”.