When exporting shipments of goods and engaging in international trade, being able to enact protective measures when it comes to payment can be vital to the cash flow of your business. Documentary Letters of Credit provide a safe and secure way of being paid.

Here at Blair, we provide a full Documentary Letter of Credit service, including checking the relevant documentation and arranging for legalisation of documents accompanying the shipment of goods, as well as managing the documentary collection process to ensure timely payment. By having our specialist service providers deal with the administrative and procedural requirements to ensure you get paid, and get paid quickly, you’ll have the peace of mind to focus on other key aspects of your exportation business.

What is a Documentary Letter of Credit?

A Documentary Letter of Credit, also known as a Commercial Credit or Documentary Credit, is a secure mechanism used to guarantee payment from a creditworthy bank to an exporter of goods, and to provide financial protection to both the buyer and seller in the context of any common type of international transaction. It’s the most frequent form of payment in international trade terms, not least when selling goods to high-risk clients or within high-risk markets in various countries across the globe.

As the term suggests, a Documentary Letter of Credit is a letter or contractual document in which credit is issued at the request of the buyer, namely the applicant for the credit, in favour of the seller, namely the beneficiary of the credit. A third party bank, known as the issuing bank, agrees to pay the seller a stipulated amount in connection with the export and sale of goods against the presentation of specified documents relating to those goods within a prescribed timeframe.

The issuing bank may directly undertake to pay the seller an agreed sum of money against subsequent tender by the seller of the shipping documents, or via another bank in the seller’s country, known as either the correspondent or the second bank.
Once the seller has fulfilled its contractual obligations under the purchase agreement, typically by shipping the goods to the buyer, the seller may present the documents listed in the Letter of Credit to the relevant bank, receiving payment directly from the bank and not the buyer. Provided the terms of the agreement have been met, the credit is irrevocable.

What are the benefits of Documentary Credit in international trade?

Having received the Letter of Credit as a conditional guarantee that they will receive payment by the issuing or correspondent bank, the seller can ship the goods to the buyer without worrying about the buyer’s cash flow, credit risk, or availability of funds. Even if the buyer were to stop trading, the seller would still be paid.

Given the guarantee that Letters of Credit offer sellers, they are used extensively in the financing of international trade transactions, especially when the reliability of contracting parties cannot be readily and easily determined. Their economic effect is essentially to introduce a bank as an underwriter that assumes the counterparty risk of the buyer paying the seller on delivery of the goods. In this way, Documentary Letters of Credit minimise the risks involved when it comes to the possibility of nonpayment, streamlining the financial side of the transaction process in the vast majority of cases.

A Documentary Letter of Credit serves as a legally binding document that the seller can accept and take legal action on if payment is not made for the credit issued. As such, Letters of Credit are one of the safest forms of payment for international business transactions, providing assurance to sellers that there are available funds to cover the value of the transaction in question. Equally, the buyer does not have to risk sending payment to the seller before receiving their shipment of goods.

What are the drawbacks of Documentary Credit in international transactions?

In theory, there are no significant drawbacks when using a Documentary Letter of Credit, as Documentary Credit is a primary means of making payment in the context of international trade for goods shipped.

However, the preparation of shipping documents necessary to effect payment from the issuing or correspondent bank requires great care and attention to detail, not to mention shipping and banking expertise. It is therefore important to utilise the services of a Documentary Credit specialist to help minimise certain risks.

When looking to prepare Letters of Credit without expert assistance, many exporters can face multiple problems arising out of inexperienced or inadequately trained staff, from delays in payment due to discrepancies in documentation to additional costs incurred in rectifying any oversights.

As the first UK company to recognise the importance of correct and compliant Letter of Credit documentation in minimising payment risk and accelerating receipt of funds, Blair continues to help thousands of exporters get paid on time.
By deputising our expert team to deal with the extensive administrative and procedural requirements involved in the Documentary Letter of Credit process, your time can be used more productively on other aspects of running a successful exportation business.

How can Blair help with your Documentary Letter of Credit needs?

At Blair, we offer a complete Documentary Letter of Credit service to help accelerate receipt of funds, while minimising any payment risk. Our service includes:

• Taking care of your credit from the outset, be it the checking of documentation to ensure that it complies with the terms of the credit, or the raising of documents, such as invoices and packing lists, while liaising with exporters and shippers every step of the way;
• Downloading Letters of Credit directly from selected banks, and other relevant financial institutions, as well as assessing payment conditions for any given transaction;
• Arranging for verification and authentication of documents, if required, using our own in-house certification department, including online certification. By working in direct partnership with the London Chamber of Commerce and Industry (LCCI), we can expedite the legalisation of documentation in many cases;
• Managing the documentary collection process and presenting the specific documents needed to the issuing or correspondent bank, electronically where possible, and ensuring payment is made to the seller within the prescribed time frame. Using our experienced members of staff and a pioneering web-based document-management platform, we can eradicate high discrepancy fees and improve a company’s working capital.

To discuss your Documentary Letter of Credit requirements, and to find out more about how Documentary Credit can help you or your business, please telephone our Sales Team on +44 (0) 1784 254123 or contact us to learn more today.

Legal disclaimer

The matters contained within this article are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to the accuracy of the blog contents, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert advice should be sought.