What is a Documentary Letter of Credit (L/C, DLC)?
Letter of credit (Documentary Letter Of Credit (L/C, DLC) is the bank’s obligation to pay the seller of goods or services a certain amount of money in the timely submission of documents confirming shipment of goods or performance of contractual services.
Documentary Letter Of Credit is one of the most important means of financing in the international trade, as the letter of credit is a tool that removes most of risks as from the buyer (importer) and from the seller (exporter). Documentary Letter Of Credit is very flexible and convenient tool of calculations, which have the widest recognition and acceptance in the world.
There are the following forms of letter of credit:
Revocable Letters of Credit, which can be changed or canceled by the issuing bank without prior notice to the recipient of funds. Revoke of letter of credit does not create any obligation of the issuing bank to the payee. Nominated bank is obligated to make a payment or other operations on a revocable letter of credit, if at the time of their commission they have not received notice of the change of conditions or canceling credit. A letter of credit is revocable if its text does not explicitly state otherwise.
Irrevocable letter of credit is a firm obligation of the issuing bank to pay money in order and the terms defined by the conditions of the letter of credit, if the documents provided for by it, submitted to the bank specified in the credit. Irrevocable letter of credit guarantees that the exporter will make payment to the performance of its obligations, even if an importer wants to abandon the deal. Therefore, exporter, performing a special order, for which most likely will not be another buyer, chooses exactly this kind of letter of credit.
Irrevocable unconfirmed letter of credit. When making an unconfirmed letter of credit issuing bank, providing a letter of credit, is only party that is responsible for the disbursement to seller. Nominated bank has to pay only after receiving the money from the issuing bank. Nominated bank simply acts on behalf of the bank providing credit, so it does not take any risk.
Irrevocable confirmed letter of credit – the obligation of the issuing bank is confirmed by another bank. Confirmation is an additional guarantee of payment from another bank (Bank of the exporter or prime bank).
Bank, confirming letter of credit is committed to pay for documents according to the conditions of the letter of credit if the issuing bank fails to make the payment.
Currently, LC issuance is governed by the latest version of UCP 600.