Letter of Credit

A letter of credit is a payment instrument regulated by international standard.

A letter of credit or a documentary credit is a written undertaking of a bank on the instructions of the applicant (buyer) to pay a specific amount to the beneficiary (seller) against the documents stipulated in the letter of credit provided the beneficiary submits the documents in conformity with the terms and conditions of the letter of credit.

The advantages the letter of credit gives to the buyer/importer:

• security because the bank will make payment against documents which comply with the terms and conditions stipulated by the buyer and the international standards;
• by opening a letter of credit, the importer acknowledges that he is credit worthy and may be able to obtain more favourable payment terms (no advance payment, deferred payment);
• management tool – time of delivery, documents, etc.

The advantages the letter of credit gives to the seller/exporter:

• certainty of receiving payment for the goods delivered (the buyer’s bank guarantees the payment);
• the seller does not depend on buyer’s ability or desire to make payment;
• payment will be effected on an agreed date.