D-1-2- The documentary credit

Payment processing is one of the main preoccupations of companies with international transactions. Doing business is important, but compensation is essential. Esandis offers you free training space dedicated to international transactions, and all the skills you need to become an export or import manager. Our objective is to provide you an understanding of the importance of the payment component of an international transaction.

The documentary credit is one of these payment techniques.

1-2-1- The documentary credit : a payment technique

A documentary credit is therefore a payment technique and it is universally used within the scope of international transactions. It is one of the most secure payment techniques. This technique involves the respective importer and exporter banks. They become the guarantors of the transactions, permitting the exchange of the documents against the payment of the goods.

However, this payment and transfer of ownership can be come only after an extensive examination of the goods, transport documents and insurance documents.

1-2-2- Documentary credits and their uses

The documentary credit is therefore used by the exporter to ensure payment for delivered goods. The importer uses a documentary credit to ensure the delivery of purchased goods.

Documentary credits can be used as a mode of funding, and can offer the importer delayed payment terms (deferred payment).

This payment technique can be split into two groups: Import documentary credits and export documentary credits. Both represent commitments taken by the exporter's bank and the importer's bank.

1-2-3- The most commonly used documentary credits

Each documentary credits may be accompanied by individual specifications, but the most commonly used are the irrevocable documentary credit and the irrevocable and confirmed documentary credit.

Each of this documentary credit has advantages and drawbacks.

1-2-4- The four documentary credit implementations

Documentary credits are implemented:
  • by negotiation,
  • by acceptance,
  • at sight payment
  • and by deferred payment.

1-2-5- Special documentary credits

There are documentary credits other the three mentioned above, sometimes referred to as variations or special documentary credits.

Special documentary credits
The back-to-back documentary credit
Revolving documentary credit
Transferable documentary credit
Red clause documentary credit

1-2-6- The steps of a documentary credit

The documentary credit consists of three major phases: the sales contract, the agreement to open the documentary credit and the documentary credit itself. Each phase is independent the others. The documentary credit can be divided into steps including: the opening, correspondences (mt700), payment and delivery of the goods.

1-2-7- Legislation and the documentary credit

All the provisions relating to the documentary credit are regulated by the UCP500, UCP600 and other rules and laws published by the ICC (International Chamber of Commerce).