Definitions

Documentary Letter of Credit (L/C, DLC)

A Documentary Letter of Credit (L/C, DLC) is a bank’s obligation to pay the seller of goods or services a certain amount of money upon timely submission of documents confirming shipment of goods or performance of contractual services.

A DLC is one of the most important means of financing in international trade, since the letter of credit is a tool that removes most of the risks from the buyer (importer) and from the seller (exporter). DLC is a very flexible and convenient settlement tool that is widely recognised.

There are several forms of Letters of Credit:

Under UCP 600, a documentary credit is irrevocable even if the credit does not say so. Where another set of rules permits a revocable letter of credit, the terms and rules governing it determine how it can be changed or cancelled and when a nominated bank may act.

The Irrevocable Letter of Credit is a firm obligation of the issuing bank to pay on the terms of the letter of credit, provided the documents it specifies are presented to the bank. The Irrevocable Letter of Credit guarantees that the exporter will receive payment when it complies with the terms of the credit, even if an importer wants to abandon the deal. Therefore, exporters filling a special order that likely has no other buyer choose this kind of letter of credit. Irrevocable Unconfirmed Letter of Credit. When issuing an unconfirmed letter of credit, the issuing bank providing a letter of credit is the only party responsible for the disbursement to the seller. The nominated bank has to pay only after receiving the money from the issuing bank. The nominated bank simply acts on behalf of the bank providing credit; therefore, it takes no 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). The confirming bank undertakes to honour or negotiate a complying presentation under the terms of the letter of credit. A letter of credit is governed by UCP 600 when it expressly incorporates those rules.