Documentary operationsDocumentary credit or letter of credit (LC) is the bank's obligation to pay seller of goods or services a certain amount of money for timely submission of the relevant documents confirming the shipment of goods or performance of contractual services. Documentary letter of credit allows to make the payment immediately after submission of the documents ("in demand") or on a specified future date after shipment (the "Term"). Uniform Customs and Practice for Documentary Credits, ICC Publication number 600, 2007 Edition Paris, are the basis of regulatory documents used in letters of credit. Payment mechanism:1. Two parties sign purchase and sale agreement, where form of payment is irrevocable documentary letter of credit (Letter of credit).2. Importer (buyer) applies to the issuing bank to open letter of credit in the amount agreed for the goods delivery. 3. Issuing bank opens letter of credit in the seller's (exporter) favour, which enters the beneficiary's bank (exporter's bank) in the form of SWIFT messages. 4. The exporter's bank (bank of the beneficiary) informs the exporter that letter of credit is issued in his favour. 5. Exporter ships the goods, prepares necessary documents and send them to the bank in order to provide the designated bank. 6. Designated bank checks the documents; in the case of matching documents, terms and conditions of the LC, it makes payment to the exporter in the amount of documents (according to the actual shipment). 7. Designated bank sends the documents to the importer's bank for onward transmission to the importer. The importer (buyer) has assurance that bank does not enroll payment for the account until it will receive shipping documents in accordance with the LC terms and it is satisfied that the received documents satisfy requirements of the importer. Banks refuse to pay for documents at the importer expense, if the documents on the goods do not meet terms of the LC, protecting the importer's interests. Seller can be confident of receiving payment, but he will give the bank the documents matching the LC. Seller receives against shipping documents required in the letter of credit provided, immediate payment (if the Credit provides for the terms of payment "on demand"). Benefits of using letters of credit to the exporter (seller):
Benefits for the importer (buyer):
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