Documentary credit

Definition

This is an agreement whereby a bank (issuing bank) at the request of a customer (ordering party) and in accordance with the latter’s instructions, is required irrevocably to make a payment to a third party (beneficiary) through the latter’s bank (notifying bank) upon presentation of all the documents required within the established timeframe, provided that each of the terms and conditions of the credit has been met.

Bearing this in mind, the documentary credit or letter of credit guarantees irrevocable payment upon the presentation of the correct documents. Hence the importance of negotiating the conditions of the operation in advance so that the exporter is certain to be able to present the correct documents in accordance with the terms and conditions received in their favour.

It should be noted that this is a means of collection/payment that can be used in the national market.

The rules governing documentary credits or letters of credit are the ICC UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS, UPC 600, 2007 REVISION. These rules are published by the International trade chamber.