Documentary credits

Documentary credits: definition

A documentary credit, or letter of credit, is a by-product of international trade. It is used to reduce import and export related risks. It is most often found in long-distance sales transactions. This is why reference is usually made to a sales contract. The documentary credit serves to guarantee payment for the provision of services resulting from this basic contractual relationship.

First and foremost, a letter of credit is a payment instrument which has become virtually essential in trade operations. In practice, the buyer discharges its duty to pay for the goods ordered by means of a letter of credit instead of paying the purchase price directly. By accepting the inclusion of a letter of credit clause in the sales contract, the buyer undertakes to authorise a bank to issue a documentary credit, and to pay the sale price to the beneficiary (seller) against presentation of compliant documents.

Conditions

Handling letters of credit is subject to the uniform rules and practices published by the International Chamber of Commerce in Paris. These rules are regularly revised so as to comply with commercial practice.

A letter of credit is quite a costly instrument. It is not recommended for small-scale operations.